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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Nextera Enterprises Inc (CE) | USOTC:NXRA | OTCMarkets | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 0.000001 | 0.00 | 01:00:00 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
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 000-25995
NEXTERA ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
95-4700410 |
(State or other jurisdiction of |
|
(I.R.S. Employer |
incorporation or organization) |
|
Identification Number) |
14320 Arminta Street, Panorama City, California, 91402
(Address of principal executive office, including zip code)
(818) 902-5537
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Exchange Act Rule 12b-2.
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). YES o NO x
As of November 7, 2007, 38,692,851 shares of registrants Class A Common Stock, $0.001 par value, were outstanding and 3,844,200 shares of registrants Class B Common Stock, $0.001 par value, were outstanding.
NEXTERA ENTERPRISES, INC.
Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 2007
INDEX
2
Nextera Enterprises, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share amounts)
|
|
September 30, 2007 |
|
December 31,
|
|
||
|
|
(Unaudited) |
|
|
|
||
Assets |
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
412 |
|
$ |
597 |
|
Accounts receivable, net of allowances for customer deductions and doubtful accounts of $4,100 at September 30, 2007 |
|
741 |
|
|
|
||
Inventories |
|
1,983 |
|
2,595 |
|
||
Due from supplier |
|
|
|
127 |
|
||
Prepaid expenses and other current assets |
|
328 |
|
260 |
|
||
Total current assets |
|
3,464 |
|
3,579 |
|
||
|
|
|
|
|
|
||
Property and equipment, net |
|
256 |
|
284 |
|
||
Goodwill |
|
8,969 |
|
10,969 |
|
||
Intangible assets, net |
|
12,377 |
|
12,827 |
|
||
Other assets |
|
461 |
|
484 |
|
||
Total assets |
|
$ |
25,527 |
|
$ |
28,143 |
|
|
|
|
|
|
|
||
Liabilities and Stockholders Equity |
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
||
Accounts payable and accrued expenses |
|
$ |
1,876 |
|
$ |
4,364 |
|
Revolver credit facility |
|
2,750 |
|
|
|
||
Current portion of long-term debt |
|
750 |
|
|
|
||
Total current liabilities |
|
5,376 |
|
4,364 |
|
||
|
|
|
|
|
|
||
Long-term debt, net of current portion |
|
8,750 |
|
11,718 |
|
||
|
|
|
|
|
|
||
Deferred taxes |
|
416 |
|
236 |
|
||
Other long-term liabilities |
|
934 |
|
1,334 |
|
||
Commitments and contingencies |
|
|
|
|
|
||
|
|
|
|
|
|
||
Redeemable Preferred Stock, $0.001 par value. Liquidation preference of $100 per share: |
|
|
|
|
|
||
Series B Cumulative Non-Convertible, 200,000 authorized shares designated, 25,801 and 0 issued and outstanding at September 30, 2007 and December 31, 2006, respectively. |
|
1,869 |
|
|
|
||
Series C Cumulative Non-Convertible, 200,000 authorized shares designated, none outstanding at September 30, 2007 and December 31, 2006. |
|
|
|
|
|
||
|
|
|
|
|
|
||
Stockholders equity: |
|
|
|
|
|
||
Preferred Stock, $0.001 par value, 10,000,000 shares authorized. Liquidation preference of $100 per share: |
|
|
|
|
|
||
Series A Cumulative Convertible, 600,000 authorized shares designated, 55,398 and 52,429 issued and outstanding at September 30, 2007 and December 31, 2006, respectively. |
|
5,540 |
|
5,243 |
|
||
Class A Common Stock, $0.001 par value, 95,000,000 shares authorized, 38,692,851 and 38,492,851 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively. |
