NXRA Nextera Enterprises Inc (CE)

PART I                                FINANCIAL INFORMATION

See Notes to Condensed Consolidated Financial Statements

4

See Notes to Condensed Consolidated Financial Statements

5

NEXTERA ENTERPRISES, INC.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and demand deposit accounts. The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates market value.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents in various financial institutions with high credit ratings and, by policy, limits the amount of credit exposure to any one financial institution.

Concentrations of credit risk with respect to accounts receivable exist due to a limited number of customers that make up the Company’s customer base. Three customers accounted for 82% of gross accounts receivable as of September 30, 2007. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains allowances for doubtful accounts for specifically identified estimated losses resulting from the inability of its customers to make required payments. Gross sales (net sales prior to customer deductions) to the Company’s three largest customers made up 73% and 63% of total gross sales for the three-month and nine-month periods ending September 30, 2007.

Revenue Recognition, Allowances for Sales Returns and Markdowns

Sales are recognized when title and risk of loss transfer to the customer, the sales price is fixed or determinable and the collection of the resulting receivable is probable. Sales are recorded net of estimated returns and other allowances. The provision for sales returns represents management’s estimate of future returns based on historical experience and considering current external factors and market conditions.

The sales-return accrual is a subjective critical estimate that has a direct impact on reported net sales.  As is customary in the industry, the Company grants certain of its customers, subject to authorization and approval, the right to either return products or to receive a markdown allowance for certain promotional product. Upon sale, the Company records a provision for product returns and markdowns estimated based on historical and projected experience, economic trends and changes in customer demand. There is considerable judgment used in evaluating the factors influencing the allowance for returns and markdowns, and therefore additional allowances in any particular period may be needed. The types of known or anticipated events that the Company has considered, and will continue to consider, include, but are not limited to, the solvency of its customers, store closings by retailers, changes in the retail environment, including mergers and acquisitions, and the Company’s decision to continue or support new and existing products. Actual sales returns and markdowns may differ significantly, either favorably or unfavorably, from these estimates.

Advertising , Promotion and Marketing

All costs associated with advertising, promoting and marketing (including promotions, direct selling, co-op advertising and media placement) of Company products are expensed as incurred and charged to selling, general and administrative expense. For the three months ended September 30, 2007 and 2006, advertising and promotion expenses were $0.2 million and $0.6 million, respectively. For the nine months ended September 30, 2007 and 2006, advertising and promotion expenses were $0.8 million and $1.6 million, respectively

Shipping and Handling Costs

Substantially all costs associated with shipping and handling of products to customers are included in selling, general and administrative expense. For the three months ended September 30, 2007 and 2006, shipping and handling costs were approximately $0.1 million and $0.1 million, respectively. For the nine months ended September 30, 2007 and 2006, shipping and handling costs were approximately $0.3 million and $0.3 million, respectively.

7

Inventories

Inventories are stated at the lower of cost (using the first-in, first-out method) or market value.

Provisions for Inventory Obsolescence

The Company records a provision for estimated obsolescence of inventory. These estimates consider the cost of inventory, forecasted demand, the estimated market value, the shelf life of the inventory and historical experience. If there are changes to these estimates, additional provisions for inventory obsolescence may be necessary.

Property and Equipment

Property and equipment are stated at cost. Depreciation of property and equipment is provided on the straight line method based on the estimated lives of the assets. The principal estimated useful lives used in computing depreciation and amortization are as follows:

Leasehold improvements are amortized over the shorter of the life of the lease or the estimated useful life of the asset.

Accounting for Acquisitions and Intangible Assets

The Company has accounted for its acquisitions under the purchase method of accounting for business combinations. Under the purchase method of accounting, the costs, including transaction costs, are allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

The judgments made in determining the estimated fair value and expected useful lives assigned to each class of assets and liabilities acquired can significantly affect net income. For example, different classes of assets will have useful lives that differ and the useful life of property, plant and equipment acquired will differ substantially from the useful life of brand licenses and trademarks. Consequently, to the extent a longer-lived asset is ascribed greater value under the purchase method than a shorter-lived asset, net income in a given period may be higher.

Determining the fair value of certain assets and liabilities acquired is judgmental in nature and often involves the use of significant estimates and assumptions. One of the areas that requires more judgment is determining the fair value and useful lives of intangible assets. To assist in this process, the Company often obtains appraisals from independent valuation firms for certain intangible assets.

