##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 þ
    
    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 
incorporation or organization)
    
    (I.R.S. Employer
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 September 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2006 and 2005
    
    
    5Condensed Consolidated Statements of Cash Flows for the  Nine Months Ended September 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
    
    
    21PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    22Item 1A.
    
    Risk Factors
    
    
    22Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3.
    
    Defaults Upon Senior Securities
    
    
    22Item 6.
    
    Exhibits
    
    
    22Signatures
    
    
    23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART IFINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Nextera Enterprises, Inc.
 
 Condensed Consolidated Balance Sheets
  September 30,
    
    December 31,2006
    
    2005(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,532
    
    
    $
    15,043Accounts receivable
    
    
    1,685
    
    
    
    Inventory
    
    
    2,522
    
    
    
    Due from supplier
    
    
    270
    
    
    
    Prepaid expenses and other current assets
    
    
    503
    
    
    
    128Total current assets
    
    
    6,512
    
    
    
    15,171Property and equipment, net
    
    
    157
    
    
    
    22Goodwill
    
    
    17,790
    
    
    
    Intangible assets, net
    
    
    6,003
    
    
    
    Other assets
    
    
    670
    
    
    
    42Total assets
    
    $
    31,132
    
    
    $
    15,235Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    1,872
    
    
    $
    542Revolving credit facility
    
    
    1,068
    
    
    
    Current portion of long-term debt
    
    
    1,000
    
    
    
    Total current liabilities
    
    
    3,940
    
    
    
    542Long-term debt
    
    
    9,750
    
    
    
    Deferred taxes
    
    
    504
    
    
    
    Other long-term liabilities
    
    
    1,334
    
    
    
    1,334Commitments and contingencies (Note 9)
    
    
    
    
    
    
    Stockholders equity:Preferred Stock, $0.001 par value,
10,000,000 shares authorized, 600,000
authorized shares designated Series A,
51,535 and 48,906 Series A issued and
outstanding at September 30, 2006 and
December 31, 2005, respectively
    
    
    5,154
    
    
    
    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 September 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
September 30, 2006 and December 31, 2005
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    165,267
    
    
    
    161,130Accumulated deficit
    
    
    (154,859
    )
    
    
    (152,695
    )Total stockholders equity
    
    
    15,604
    
    
    
    13,359Total liabilities and stockholders equity
    
    $
    31,132
    
    
    $
    15,235
  3




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Nextera Enterprises, Inc.
 
 Condensed Consolidated Statements of Operations
  Three Months EndedSeptember 30,2006
    
    2005Net sales
    
    $
    3,800
    
    
    $
    Cost of sales
    
    
    1,282
    
    
    
    Gross profit
    
    
    2,518
    
    
    
    Selling, general and administrative expenses
    
    
    2,129
    
    
    
    491Amortization of intangibles
    
    
    146
    
    
    
    Operating income (loss)
    
    
    243
    
    
    
    (491
    )Interest income
    
    
    23
    
    
    
    64Interest expense
    
    
    (319
    )
    
    
    Other expense
    
    
    
    
    
    
    (142
    )Loss from continuing operations before income taxes
    
    
    (53
    )
    
    
    (569
    )Provision for income taxes
    
    
    475
    
    
    
    6Loss from continuing operations
    
    
    (528
    )
    
    
    (575
    )Income from discontinued operations
    
    
    
    
    
    
    19Net loss
    
    
    (528
    )
    
    
    (556
    )Preferred stock dividends
    
    
    (90
    )
    
    
    (84
    )Net loss applicable to common stockholders
    
    $
    (618
    )
    
    $
    (640
    )Net loss per common share, basic and dilutedContinuing operations
    
    $
    (0.01
    )
    
    $
    (0.02
    )Discontinued operations
    
    
    
    
    
    
    0.00Net loss per common share, basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.02
    )Weighted average common shares outstanding, basic and diluted
    
    
    42,337
    
    
    
    33,870
  4




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Nextera Enterprises, Inc.
 
 Condensed Consolidated Statements of Operations
  Nine Months EndedSeptember 30,2006
    
    2005Net sales
    
    $
    8,460
    
    
    $
    Cost of sales
    
    
    3,639
    
    
    
    Gross profit
    
    
    4,821
    
    
    
    Selling, general and administrative expenses
    
    
    5,659
    
    
    
    1,623Amortization of intangibles
    
    
    329
    
    
    
    Operating loss
    
    
    (1,167
    )
    
    
    (1,623
    )Interest income
    
    
    178
    
    
    
    182Interest expense
    
    
    (706
    )
    
    
    Other expense
    
    
    
    
    
    
    (179
    )Loss from continuing operations before income taxes
    
    
    (1,695
    )
    
    
    (1,620
    )Provision for income taxes
    
    
    504
    
    
    
    18Loss from continuing operations
    
    
    (2,199
    )
    
    
    (1,638
    )Income from discontinued operations
    
    
    35
    
    
    
    131Net loss
    
    
    (2,164
    )
    
    
    (1,507
    )Preferred stock dividends
    
    
    (264
    )
    
    
    (245
    )Net loss applicable to common stockholders
    
    $
    (2,428
    )
    
    $
    (1,752
    )Net loss per common share, basic and dilutedContinuing operations
    
    $
    (0.06
    )
    
    $
    (0.06
    )Discontinued operations
    
    
    0.00
    
    
    
    0.00Net loss per common share, basic and diluted
    
    $
    (0.06
    )
    
    $
    (0.05
    )Weighted average common shares outstanding, basic and diluted
    
    
    40,205
    
    
    
    33,870
  5




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Nextera Enterprises, Inc.
 
