##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-25995
 NEXTERA ENTERPRISES, INC.
  Delaware
    
    95-4700410(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 
 
 þ o
  o o þ
 o þ




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##### 



Page
No.PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2006
and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 2006 and 2005
    
    
    5Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2006 and 2005
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    21Item 1A.
    
    Risk Factors
    
    
    21Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3.
    
    Defaults Upon Senior Securities
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22Item 6.
    
    Exhibits
    
    
    22Signatures
    
    
    24EXHIBIT 10.18EXHIBIT 10.19EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Nextera Enterprises, Inc.
 
 Condensed Consolidated Balance Sheets
 June 30,
    
    December 31,2006
    2005(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,187
    
    
    $
    15,043Accounts receivable
    
    
    1,273
    
    
    
    Inventory
    
    
    2,843
    
    
    
    Due from supplier
    
    
    270
    
    
    
    Prepaid expenses and other current assets
    
    
    394
    
    
    
    128Total current assets
    
    
    6,967
    
    
    
    15,171Property and equipment, net
    
    
    124
    
    
    
    22Goodwill
    
    
    17,499
    
    
    
    Intangible assets, net
    
    
    6,122
    
    
    
    Other assets
    
    
    708
    
    
    
    42Total assets
    
    $
    31,420
    
    
    $
    15,235Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    1,529
    
    
    $
    542Revolving credit facility
    
    
    1,500
    
    
    
    Current portion of long-term debt
    
    
    1,000
    
    
    
    Total current liabilities
    
    
    4,029
    
    
    
    542Long-term debt
    
    
    10,000
    
    
    
    Other long-term liabilities
    
    
    1,334
    
    
    
    1,334Commitments and contingencies (Note 10)
    
    
    
    
    
    
    Stockholders equity:Preferred Stock, $0.001 par value,
10,000,000 shares authorized, 600,000
authorized shares designated Series A,
50,637 and 48,906 Series A issued and
outstanding at June 30, 2006 and
December 31, 2005, respectively
    
    
    5,064
    
    
    
    4,890Class A Common Stock, $0.001 par value,
95,000,000 shares authorized, 38,492,851
and 30,025,441 shares issued and
outstanding at June 30, 2006 and
December 31, 2005, respectively
    
    
    38
    
    
    
    30Class B Common Stock, $0.001 par value,
4,300,000 shares authorized, 3,844,200
shares issued and outstanding at June
30, 2006 and December 31, 2006
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    165,282
    
    
    
    161,130Accumulated deficit
    
    
    (154,331
    )
    
    
    (152,695
    )Total stockholders equity
    
    
    16,057
    
    
    
    13,359Total liabilities and stockholders equity
    
    $
    31,420
    
    
    $
    15,235
  3




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Nextera Enterprises, Inc.
 
 Condensed Consolidated Statements of Operations
 Three Months EndedJune 30,2006
    
    2005Net sales
    
    $
    3,564
    
    
    $
    Cost of sales
    
    
    1,817
    
    
    
    Gross profit
    
    
    1,747
    
    
    
    Selling, general and administrative expenses
    
    
    2,318
    
    
    
    567Amortization of intangibles
    
    
    152
    
    
    
    Operating loss
    
    
    (723
    )
    
    
    (567
    )Interest income
    
    
    30
    
    
    
    59Interest expense
    
    
    (313
    )
    
    
    Other expense
    
    
    
    
    
    
    (37
    )Loss from continuing operations before income taxes
    
    
    (1,006
    )
    
    
    (545
    )Provision for income taxes
    
    
    
    
    
    
    6Loss from continuing operations
    
    
    (1,006
    )
    
    
    (551
    )Income from discontinued operations
    
    
    35
    
    
    
    91Net loss
    
    
    (971
    )
    
    
    (460
    )Preferred stock dividends
    
    
    (90
    )
    
    
    (83
    )Net loss applicable to common stockholders
    
    $
    (1,061
    )
    
    $
    (543
    )Net loss per common share, basic and dilutedContinuing operations
    
    $
    (0.03
    )
    
    $
    (0.02
    )Discontinued operations
    
    
    
    
    
    
    Net loss per common share, basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )Weighted average common shares outstanding, basic and diluted
    
    
    42,337
    
    
    
    33,870
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Nextera Enterprises, Inc.
 