The Company’s intangible assets primarily consist of customer relationships, non-compete covenants, exclusive brand licenses and trademarks. The value of the intangible assets, including customer relationships and other intangibles, is exposed to future adverse changes if the Company experiences declines in operating results or experiences significant negative industry or economic trends. The Company periodically reviews intangible assets, at least annually or more often as circumstances dictate, for impairment and the useful life assigned using the guidance of applicable accounting literature.

Long-Lived Assets

The Company reviews for the impairment of long-lived assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

8

Deferred Financing Costs

The Company has incurred costs in connection with its credit agreement. Costs directly associated with financings are capitalized as deferred financing costs and are amortized over the weighted average life of the long-term credit facility.

Basic and Diluted Earnings Per Common Share

The Company presents two earnings per share amounts: the basic earnings per common share and the diluted earnings per common share. Basic earnings per common share includes only the weighted average shares outstanding and excludes any dilutive effects of options, warrants and convertible securities. The dilutive effects of options, warrants and convertible securities are added to the weighted average shares outstanding in computing diluted earnings per common share. For the three and nine-month periods ended September 30, 2007 and 2006, basic and diluted earnings per common share are the same due to the antidilutive effect of potential common shares outstanding.

Income Taxes

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007.  The impact of adopting FIN 48 was not material to the Company’s financial position or results of operations. Excluding the federal benefits on state tax positions and federal and state benefits on interest which have been recorded as deferred income taxes, there are no unrecognized tax benefits.

There are no income tax examinations currently in process.

Share-Based Compensation

All share-based payments to employees, including the grant of employee stock options, are recognized in the condensed consolidated financial statements based on their fair value. Compensation cost for awards that vest will not be reversed if the awards expire without being exercised. The fair value of stock options is determined using the Black-Scholes option-pricing model. Compensation costs for awards are amortized using the straight-line method. Option pricing model input assumptions such as expected term, expected volatility and risk-free interest rate impact the fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions are based on or determined from external data and other assumptions are derived from historical experience. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances.

The Company relies on its historical experience and post-vested termination activity to provide data for estimating its expected term for use in determining the fair value of its stock options. The Company currently estimates its stock volatility by considering its historical stock volatility experience and other key factors. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the input to the Black-Scholes model. The Company estimates forfeitures using its historical experience. The estimates of forfeitures will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from their estimates.

Comprehensive Loss

Other than the net loss incurred during the three-month periods ended September 30, 2007 and 2006, there were no additional material other components of comprehensive loss.

Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) Statement No. 157, “ Fair Value Measurements,” (“SFAS 157”). SFAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and expands on required disclosures about fair value measurement. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. Early adoption is permitted. The

9

Company plans to adopt SFAS No. 157 in the first quarter of its 2008 fiscal year. The provisions of SFAS 157 are not expected to have a material impact on the Company’s consolidated financial statements.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 158, “ Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. This statement is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2006. The provisions of SFAS 158 are not expected to have a material impact on the Company’s consolidated financial statements.

In February 2007, the Financial Accounting Standards Board (“F ASB”) issued SFAS 159, “ The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact of SFAS 159 on the Company’s consolidated financial statements.

Reclassifications

Certain reclassifications were made to the 2006 financial statements in order that they may be consistent with the 2007 presentation.

3.               Acquisitions

Woodridge Labs, Inc

On March 9, 2006, the Company, through W Lab Acquisition Corp., the Company’s wholly owned subsidiary, acquired substantially all of the assets of Jocott. Jocott formerly operated under the name “Woodridge Labs, Inc.”  The assets of Jocott were acquired pursuant to an asset purchase agreement, which agreement is referred to as the “Woodridge Asset Purchase Agreement” in these financial statements. The acquisition of the assets of Jocott and all related transactions are referred to in these financial statements as the “Woodridge Transaction.”  Subsequently, W Lab Acquisition Corp. was renamed Woodridge Labs, Inc. As used in these financial statements, the term “Woodridge” refers to Jocott for all periods prior to March 9, 2006 and to the Company’s wholly owned subsidiary Woodridge Labs, Inc. from and after March 9, 2006. Woodridge’s financial results have only been included for the period subsequent to the acquisition date, March 9, 2006.