|
39 |
|
38 |
|
||
Class B Common Stock, $0.001 par value, 4,300,000 shares authorized, 3,844,200 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively. |
|
4 |
|
4 |
|
||
Additional paid-in capital |
|
165,711 |
|
165,218 |
|
||
Accumulated deficit |
|
(163,112 |
) |
(160,012 |
) |
||
Total stockholders equity |
|
8,182 |
|
10,491 |
|
||
Total liabilities and stockholders equity |
|
$ |
25,527 |
|
$ |
28,143 |
|
See Notes to Condensed Consolidated Financial Statements
3
Nextera Enterprises, Inc.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except share amounts; unaudited)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net sales |
|
$ |
1,709 |
|
$ |
3,800 |
|
$ |
7,101 |
|
$ |
8,460 |
|
Cost of sales |
|
820 |
|
1,282 |
|
3,020 |
|
3,639 |
|
||||
Gross profit |
|
889 |
|
2,518 |
|
4,081 |
|
4,821 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative expenses |
|
1,645 |
|
2,129 |
|
5,659 |
|
5,659 |
|
||||
Amortization of intangible assets |
|
276 |
|
146 |
|
808 |
|
329 |
|
||||
Operating income(loss) |
|
(1,032 |
) |
243 |
|
(2,386 |
) |
(1,167 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
|
|
23 |
|
6 |
|
178 |
|
||||
Interest expense |
|
(350 |
) |
(319 |
) |
(941 |
) |
(706 |
) |
||||
Other income (expense) |
|
(1 |
) |
|
|
1 |
|
|
|
||||
Loss from continuing operations before income taxes |
|
(1,383 |
) |
(53 |
) |
(3,320 |
) |
(1,695 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Provision (benefit) for income taxes |
|
(340 |
) |
475 |
|
(220 |
) |
504 |
|
||||
Loss from continuing operations |
|
(1,043 |
) |
(528 |
) |
(3,100 |
) |
(2,199 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Income from discontinued operations |
|
|
|
|
|
|
|
35 |
|
||||
Net loss |
|
(1,043 |
) |
(528 |
) |
(3,100 |
) |
(2,164 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Preferred stock dividends |
|
(140 |
) |
(90 |
) |
(350 |
) |
(264 |
) |
||||
Net loss applicable to common stockholders |
|
$ |
(1,183 |
) |
$ |
(618 |
) |
$ |
(3,450 |
) |
$ |
(2,428 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Net loss per common share, basic and diluted |
|
|
|
|
|
|
|
|
|
||||
Continuing operations |
|
$ |
(0.03 |
) |
$ |
(0.01 |
) |
$ |
(0.08 |
) |
$ |
(0.06 |
) |
Discontinued operations |
|
( |
) |
( |
) |
( |
) |
( |
) |
||||
Net loss per common share, basic and diluted |
|
$ |
(0.03 |
) |
$ |
(0.01 |
) |
$ |
(0.08 |
) |
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares outstanding, basic and diluted |
|
42,470 |
|
42,337 |
|
42,381 |
|
40,205 |
|
See Notes to Condensed Consolidated Financial Statements
4
Nextera Enterprises, Inc.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands; unaudited)
|
|
Nine Months Ended
|
|
||||
|
|
2007 |
|
2006 |
|
||
Operating activities |
|
|
|
|
|
||
Net loss |
|
$ |
(3,100 |
) |
$ |
(2,164 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
||
Depreciation |
|
52 |
|
36 |
|
||
Amortization of intangible assets |
|
808 |
|
329 |
|
||
Provision for allowances and returns |
|
1,033 |
|
|
|
||
Inventory write-down |
|
163 |
|
|
|
||
Deferred taxes |
|
180 |
|
504 |
|
||
Stock based compensation |
|
184 |
|
175 |
|
||
Gain on sale of fixed assets |
|
(1 |
) |
|
|
||
Change in operating assets and liabilities: |
|
|
|
|
|
||
Accounts receivable |
|
(2,481 |
) |
(1,043 |
) |
||
Inventories |
|
449 |
|
843 |
|
||
Prepaid expenses and other assets |
|