 Condensed Consolidated Statements of Operations
 Six Months EndedJune 30,2006
    
    2005Net sales
    
    $
    4,660
    
    
    $
    Cost of sales
    
    
    2,357
    
    
    
    Gross profit
    
    
    2,303
    
    
    
    Selling, general and administrative expenses
    
    
    3,530
    
    
    
    1,132Amortization of intangibles
    
    
    183
    
    
    
    Operating loss
    
    
    (1,410
    )
    
    
    (1,132
    )Interest income
    
    
    155
    
    
    
    118Interest expense
    
    
    (387
    )
    
    
    Other expense
    
    
    
    
    
    
    (37
    )Loss from continuing operations before income taxes
    
    
    (1,642
    )
    
    
    (1,051
    )Provision for income taxes
    
    
    29
    
    
    
    12Loss from continuing operations
    
    
    (1,671
    )
    
    
    (1,063
    )Income from discontinued operations
    
    
    35
    
    
    
    112Net loss
    
    
    (1,636
    )
    
    
    (951
    )Preferred stock dividends
    
    
    (174
    )
    
    
    (161
    )Net loss applicable to common stockholders
    
    $
    (1,810
    )
    
    $
    (1,112
    )Net loss per common share, basic and dilutedContinuing operations
    
    $
    (0.05
    )
    
    $
    (0.04
    )Discontinued operations
    
    
    
    
    
    
    Net loss per common share, basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.03
    )Weighted average common shares outstanding, basic and diluted
    
    
    39,139
    
    
    
    33,870
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Nextera Enterprises, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 Six Months EndedJune 30,2006
    
    2005Operating activitiesNet loss
    
    $
    (1,636
    )
    
    $
    (951
    )Adjustments to reconcile net loss to net cash used
in operating activities:Depreciation and amortization
    
    
    24
    
    
    
    9Reversal of allowance
    
    
    
    
    
    
    (112
    )Amortization of Intangible assets
    
    
    183
    
    
    
    Stock based compensation
    
    
    98
    
    
    
    3Change in operating assets and liabilities:Accounts receivable
    
    
    (506
    )
    
    
    Inventory
    
    
    982
    
    
    
    Prepaid expenses and other assets
    
    
    (55
    )
    
    
    (32
    )Accounts payable and accrued expenses
    
    
    290
    
    
    
    (181
    )Net cash used in operating activities
    
    
    (620
    )
    
    
    (1,264
    )Investing activitiesPurchase of property and equipment
    
    
    (14
    )
    
    
    Acquisition of businesses, net of cash acquired
    
    
    (23,232
    )
    
    
    Proceeds from sale of business
    
    
    
    
    
    
    215Net cash (used in) provided by investing activities
    
    
    (23,246
    )
    
    
    215Financing activitiesNet borrowings under revolving credit facility
    
    
    2,500
    
    
    
    Borrowings under term note
    
    
    10,000
    
    
    
    Payment of note acquired in acquisition
    
    
    (1,000
    )
    
    
    Payment of debt issuance costs
    
    
    (490
    )
    
    
    Net cash provided by financing activities
    
    
    11,010
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (12,856
    )
    
    
    (1,049
    )Cash and cash equivalents at beginning of period
    
    
    15,043
    
    
    
    16,713Cash and cash equivalents at end of period
    
    $
    2,187
    
    
    $
    15,664
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Note 1. Basis of Presentation
      Note 2. Accounting Policies
 Stock-Based Compensation and Other Equity Instruments
 Share-Based
Payment,
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Three Months Ended
    
    Six Months EndedJune 30, 2005
    
    June 30, 2005(Amounts in thousands, except per share data)Net loss, as reported
    
    $
    (460
    )
    
    $
    (951
    )Compensation expense under fair value-based
accounting method
    
    
    (44
    )
    
    
    (94
    )Pro forma net loss
    
    $
    (504
    )
    
    $
    (1,045
    )Net loss per common share, basic and diluted:As reported
    
    $
    (0.02
    )
    
    $
    (0.03
    )Pro forma
    
    $
    (0.02
    )
    