The purchase price comprised:

•                   $23.2 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 Woodridge Transaction; and

•                   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 Woodridge Transaction.

$2.0 million of the cash portion of the purchase price was originally placed in escrow through September 2007. On March 29, 2007, Nextera, Woodridge and Jocott entered into an Indemnity Deposit Agreement, under which  $0.5 million was withdrawn from the escrow account that was established in connection with the Woodridge Transaction and such funds were paid to Nextera by Jocott as a deposit to be held by Nextera and Woodridge pending any final determination under which Jocott was obligated under the Woodridge Asset Purchase Agreement to indemnify Woodridge or Nextera for damages in connection with the March 2007 product recall of certain DermaFreeze365™ products sold by Woodridge.

10

Nextera, Woodridge, Mounte and Jocott entered into a Funding Agreement, dated April 16, 2007 (“Funding Agreement”), whereby Jocott paid as an additional irrevocable indemnity deposit, an amount equal to $1.5 million. The additional deposit was also made by withdrawing such amount from the escrow account that was established in connection with the Woodridge Transaction. The parties agreed that the terms and conditions of the Funding Agreement will govern both the original and additional indemnity deposits. The Jocott deposit of $2.0 million will not bear interest and Nextera and Woodridge may use the deposit funds to satisfy any liabilities, obligations or other requirements of either or both of Nextera and Woodridge. The deposits will be deemed to be in satisfaction and payment in full of any and all past, present and future claims for indemnification for any breaches of any of the representations and warranties pursuant to the Woodridge Asset Purchase Agreement that originally would have survived for only eighteen months following the closing date of the Woodridge Transaction, but does not apply to any claims for breaches of any representations or warranties that survive beyond the eighteen month period. The deposits are the sole and exclusive property of Nextera and Nextera has no liability or obligation to account for or return or refund any portion of the deposits or any earnings on the deposits. Accordingly, the entire $2.0 million was recorded as a reduction of the purchase price and therefore a reduction of goodwill related to the Woodridge Transaction in March 2007.

The Woodridge Transaction was accounted for under the purchase method of accounting in accordance with SFAS No. 141, “ Business Combinations ” (“SFAS 141”)  Under the purchase method of accounting, the total estimated purchase price is allocated to the net tangible and intangible identifiable assets and liabilities based on their estimated relative fair values. The excess purchase price over those assigned values was recorded as goodwill. Goodwill recorded as a result of this acquisition is deductible for tax purposes. The final purchase price allocation is as follows (in thousands):

The following table sets forth the unaudited pro forma results in thousands, except for share data, of the Company’s operations for the nine months ended September 30, 2006 as if the acquisition of Woodridge had been completed on January 1, 2006. The unaudited pro forma results are not indicative of what the actual results would have been had the acquisition been completed on January 1, 2006 nor do they purport to indicate the results of the future operations of Nextera.

The amortization of the inventory step-up, which represents an increase to the inventory to reflect its fair value (less selling profit) and results in an increase in cost of sales upon the sale of the inventory, has been excluded from the pro forma amounts as the costs are non-recurring.

11

LaVar Acquisition

On May 23, 2006, Woodridge entered into a purchase agreement with LaVar Holdings, Inc. (the “LaVar Purchase Agreement”), whereby Woodridge acquired the exclusive worldwide license rights, along with certain other assets and proprietary rights, to the Ellin LaVar Textures Ô hair care product line and brand name. The total purchase price, which includes approximately $0.1 million of transactions costs, was approximately $0.5 million. Under the terms of the LaVar Purchase Agreement, Woodridge will pay a royalty to LaVar Holdings, Inc. with respect to certain future sales of products under the acquired trademarks.

Heavy Duty Acquisition

On March 8, 2007, Woodridge entered into a purchase agreement with Heavy Duty Company (the “Heavy Duty Purchase Agreement”), whereby Woodridge acquired the exclusive worldwide license rights, along with certain other assets and proprietary rights, to the Heavy Duty Ô personal care product line and brand name. The total purchase price, which includes approximately $0.1 million of transactions costs, was approximately $0.3 million. Under the terms of the Heavy Duty Purchase Agreement, Woodridge will pay a royalty to the Heavy Duty Company with respect to certain future sales of products under the acquired trademarks.