(151 |
) |
(126 |
) |
||
Accounts payable and accrued expenses |
|
(2,054 |
) |
633 |
|
||
Net cash used in operating activities |
|
(4,918 |
) |
(813 |
) |
||
|
|
|
|
|
|
||
Investing activities |
|
|
|
|
|
||
Cash recovered from acquisition escrow |
|
2,000 |
|
|
|
||
Acquisition of business, net of cash acquired |
|
|
|
(22,967 |
) |
||
Purchase of intellectual property and licensing agreement |
|
(276 |
) |
|
|
||
Purchase of fixed assets |
|
(23 |
) |
(59 |
) |
||
Net cash provided by (used in) investing activities |
|
1,701 |
|
(23,026 |
) |
||
|
|
|
|
|
|
||
Financing activities |
|
|
|
|
|
||
Borrowing (payments) under revolving credit facility |
|
532 |
|
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 |
) |
||
Proceeds from issuance of note payable |
|
2,500 |
|
|
|
||
Net cash provided by financing activities |
|
3,032 |
|
10,328 |
|
||
|
|
|
|
|
|
||
Net decrease in cash and cash equivalents |
|
(185 |
) |
(13,511 |
) |
||
|
|
|
|
|
|
||
Cash and cash equivalents at beginning of period |
|
597 |
|
15,043 |
|
||
Cash and cash equivalents at end of period |
|
$ |
412 |
|
$ |
1,532 |
|
|
|
|
|
|
|
||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
||
Interest |
|
$ |
730 |
|
640 |
|
|
Income Taxes |
|
1 |
|
|
|
||
Non-cash financing activity: |
|
|
|
|
|
||
Conversion of note payable to preferred stock and warrant |
|
2,500 |
|
|
|
See Notes to Condensed Consolidated Financial Statements
5
NEXTERA ENTERPRISES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Nextera Enterprises, Inc. (Nextera or the Company) for the three months and nine months ended September 30, 2007 and 2006 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.
The condensed consolidated balance sheet as of December 31, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with managements discussion and analysis of financial condition and results of operations, contained in the Companys Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on April 17, 2007.
On March 9, 2006, the Company, through a wholly-owned subsidiary, acquired substantially all of the assets of Jocott Enterprises, Inc. (Jocott), formerly Woodridge Labs, Inc. Subsequently, the wholly owned subsidiary was renamed Woodridge Labs, Inc. As used herein, the term Woodridge refers to Jocott for all periods prior to March 9, 2006 and to Nexteras wholly owned subsidiary Woodridge Labs, Inc. from and after March 9, 2006. Prior to the acquisition of the Woodridge assets, Nextera had no business operations for the period from November 29, 2003 through March 8, 2006. Woodridges financial results have been included for the period subsequent to the acquisition date, March 9, 2006.
Woodridge, Nexteras sole operating business, is an independent developer and marketer of branded consumer products that offer solutions to niche personal care needs. Brands sold by Woodridge include Vita-K Solution, DermaFreeze 365 TM , Ellin LaVar Textures TM , Heavy Duty, Virtual laser TM , Pssssst®, Bath Lounge TM , Vita-C2 TM , firminol-10® and Turboshave®.
Mounte LLC (successor to Krest, LLC, Knowledge Universe LLC and Knowledge Universe, Inc., Mounte) controls a majority of the voting rights of the Companys equity securities through its ownership of the Companys Class A Common Stock, Class B Common Stock, Series A Cumulative Convertible Preferred Stock (Series A Preferred) and Series B Cumulative Non-Convertible Preferred Stock (Series B Preferred).