 Condensed Consolidated Statements of Cash Flows
  Nine Months EndedSeptember 30,2006
    
    2005Operating activitiesNet loss
    
    $
    (2,164
    )
    
    $
    (1,507
    )Adjustments to reconcile net loss to net cash used
in operating activities:Depreciation and amortization
    
    
    36
    
    
    
    13Reversal of allowance
    
    
    
    
    
    
    (131
    )Amortization of intangible assets
    
    
    329
    
    
    
    Deferred taxes
    
    
    504
    
    
    
    Stock-based compensation
    
    
    175
    
    
    
    4Change in operating assets and liabilities:Accounts receivable
    
    
    (1,043
    )
    
    
    Inventory
    
    
    843
    
    
    
    Prepaid expenses and other assets
    
    
    (126
    )
    
    
    90Accounts payable and accrued expenses
    
    
    633
    
    
    
    (107
    )Net cash used in operating activities
    
    
    (813
    )
    
    
    (1,638
    )Investing activitiesPurchase of property and equipment
    
    
    (59
    )
    
    
    Acquisition of businesses, net of cash acquired
    
    
    (22,967
    )
    
    
    Proceeds from sale of business
    
    
    
    
    
    
    237Net cash (used in) provided by investing activities
    
    
    (23,026
    )
    
    
    237Financing activitiesNet borrowings under revolving credit facility
    
    
    2,068
    
    
    
    Borrowings under term note
    
    
    10,000
    
    
    
    Payment of term note
    
    
    (250
    )
    
    
    Payment of note acquired in acquisition
    
    
    (1,000
    )
    
    
    Payment of debt issuance costs
    
    
    (490
    )
    
    
    Net cash provided by financing activities
    
    
    10,328
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (13,511
    )
    
    
    (1,401
    )Cash and cash equivalents at beginning of period
    
    
    15,043
    
    
    
    16,713Cash and cash equivalents at end of period
    
    $
    1,532
    
    
    $
    15,312
  6




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Note 1. Basis of Presentation
      Note 2. Accounting Policies
 Stock-Based Compensation and Other Equity Instruments
 Share-Based Payment,
 7




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Three Months Ended
    
    Nine Months EndedSeptember 30, 2005
    
    September 30, 2005(Amounts in thousands, except per share data)Net loss, as reported
    
    $
    (556
    )
    
    $
    (1,507
    )Compensation expense under fair value-based
accounting method
    
    
    (43
    )
    
    
    (136
    )Pro forma net loss
    
    $
    (599
    )
    
    $
    (1,643
    )Net loss per common share, basic and diluted:As reported
    
    $
    (0.02
    )
    
    $
    (0.05
    )Pro forma
    
    $
    (0.02
    )
    
    $
    (0.06
    )
 Reclassifications
  Recently Issued Accounting Pronouncements
 Accounting for Uncertainty in Income Taxesan interpretation
of FASB Statement No. 10
 Inventory Costs 
 Note 3. Acquisitions
 Woodridge Labs, Inc
   
    
    $23.0 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;
 8




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
    
    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.
  Business Combinations
 Current assets
    
    $
    4,638Long-term assets
    
    
    389Goodwill
    
    
    17,790Intangible assets
    
    
    6,100Total assets acquired
    
    $
    28,917Less liabilities assumed
    
    
    1,703$
    27,214
  Nine Months Ended
    
    Three Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2005(Amounts in thousands, except per share data)Net sales
    
    $
    10,639
    
    
    $
    12,104
    
    
    $
    3,253Income (loss) from continuing operations
before income taxes
    
    
    (110
    )
    
    
    649
    
    
    
    183Net income (loss)
    
    
    (649
    )
    
    
    768
    
    
    
    207
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Nine Months Ended
    
    Three Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2005(Amounts in thousands, except per share data)Preferred stock dividends
    
    
    (264
    )
    
    
    (245
    )
    
    
    (84
    )Net income (loss) applicable to common
stockholders
    
    $
    (385
    )
    
    $
    523
    
    
    $
    291Weighted average common shares
outstandingbasic and diluted
    
    
    42,337
    
    
    
    42,337
    
    
    
    42,337Basic and diluted income (loss) per share
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    0.01
  LaVar Licensing Agreement
 Ô
 Note 4. Inventories
  September 30, 2006(In thousands)Raw materials
    