4.               Inventories

Inventories, net of provision for obsolescence, consist of the following:

5.               Intangible Assets

Intangible assets consist of the following:

The intangible assets, other than the covenant not to compete, are amortized over their estimated useful lives, which range from 10-20 years. The covenant not to compete is amortized over its contractual life of 9 years.

The estimated intangible amortization expense for the next five years is as follows:

12

6.               Property and Equipment

Property and equipment are stated at cost and are summarized by major classification as follows:

7.               Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

8.               Financing Arrangements

In connection with the acquisition of substantially all of the assets of Jocott, Nextera and Woodridge (as borrower) entered into a credit agreement on March 9, 2006 for a $15.0 million senior secured credit facility, which was originally comprised of a $10.0 million fully-drawn term loan and a four-year $5.0 million revolving credit facility (the “Credit Agreement”). The Credit Agreement was subsequently amended on March 29, 2007, April 17, 2007 and again on November 7, 2007.

Effective March 29, 2007, Nextera, Woodridge, the administrative agent for the lenders, and the lenders, entered into an amendment and forbearance agreement (the “Amendment and Forbearance Agreement”). The Amendment and Forbearance Agreement amended and modified certain terms of the original Credit Agreement. Under the terms of the Amendment and Forbearance Agreement, the date by which Nextera and Woodridge were required to deliver Nextera’s audited consolidated financial statements as of and for the year ended December 31, 2006 and related certificates and reports to the administrative agent was postponed from March 31, 2007 to April 30, 2007. Additionally, a principal payment of $250,000 that was due on March 31, 2007 was postponed to April 30, 2007.

The administrative agent for the lenders under the Credit Agreement determined that, as of March 29, 2007, certain events of default under the Credit Agreement (which events of default are referred to as the “Specified Events of Default” in these financial statements) had occurred as a consequence of the breach by Nextera and Woodridge of certain financial covenants as of December 31, 2006. Under the Amendment and Forbearance Agreement, the lenders

13

agreed, during the forbearance period, to forbear the exercise of any and all rights and remedies to which the lenders are or may become entitled as a result of the Specified Events of Default. The forbearance period began on March 29, 2007 and ended on April 30, 2007.

On April 17, 2007, Nextera, Woodridge, the administrative agent and the lenders entered into an amendment agreement under the Credit Agreement (the “Second Amendment”). Under the terms of the Second Amendment, the revolving credit facility was reduced from $5.0 million to $2.75 million. Pursuant to the Second Amendment, the term loan and the revolving credit facility bear interest at the London Interbank Offered Rate (“LIBOR”) plus 4.50%, or bank base rate plus 3.25%, as selected by Woodridge.

On November 7, 2007, Nextera, Woodridge, Mounte, the administrative agent and the lenders entered into an amendment agreement under the Credit Agreement (the “Third Amendment”). Under the terms of the Third Amendment, the Company obtained a bridge loan credit facility aggregating $2.5 million. Pursuant to the Third Amendment, the bridge loan facility , the term loan and the revolving credit facility will bear interest at the London Interbank Offered Rate (“LIBOR”) plus 5.0%, or bank base rate plus 4.0%, as selected by Woodridge. Outstanding borrowings under the bridge loan facility must be repaid with cash balances in excess of $500,000 through the final maturity of May 31, 2008. Outstanding borrowings under the term loan must be repaid in 4 quarterly payments, commencing March 31, 2008, with a final payment due on March 31, 2009, the maturity date of the term loan. The maturity date for the revolving credit facility is also March 31, 2009. The commitment fee on the revolving credit facility is payable quarterly at a rate of 0.50% of the unused amount of the revolving credit facility per annum. Additionally, the financial covenants were waived for periods prior to November 7, 2007 and modified thereafter.

The Company has an interest rate collar agreement to hedge the LIBOR interest rate risk on $5.0 million of the term loan. Under the terms of this agreement, the Company will pay a 6% fixed rate if the three-month LIBOR rate exceeds 6% and in return will receive the three-month LIBOR rate. In addition, if the three-month LIBOR rate falls below 5%, the Company will pay a 5% fixed rate and in return will receive the three-month LIBOR rate. The effect of this agreement is therefore to convert the floating three-month LIBOR rate to a fixed rate if the three-month LIBOR rate exceeds 6% or falls below 5%. The three-month LIBOR rate received under the agreement will substantially match the rate paid on the term loan since term loan currently bears interest at the six-month LIBOR rate. The fair value of the collar was ($56,000) at September 30, 2007.