The accompanying condensed consolidated financial statements have been prepared on the basis that the Company is a going concern. In March 2007, the Company voluntarily recalled certain products in its DermaFreeze365 product line, resulting in adjustments to accounts receivable and inventory of $2.5 million and $0.2 million, respectively. Primarily as a result of these factors, the Company negotiated revisions to its financial covenants for 2007 with its lender (see footnote 8). The Company was successful in revising its financial covenants to provide for the deferral of certain covenants until 2008, as well as reducing the thresholds of other covenants that remain in effect throughout 2007. Further, the Company entered into various agreements with certain of its shareholders to obtain $4.5 million in additional subordinated financing which was funded during March and April 2007 and further amended its credit facility in November 2007 to obtain additional working capital bridge financing of $2.5 million (see footnote 8). The Companys forecast for 2007 anticipates compliance with all required financial covenants throughout 2007; however, management of the Company can provide no assurances that such compliance can be maintained. Should future events occur that are not now anticipated, the Company could be in violation of some or all of its covenants in 2007 and in 2008.
2. Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in the consolidation.
6
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 Companys 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 Companys 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 managements 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 Companys 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:
Equipment and vehicles |
|
3 - 5 years |
Furniture and fixtures |
|
3 - 5 years |
Software |
|
3 years |
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 Companys 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 Companys 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 Companys consolidated financial statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan 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 entitys first fiscal year that begins after December 15, 2006. The provisions of SFAS 158 are not expected to have a material impact on the Companys 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 entitys first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact of SFAS 159 on the Companys 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 Companys 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 Companys wholly owned subsidiary Woodridge Labs, Inc. from and after March 9, 2006. Woodridges 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 Nexteras 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):
Current assets |
|
$ |
4,559 |
|
Long-term assets |
|
389 |
|
|
Goodwill |
|
8,969 |
|
|
Intangible assets |
|
13,000 |
|
|
Total assets acquired |
|
$ |
26,917 |
|
Less liabilities assumed |
|
1,703 |
|
|
|
|
$ |
25,214 |
|
The following table sets forth the unaudited pro forma results in thousands, except for share data, of the Companys 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.
|
|
Nine months ended
|
|
|
Net sales |
|
$ |
10,639 |
|
|
|
|
|
|
Loss from continuing operations before income taxes |
|
(110 |
) |
|
|
|
|
|
|
Net loss |
|
(649 |
) |
|
Preferred stock dividends |
|
(264 |
) |
|
Net loss applicable to common stockholders |
|
$ |
(385 |
) |
|
|
|
|
|
Weighted average common shares outstandingbasic and diluted |
|
42,337 |
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
$ |
(0.01 |
) |
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:
|
|
September 30,
|
|
December 31,
|
|
||
|
|
(In thousands) |
|
||||
|
|
|
|
|
|
||
Raw materials |
|
$ |
910 |
|
$ |
1,217 |
|
Finished goods |
|
1,073 |
|
1,378 |
|
||
|
|
$ |
1,983 |
|
$ |
2,595 |
|
5. Intangible Assets
Intangible assets consist of the following:
|
|
September 30, |
|
December 31, |
|
||
|
|
2007 |
|
2006 |
|
||
|
|
(In thousands) |
|
||||
|
|
|
|
|
|
||
Goodwill |
|
$ |
8,969 |
|
$ |
10,969 |
|
|
|
|
|
|
|
||
Trademarks and brands |
|
2,200 |
|
2,200 |
|
||
Covenant not to compete |
|
1,600 |
|
1,600 |
|
||
Customer relationships |
|
9,200 |
|
9,200 |
|
||
Licensing agreements |
|
785 |
|
489 |
|
||
Other |
|
37 |
|
64 |
|
||
|
|
13,822 |
|
13,553 |
|
||
Less: accumulated amortization |
|
1,445 |
|
726 |
|
||
Intangible assets, net |
|
$ |
12,377 |
|
$ |
12,827 |
|
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:
|
|
Amortization Expense |
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
2007 |
|
$ |
244 |
|
2008 |
|
936 |
|
|
2009 |
|
937 |
|
|
2010 |
|
936 |
|
|
2011 |
|
937 |
|
|
2012 |
|
936 |
|
|
Thereafter |
|
7,451 |
|
|
12
6. Property and Equipment
Property and equipment are stated at cost and are summarized by major classification as follows:
|
|
September 30, |
|
December 31, |
|
||
|
|
2007 |
|
2006 |
|
||
|
|
(In thousands) |
|
||||
|
|
|
|
|
|
||
Equipment |
|
$ |
166 |
|
$ |
182 |
|
Tools and dies |
|
107 |
|
85 |
|
||
Software |
|
17 |
|
25 |
|
||
Furniture and fixtures |
|
26 |
|
53 |
|
||
Leasehold Improvements |
|
19 |
|
19 |
|
||
|
|
335 |
|
364 |
|
||
Less: accumulated depreciation |
|
79 |
|
80 |
|
||
Property and equipment, net |
|
$ |
256 |
|
$ |
284 |
|
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
|
|
September 30,
|
|
December 31,
|
|
||
|
|
(In thousands) |
|
||||
|
|
|
|
|
|
||
Trade accounts payable |
|
$ |
422 |
|
$ |
1,717 |
|
Accrued credit customer balances |
|
834 |
|
1,859 |
|
||
Accrued payroll and compensation |
|
176 |
|
129 |
|
||
Accrued legal, audit and annual report costs |
|
178 |
|
134 |
|
||
Accrued severance |
|
|
|
270 |
|
||
Accrued interest |
|
130 |
|
65 |
|
||
Accrued commission |
|
42 |
|
|
|
||
Other |
|
94 |
|
190 |
|
||
|
|
$ |
1,876 |
|
$ |
4,364 |
|
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 Nexteras 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, Woodridges 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) Woodridges 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 Nexteras 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):
|
|
September 30,
|
|
|
Term loan |
|
$ |
9,500 |
|
Revolving credit facility |
|
|
|
|
|
|
9,500 |
|
|
Less: Current portion of long-term debt |
|
750 |
|
|
|
|
$ |
8,750 |
|
Future principal payments required in accordance with the terms of the Credit Agreement are as follows (in thousands):
Twelve months ending September 30, |
|
|
|
|
2008 |
|
$ |
750 |
|
2009 |
|
8,750 |
|
|
|
|
$ |
9,500 |
|
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 Nexteras 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 Nexteras 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 Jocotts irrevocable payment of the $2.0 million indemnity deposit and Jocotts 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 Jocotts irrevocable payment of the $2.0 million indemnity deposit and Jocotts 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 Companys 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 Nexteras 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 Nexteras 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 Nexteras 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 Nexteras 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 Nexteras 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 Nexteras 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 Companys 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.
|
|
Nine months ended
|
|
||
|
|
|
|
||
Risk-free interest rates |
|
4.75% |
- |
5.10% |
|
Expected lives (years) |
|
3 |
- |
5 |
|
Expected volatility |
|
58.3% |
- |
118.9% |
|
Dividend rate |
|
0% |
|
Stock Option Activity
Options granted, exercised, expired and forfeited under the Plan are as follows:
Stock Options |
|
Shares |
|
Weighted
|
|
Weighted-Average
|
|
Aggregate
|
|
||
Outstanding at December 31, 2006 |
|
6,552,267 |
|
$ |
1.62 |
|
|
|
|
|
|
Granted |
|
1,651,168 |
|
0.24 |
|
|
|
|
|
||
Exercised |
|
|
|
|
|
|
|
|
|
||
Forfeited or expired |
|
1,375,000 |
|
1.25 |
|
|
|
|
|
||
Options Outstanding at September 30, 2007 |
|
6,828,435 |
|
$ |
1.36 |
|
6.0 |
|
$ |
|
|
Options vested and expected to vest at September 30, 2007 |
|
6,204,732 |
|
$ |
1.46 |
|
5.0 |
|
$ |
|
|
Options exercisable at September 30, 2007 |
|
5,286,977 |
|
$ |
1.65 |
|
5.0 |
|
$ |
|
|
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:
|
|
Options Outstanding |
|
Options Exercisable |
|
||||||||
Range of
|
|
Shares |
|
Weighted Average Exercise Price |
|
Weighted Average Remaining Contractual Life |
|
Shares |
|
Weighted Average Exercise Price |
|
||
$0.16 - $ 1.00 |
|
3,851,168 |
|
$ |
0.41 |
|
7.9 |
|
2,309,710 |
|
$ |
0.43 |
|
$1.01 - $ 3.00 |
|
2,762,267 |
|
$ |
2.00 |
|
3.1 |
|
2,762,267 |
|
$ |
2.00 |
|
$3.01 and up |
|
215,000 |
|
$ |
10.32 |
|
2.0 |
|
215,000 |
|
$ |
10.32 |
|
|
|
6,828,435 |
|
$ |
1.36 |
|
6.0 |
|
5,286,977 |
|
$ |
1.65 |
|
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 Companys financial position and results of operations or liquidity.