    $
    1,179Finished goods
    
    
    1,343$
    2,522
 Note 5. Intangible Assets
  September 30, 2006(In thousands)Goodwill
    
    $
    17,790Trademarks and brands
    
    $
    2,800Covenant not to compete
    
    
    1,900Customer relationships
    
    
    1,400Licensing agreements
    
    
    192Other
    
    
    406,332Less: accumulated amortization
    
    
    329Intangible assets, net
    
    $
    6,003
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Note 6. Financing Arrangements
      11




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September 30, 2006Term loan
    
    $
    9,750Revolving credit facility
    
    
    2,068$
    11,818Less: Current portion of long-term debt (including $1.1
million of the revolving credit facility which is
expected to be repaid during the next twelve months)
    
    
    2,068$
    9,750
  Twelve months ending December 31,
2006
    
    $
    2502007
    
    
    1,0002008
    
    
    1,2502009
    
    
    1,7502010
    
    
    5,318Thereafter
    
    
    2,250$
    11,818
 Note 7. Basic and Diluted Net Income (Loss) per Common Share
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005(Amounts in thousands, except per share data)Loss from continuing operations
    
    $
    (528
    )
    
    $
    (575
    )
    
    $
    (2,199
    )
    
    $
    (1,638
    )Preferred stock dividends
    
    
    (90
    )
    
    
    (84
    )
    
    
    (264
    )
    
    
    (245
    )Loss from continuing operations
applicable to common stockholders
    
    
    (618
    )
    
    
    (659
    )
    
    
    (2,463
    )
    
    
    (1,883
    )
 12




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005(Amounts in thousands, except per share data)Income from discontinued operations
    
    
    
    
    
    
    19
    
    
    
    35
    
    
    
    131Net loss applicable to common
stockholders
    
    $
    (618
    )
    
    $
    (640
    )
    
    $
    (2,428
    )
    
    $
    (1,752
    )Weighted average common shares
outstandingbasic and diluted
    
    
    42,337
    
    
    
    33,870
    
    
    
    40,205
    
    
    
    33,870Basic and diluted net loss per
common shareLoss from continuing operations
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.06
    )
    
    $
    (0.06
    )Income from discontinued operations
    
    
    
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Net loss per common share, basic
and diluted
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.06
    )
    
    $
    (0.05
    )
  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
    %
 13




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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 September 30, 2006
    
    
    6,839,267
    
    
    $
    1.58
    
    
    
    5.8
    
    
    $
    Options exercisable at September
30, 2006
    
    
    5,189,600
    
    
    $
    1.91
    
    
    
    4.1
    
    
    $
    
 
 (1)
    
    The intrinsic value of a stock option is the amount by which the current market value of the
underlying stock exceeds the exercise price of the option.  Note 9. 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
   
    
    $23.0 million in cash, including $0.8 million of acquisition expenses paid to third parties;
 15




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
    
    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 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 September 30, 2006 and the Three Months Ended September 30,
2005
 Net Sales
 Gross Profit
 Selling, General and Administrative Expenses.
 Interest Income
 Interest Expense
 Income Taxes
 16




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Comparison of the Nine Months Ended September 30, 2006 and the Nine Months Ended September 30, 2005
 Net Sales
 Gross Profit
 Selling, General and Administrative Expenses.
 Interest Income
 Interest Expense
 Income Taxes
 17




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Liquidity and Capital Resources
         18




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Certain Contractual Obligations, Commitments and Contingencies
  Contractual Obligations
    
    Payments due by Period as of September 30, 2006(in thousands)
    
    Total
    
    Less than 1 year
    
    1-3 years
    
    4-5 years
    
    After 5 yearsLong-term debt
    
    $
    11,818
    
    
    $
    1,000
    
    
    $
    2,813
    
    
    $
    8,005
    
    
    $
    Operating leases
    
    
    2,709
    
    
    
    634
    
    
    
    1,091
    
    
    
    984
    
    
    
    Total contractual
obligations
    
    $
    14,527
    
    
    $
    1,634
    
    
    $
    3,904
    
    
    $
    8,989
    
    
    $
    
 Off-Balance-Sheet Arrangements
  Critical Accounting Policies
  Revenue Recognition.
 19




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Allowances for Sales Returns and Markdowns.
 Provisions for Inventory Obsolescence.
 Goodwill and Other Intangible Assets.
  
  Interest Rate Risk
  Foreign Currency Risk
  20




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.
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Exhibit No.
    
    Description31.1
    
    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
 
 ***
    
    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. 22




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NEXTERA ENTERPRISES, INC.
(Registrant)Date:  November 14, 2006
    By:
    /s/ Joseph J. MillinJoseph J. MillinPresident
(Principal Executive Officer)Date:  November 14, 2006
    By:
    /s/ Michael P. MuldowneyMichael P. MuldowneyChief Operating Officer and Chief Financial Officer

(Principal Financial Officer) 23