    $
    (0.04
    )
 Reclassifications
  Recently Issued Accounting Pronouncements
 Inventory Costs
 Note 3. Acquisitions
 Woodridge Labs, Inc
   
    
    $23.3 million in cash including $0.8 million of acquisition expenses paid to third parties;
    
    8,467,410 unregistered restricted shares of Nexteras Class A Common Stock constituting
approximately 20% of the total outstanding common stock of Nextera immediately after such
issuance, which shares were issued to Jocott. Such shares had a value of $4.2 million on
the date of the Transaction;
    
    the assumption of a promissory note of Jocott in the principal amount of $1.0 million,
which assumed debt was paid in full by the Company on the closing date of the Transaction;
and
    
    an earn-out of up to $2.5 million which is payable if the audited earnings before
interest, income taxes, depreciation and amortization (EBITDA) of Woodridge for the period
from the closing date of the Transaction through December 31, 2006 exceeds $4.2 million,
and is fully earned at
approximately $6.5 million of audited EBITDA of Woodridge. This earn-out amount, if any, is
payable in the second quarter of 2007.
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Current assets
    
    $
    5,222Long-term assets
    
    
    389Goodwill
    
    
    17,499Intangible assets
    
    
    6,100Total assets acquired
    
    $
    29,210Less liabilities assumed
    
    
    (1,703
    )$
    27,507
  Three MonthsSix Months Ended
    
    EndedJune 30,
    
    June 30,2006
    
    2005
    
    2005(Amounts in thousands, except per share data)Net sales
    
    $
    6,839
    
    
    $
    8,851
    
    
    $
    4,971Income (loss) from continuing
operations before income taxes
    
    
    (428
    )
    
    
    738
    
    
    
    659Net income (loss)
    
    
    (393
    )
    
    
    850
    
    
    
    750Preferred stock dividends
    
    
    (174
    )
    
    
    (161
    )
    
    
    (83
    )Net income (loss) applicable to
common stockholders
    
    $
    (567
    )
    
    $
    689
    
    
    $
    667Weighted average common shares
outstandingbasic and diluted
    
    
    42,337
    
    
    
    42,337
    
    
    
    42,337Basic and diluted loss per share
    
    $
    (0.01
    )
    
    $
    0.02
    
    
    $
    0.02
  9




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LaVar Licensing Agreement
 Ô
 Note 4. Inventories
  June 30, 2006(In thousands)Raw materials
    
    $
    1,093Finished goods
    
    
    1,750$
    2,843
  Note 5. Intangible Assets
  June 30, 2006(In thousands)Goodwill
    
    $
    17,499Trademarks and brands
    
    $
    2,800Covenant not to compete
    
    
    1,900Customer relationships
    
    
    1,400Licensing Agreement
    
    
    172Other
    
    
    336,305Less: accumulated amortization
    
    
    183Intangible assets, net
    
    $
    6,122
  Note 6. Financing Arrangements
  10




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June 30, 2006Term loan
    
    $
    10,000Revolving credit facility
    
    
    2,500$
    12,500Current portion of long-term debt (including $1.5 million of
the revolving credit facility which is expected to be repaid
during the next twelve months)
    
    
    2,500$
    10,000
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Twelve months ending December 31,2006
    
    $
    5002007
    
    
    1,0002008
    
    
    1,2502009
    
    
    1,7502010
    
    
    5,750thereafter
    
    
    2,250$
    12,500
 Note 7. Basic and Diluted Net Income (Loss) per Common Share
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005(Amounts in thousands, except per share data)Loss from continuing operations
    
    $
    (1,006
    )
    
    $
    (551
    )
    
    $
    (1,671
    )
    
    $
    (1,063
    )Preferred stock dividends
    
    
    (90
    )
    
    
    (83
    )
    
    
    (174
    )
    
    
    (161
    )Loss from continuing operations
applicable to common stockholders
    
    
    (1,096
    )
    
    
    (634
    )
    
    
    (1,845
    )
    
    
    (1,224
    )Income from discontinued operations
    
    
    35
    
    
    
    91
    
    
    
    35
    
    
    
    112Net loss applicable to common
stockholders
    
    $
    (1,061
    )
    
    $
    (543
    )
    
    $
    (1,810
    )
    