The obligations of Woodridge, as borrower, under the Credit Agreement are guaranteed by Nextera and all of the direct and indirect domestic subsidiaries of Woodridge and Nextera existing from time to time (other than Nextera Business Performance Solutions Group, Inc., Nextera Canada Co. and Nextera Economics, Inc.), which are referred to as the “Subsidiary Guarantors” in these financial statements. In addition, Nextera, Woodridge and the Subsidiary Guarantors are party to a security agreement and a pledge agreement, which create security and pledge interests with respect to substantially all present and future property of Nextera, Woodridge and the Subsidiary Guarantors.

Under the Credit Agreement, as amended, Nextera and Woodridge are subject to certain limitations, including limitations on their ability: to incur additional debt or sell assets, with restrictions on the use of proceeds; to make certain investments and acquisitions; to grant liens; and to pay dividends and make certain other restricted payments. In addition, Woodridge will be required to prepay principal amounts outstanding under certain circumstances if it issues debt or equity, sells assets or property, receives certain extraordinary receipts or generates excess cash flow. The Credit Agreement, as amended, also contains certain restrictive financial covenants, including minimum consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”), minimum purchase order levels and maximum corporate overhead, as defined..

Upon the occurrence of certain events of default, Woodridge’s obligations under the Credit Agreement may be accelerated and the lending commitments terminated. Such events of default include, but are not limited to: (i) the failure of Woodridge to pay principal or interest when due, (ii) Woodridge’s breach or failure to perform any of the covenants or obligations set forth in the Credit Agreement, which for certain covenants and obligations is subject to a 30-day cure period, (iii) the acceleration of certain other indebtedness of Woodridge, (iv) a filing of a petition in bankruptcy by Woodridge, (v) the entry of a judgment or a court order against Woodridge in excess of certain specified dollar thresholds, (vi) a reduction below certain levels in the ownership or economic interests of our existing significant stockholders in the aggregate or (vii) Mr. Millin ceasing to be a member of Nextera’s board of directors or the chief executive officer of Woodridge prior to March 9, 2010, except for certain specified reasons.

14

Long-term debt consists of the following (in thousands):

Future principal payments required in accordance with the terms of the Credit Agreement are as follows (in thousands):

Funding Agreement and Note Conversion Agreements

On April 16, 2007, Nextera, Woodridge, Mounte and Jocott entered into a Funding Agreement (the “Funding Agreement”). Under the terms of the Funding Agreement, Mounte and Jocott loaned to Nextera the principal sums of $1.5 million and $1.0 million respectively, pursuant to individual promissory notes. The notes accrued interest at an annual rate of 7% with principal originally payable at the maturity date of April 1, 2012. Nextera was prohibited from paying interest in cash on these notes under the terms of its Credit Agreement. Accordingly, interest was accrued and added to the principal balance of the notes. The notes, including accrued interest, were exchanged in connection with the Note Conversion Agreement discussed below.

The Funding Agreement provides, subject to (i) any required consents or approvals of the lenders under the Credit Agreement and of any other persons whose consent or approval is required at the time under any credit or other contract or agreement to which Nextera, Woodridge or any of their affiliates is a party, (ii) any required consent of the holders of the outstanding Series A Preferred, and (iii) the approval of the Board; that, in the event that Nextera’s EBITDA for a fiscal year is greater than or equal to $7.0 million or is greater than or equal to $12.0 million for any two consecutive fiscal years, or any event happens that results in the exchange or redemption of, or payment of a liquidation preference with respect to, any of Nextera’s outstanding preferred stock (the “Triggering Event”), Nextera will take the following actions:

a)               Within 15 business days after the occurrence of a Triggering Event, Nextera will issue to Jocott additional shares of Cumulative Non-convertible Series B Preferred Stock (“Series B Preferred”) in addition to the shares of Series B Preferred issued in connection with the Note Conversion Agreement, at a price equal to $100 per share. The number of such additional shares to be issued to Jocott will be equal to the quotient obtained by dividing (i) the sum of (A) $1,000,000, plus (B) the Appreciation Amount defined below, by (ii) 100, and rounding down to the nearest whole share. Such shares of Series B Preferred will be issued to Jocott in consideration of Jocott’s irrevocable payment of the $2.0 million indemnity deposit and Jocott’s compromise and settlement of the past, pending and future specified claims. The “Appreciation Amount” means an amount equal to a deemed appreciation equal to (1) $1,000,000, multiplied by (2) seven percent (7%) per annum, compounded annually, calculated from the date that Jocott loaned the funds to Nextera pursuant to the promissory note issued by Jocott until the date of the issuance of the additional shares of Series B Preferred to Jocott.

b)              Within 15 business days after the occurrence of a Triggering Event, Nextera will also issue to Jocott the same number of shares of Series C Cumulative Non-Convertible Preferred Stock (“Series C Preferred”) of Nextera as the number of additional shares of Series B Preferred issued to Jocott. The Series C Preferred will (i) be issued at a price equal to $100 per share, (ii) have a liquidation preference equal to $100 per share and (iii) provide for a 7% paid-in-kind dividend. The Series C Preferred will not be convertible into any other securities of Nextera and the Series C Preferred will rank (i) junior to the Series A Preferred as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution or winding up, and (ii) on a parity with the Series B Preferred as to the payment of dividends and the Special Redemption Right noted below, but rank junior to the Series B Preferred as to the distribution of assets upon liquidation, dissolution or winding up. The Series C Preferred will be structured so as to comply with any applicable restrictions in any credit or other contract or agreement to which Nextera, Woodridge or any of their affiliates is a party. Such

15

shares of Series C Preferred will be issued to Jocott in consideration of Jocott’s irrevocable payment of the $2.0 million indemnity deposit and Jocott’s compromise and settlement of the past, pending and future specified claims.

c)               Nextera will grant to the holders of Series A Preferred, Series B Preferred and Series C Preferred the right (the “Special Redemption Right”), the exercise of which is conditioned upon the occurrence of a Triggering Event, the request of the holders and the approval of the Company’s board of directors,  to redeem all or a portion of the shares of the Preferred Stock held by such holders at a redemption price equal to $100 per share (plus any applicable accrued but unpaid dividends on the shares so redeemed). The Special Redemption Right of the holders of Series A Preferred will be senior and prior to the Special Redemption Rights of the holders of Series B Preferred and Series C Preferred, and the Special Redemption Rights of the holders of Series B Preferred and Series C Preferred will be on a parity with each other.

Additionally, under the provisions of the Funding Agreement, in connection with and at the time of the issuance of any Series B Preferred and/or Series C Preferred, Nextera issued warrants to purchase Nextera’s Class A Common Stock at an exercise price of $0.50 per share (the “Warrants”) to the holder of such Series B Preferred and/or Series C Preferred. The number of shares of Nextera’s Class A Common Stock for which such warrants are exercisable is equal to (i) with respect to notes redeemed or exchanged for Series B Preferred , the product of (A) the outstanding principal balance plus all accrued but unpaid interest that was redeemed or exchanged, multiplied by (B) two (2); (ii) 2,000,000 shares with respect to the Series B Preferred Stock issued upon the occurrence of a Triggering Event (when and if such Series B Preferred is issued), and (iii) 2,000,000 shares with respect to the Series C Preferred issued upon the occurrence of a Triggering Event (when and if such Series C Preferred is issued). The Warrants will have a ten (10) year term and have customary piggyback registration rights and anti-dilution rights and other rights with respect to specified events, all as determined by Nextera’s board of directors.

On June 15, 2007, Nextera entered into a Note Conversion Agreement whereby Nextera exchanged all outstanding principal and accrued interest owed to Mounte and Jocott pursuant to individual promissory notes executed in connection with the Funding Agreement for 15,169 and 10,113 shares, respectively, of Nextera’s Series B Preferred together with a cash payment in lieu of fractional shares. The Series B Preferred Stock was issued at a price of $100 per share, has a liquidation preference of $100 per share, provides for a 7% per annum cumulative paid-in-kind dividend, and entitles its holders to a number of votes equal to the number of shares held. The Series B Preferred Stock is not convertible into any other securities of Nextera and ranks junior to the Series A Preferred Stock as to the payment of dividends, the issuance of a special redemption, and the distribution of assets upon liquidation, dissolution or winding up. The Series B Preferred Stock is structured so as to qualify as “Permitted Equity Interests” as such term is defined in Nextera’s Credit Agreement, as amended.

In connection with the issuance of the issuance of the Series B Preferred Stock, Nextera issued a Class A Common Stock Purchase Warrant to, each of Mounte and Jocott, pursuant to the terms of a Funding Agreement. Under such Warrants, Nextera granted Mounte and Jocott the right to purchase 3,033,945 and 2,022,630 shares, respectively, of Nextera’s Class A Common Stock at an exercise price of $0.50 per share, exercisable at any time at the option of the holder. The warrants have a ten-year term and have customary piggyback registration rights and anti-dilution rights with respect to specified events. The fair value of the warrants has been determined to be $647 thousand. This amount was calculated using the Black-Scholes pricing model with the following assumptions: 118.9% volatility; expected term of 10 years; 5.10% risk-free rate; and 0% dividend.

The Series B Preferred is classified as mezzanine equity as the Redemption Rights are effectively redeemable at the option of the holders and are not solely within the control of the issuer. The initial carrying amount of the Series B Preferred is the fair value at issuance. The Series B Preferred will not be accreted to the redemption value of $2.5 million until redemption is considered probable. The 7% paid-in-kind dividend accrues to the carrying value of the Series B Preferred.

9.               Share-Based Compensation

For the three months ended September 30, 2007 and 2006, the compensation cost charged against income was $0.03 million and $0.07 million, respectively. For the nine months ended September 30, 2007 and 2006, the compensation cost charged against income was $0.2 million and $0.2 million, respectively. As of September 30, 2007, there were approximately $0.2 million of unrecognized compensation costs related to non-vested share-based arrangements granted under the Company’s Amended and Restated 1998 Equity Participation Plan (the “Plan”). Those costs are expected to be recognized over a weighted-average period of approximately one year.

During the three months ended September 30, 2007, the Company granted stock options for an aggregate of 400,000 shares of Class A Common Stock under the Plan to a non-employee with an Independent Contractor

16

agreement with KKG BodyFuel Foods Enterprises. The weighted-average grant-date fair value of options granted was $0.13 per share based on the Black-Scholes option-pricing model. The options expire ten years from the date of grant.

The weighted-average grant date fair value of options granted during the nine months ended September 30, 2007 was estimated on the grant date using the Black-Scholes option-pricing model with the assumptions noted in the following table.  Expected volatilities are based on historical volatility of the Common Stock and other factors.  The expected term of options represents the period of time that options granted are expected to be outstanding and is derived from historical terms and other factors.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2007 and 2006 were $0.13 and $0.35, respectively. Intrinsic value is defined as the difference between the relevant current market value of the underlying common stock and the grant price for options with exercise prices less than the market values on such dates. There were no options exercised during the three months ended September 30, 2007 and 2006.

Options are granted at an exercise price equal to the fair market value at the date of grant. Information regarding stock options outstanding as of September 30, 2007 is as follows:

17

10.        Income Taxes

For the three months ended September 30, 2007 and 2006, the provision for federal and state taxes amounted to ($0.3) million and $0.5 million, respectively. For the nine months ended September 30, 2007 and 2006, the provision for federal and state taxes amounted to ($0.2) million and $0.5 million, respectively. During the three months ended September 30, 2006, $0.4 million was recorded for a potential tax liability which at the time was deemed probable. The period for review of this tax position expired in September 2007. Since the period for review has elapsed, the $0.4 million was reversed in the current period. The effective income tax rate reflects the book to tax difference from goodwill amortization. Additionally, income tax benefits from the available net operating losses are not reflected in the 2007 and 2006 provisions as the realization of these benefits is not deemed more likely than not.

11.        Commitments and Contingencies

The Company, from time to time, is subject to certain asserted claims arising in the ordinary course of business. The Company intends to vigorously assert its rights and defend itself in any litigation that may arise from such claims. While the ultimate outcome of these matters could affect the results of operations of any one quarter or year when resolved in future periods, and while there can be no assurance with respect thereto, management believes that after final disposition, any financial impact to the Company would not be material to the Company’s financial position and results of operations or liquidity.

18