    $
    (1,112
    )Weighted average common shares
outstandingbasic and diluted
    
    
    42,337
    
    
    
    33,870
    
    
    
    39,139
    
    
    
    33,870Basic and diluted net loss per
common shareLoss from continuing operations
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.04
    )Income from discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Net loss per common share, basic
and diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )
  12




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Note
8. Share-Based Payments
    2006
    
    2005Risk-free interest rates
    
    
    5.25
    %
    
    
    3.50
    %Expected lives (years)
    
    
    3-4
    
    
    
    4Expected volatility
    
    
    73.5
    %
    
    
    80
    %Dividend rate
    
    
    0
    %
    
    
    0
    %
  Weighted-
    
    Weighted-Average
    
    Average
    
    AggregateExercise
    
    Remaining
    
    IntrinsicShares
    
    Price
    
    Life (years)
    
    Value (1)Outstanding at January 1, 2006
    
    
    5,402,267
    
    
    $
    1.84Granted
    
    
    1,437,000
    
    
    
    0.60Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at June 30, 2006
    
    
    6,839,267
    
    
    $
    1.58
    
    
    
    6.1
    
    
    $
    Options exercisable at June
30, 2006
    
    
    5,053,975
    
    
    $
    1.94
    
    
    
    4.2
    
    
    $
    
 
 
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Note
9. Income Taxes
  Note 10. Commitments and Contingencies
   14




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As used in this report, the terms we, our, ours, and us refer to Nextera Enterprises, Inc,
a Delaware Corporation, or Nextera, and its wholly owned subsidiaries. In addition, the term
Woodridge refers to Jocott Enterprises, Inc., or Jocott (the prior owner of the Woodridge
business), for all periods prior to March 9, 2006, and to Woodridge Labs, Inc., a wholly owned
subsidiary of Nextera, from and after March 9, 2006, unless the context indicates otherwise
   Overview
  Acquisition of Woodridge Business
   
    
    $23.3 million in cash including $0.8 million of acquisition expenses paid to third parties;
    
    8,467,410 unregistered restricted shares of Nexteras Class A Common Stock constituting
approximately 20% of the total outstanding common stock of Nextera immediately after such
 15




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issuance, which shares were issued to Jocott. Such shares had a value of $4.2 million on
the date of the Transaction;
    
    the assumption of a promissory note of Jocott in the principal amount of $1.0 million,
which assumed debt was paid in full by us on the closing date of the Transaction; and
    
    an earn-out of up to $2.5 million which is payable if the audited earnings before
interest, income taxes, depreciation and amortization (EBITDA) of Woodridge for the period
from the closing date of the Transaction through December 31, 2006 exceeds $4.2 million,
and is fully earned at approximately $6.5 million of audited EBITDA of Woodridge. This
earn-out amount, if any, is payable in the second quarter of 2007.
  Comparison of the Three Months Ended June 30, 2006 and the Three Months Ended June 30, 2005
 Net Sales
 Gross Profit
 Selling, General and Administrative Expenses.
 Interest Income
 Interest Expense
 Income Taxes
 Comparison of the Six Months Ended June 30, 2006 and the Six Months Ended June 30, 2005
 Net Sales
 16




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Gross Profit
 Selling, General and Administrative Expenses.
 Interest Income
 Interest Expense
 Income Taxes
 Liquidity and Capital Resources
     17




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Certain Contractual Obligations, Commitments and Contingencies
  18




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Payments due by Period as of June 30, 2006Less than 1(in thousands)
    
    Total
    
    year
    
    1-3 years
    
    4-5 years
    
    After 5 yearsLong-term debt
    
    $
    12,500
    
    
    $
    1,000
    
    
    $
    2,625
    
    
    $
    8,875
    
    
    $    
    Operating leases
    
    
    265
    
    
    
    180
    
    
    
    85
    
    
    
    
    
    
        
    Total contractual
obligations
    
    $
    12,765
    
    
    $
    1,180
    
    
    $
    2,710
    
    
    $
    8,875
    
    
    $    
    
 Off-Balance-Sheet Arrangements
  Critical Accounting Policies
  Revenue Recognition.
 Allowances for Sales Returns and Markdowns.
 Provisions for Inventory Obsolescence.
 Goodwill and Other Intangible Assets.
 19




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Interest Rate Risk
  Foreign Currency Risk
  
    .
 20




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We may be subject to claims of infringement regarding products or technologies that are protected
by trademarks, patents and other intellectual property rights.
   21




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Election of Directors
    
    Votes For
    
    Votes WithheldRalph Finerman
    
    
    80,440,164
    
    
    
    217,084Steven B. Fink
    
    
    80,538,964
    
    
    
    118,284Keith D. Grinstein
    
    
    80,446,891
    
    
    
    210,357Alan B. Levine
    
    
    80,447,199
    
    
    
    210,049Stanley E. Maron
    
    
    80,425,869
    
    
    
    231,379Joseph J. Millin
    
    
    80,540,664
    
    
    
    116,584Michael P. Muldowney
    
    
    80,517,564
    
    
    
    139,684Richard V. Sandler
    
    
    80,425,282
    
    
    
    231,966Scott J. Weiss
    
    
    80,520,264
    
    
    
    136,984
 BrokerVotes
    
    
    
    
    
    Non-Other Matters Voted Upon
    
    For
    
    Against
    
    Abstentions
    
    VotesRatification of the
selection of Ernst &
Young LLP as the
independent auditors
for the fiscal year
ending December 31,
2006.
    
    
    80,407,249
    
    
    
    11,105
    
    
    
    238,423
    
    
    
    
 
   Exhibit No.
    
    Description4.1(1)#
    
    Amended and Restated 1998 Equity Participation Plan of
Nextera Enterprises, Inc.4.2(1)#
    
    Non-Qualified Stock Option Agreement dated March 3, 2004, by
and among Nextera Enterprises, Inc. and Ralph Finerman.4.3(1)#
    
    Non-Qualified Stock Option Agreement dated March 3, 2004, by
and among Nextera Enterprises, Inc. and Steven B. Fink.4.4(1)#
    
    Non-Qualified Stock Option Agreement dated March 3, 2004, by
and among Nextera Enterprises, Inc. and Keith D. Grinstein.4.5(1)#
    
    Non-Qualified Stock Option Agreement dated March 3, 2004, by
and among Nextera Enterprises, Inc. and Alan B. Levine.
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Exhibit No.
    
    Description4.6(1)#
    
    Non-Qualified Stock Option Agreement dated March 3, 2004, by
and among Nextera Enterprises, Inc. and Stanley E. Maron.10.3.1(2)#
    
    Employment Agreement dated as of April 1, 2006 by and between
Nextera Enterprises, Inc. and Michael P. Muldowney.10.18# *
    
    Form of Non-Qualified Stock Option Agreement for use with the
Amended and Restated 1998 Equity Participation Plan
(Independent Director)10.19# *
    
    Form of Non-Qualified Stock Option Agreement for use with the
Amended and Restated 1998 Equity Participation Plan
(Employee)31.1
    
    Rule 13a-14(a)/15(d)-14(a) Certification31.2
    
    Rule 13a-14(a)/15(d)-14(a) Certification32.1***
    
    Section 1350 Certification32.2***
    
    Section 1350 Certification
 
 (1)
    
    Filed as an exhibit to Nexteras Registration Statement on Form S-8 (File No. 333-135335)
dated June 26, 2006, and incorporated herein by reference.(2)
    
    Filed as an exhibit to Nexteras Quarterly Report on Form 10-Q for the quarter ended March 31,
2006, and incorporated herein by reference.#
    
    Indicates a management plan or compensatory plan or arrangement.*
    
    Filed herewith.***
    
    Furnished solely to accompany this quarterly report pursuant
to 18 U.S.C. § 1350, and not filed for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, and is not to be
incorporated by reference into any filing of Nextera Enterprises,
Inc., whether made before or after the date hereof, regardless of any
general incorporation language in such filing. 23




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##### Table of Contents



NEXTERA ENTERPRISES, INC.(Registrant)Date: August 11, 2006
    
    By: /s/ Joseph J. MillinJoseph J. MillinPresident(Principal Executive Officer)Date: August 11, 2006
    
    By: /s/ Michael P. MuldowneyMichael P. MuldowneyChief Operating Officer and Chief Financial Officer(Principal Financial Officer)
 24