18
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 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.
Cautionary Note Regarding Forward-Looking Statements
The following discussion contains forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historic or current facts. They use words such as may, could, will, continue, should, would, anticipate, estimate, expect, project, intend, plan, believe and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these forward-looking statements include statements relating to future actions or the outcome of financial results. From time to time, we also may provide oral or written forward-looking statements in other materials released to the public. Any or all of the forward-looking statements in this annual report and in any other public statements may turn out to be incorrect. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Our actual results may differ materially from those stated or implied by such forward-looking statements.
Factors that could cause our actual results to differ materially include, but are not limited to:
the effects of the voluntary recall of certain of our DermaFreeze365 products on our business, operations and financial condition;
our ability to repay the indebtedness and comply with the covenants under our senior secured credit facilities;
retention of our key personnel, particularly Mr. Millin, and our ability to attract and retain other personnel critical to our business;
our ability to develop and introduce new products in a highly competitive marketplace and successfully execute market expansion plans;
the impact of competition within our markets, and our ability to compete against companies that are larger and more well-established than we are or that have significantly greater resources than we do;
our reliance on third parties for all of our product manufacturing requirements;
the loss of any of our significant customers, as our sales are concentrated among a relatively small number of customers;
claims against us for infringement of intellectual property; and
other factors disclosed in Nexteras Annual Report on Form 10-K for the year ended December 31, 2006 under the heading Item 1A. Risk Factors.
New factors emerge from time to time, and it is not possible for us to predict all these factors nor can we assess the impact of these factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results.
Overview
The Managements Discussion and Analysis of Financial Condition and Results of Operations is designed to enable the reader of our financial statements to assess material changes in financial condition and results of operations between the three months and nine months ended September 30, 2007 and the three months and nine months ended September 30, 2006.
Nextera was incorporated in the state of Delaware in 1997. On March 9, 2006, Nextera, through W Lab Acquisition Corp., our wholly owned subsidiary, acquired substantially all of the assets of Jocott, which formerly
19
operated under the name Woodridge Labs, Inc. We refer to this acquisition and all related transactions in this report as the Transaction. Subsequently, our wholly owned subsidiary was renamed Woodridge Labs, Inc. As used in this report, the term Woodridge refers to Jocott for all periods prior to March 9, 2006 and to our wholly owned subsidiary Woodridge Labs, Inc. from and after March 9, 2006. Prior to the acquisition of the Woodridge assets, we had no business operations for the period from November 29, 2003 through March 8, 2006. Woodridges financial results have only been included for the period subsequent to the March 9, 2006 acquisition.
Woodridge, our sole operating business, is an independent developer and marketer of branded consumer products that offer simple, effective solutions to niche personal care needs. Since its formation in 1996, Woodridge has built its reputation and market position by identifying and exploiting underdeveloped opportunities within the personal care market, and by commercializing distinctive, branded products that are intended to directly address the specific demands of niche applications. In addition to its flagship Vita-K Solution product line, Woodridge has created a portfolio of other existing and development-stage consumer products, covering a wide range of uses and applications.
Our products are marketed at retail under the following core brands: Vita-K Solution®, DermaFreeze365, Ellin LaVar Textures, Heavy Duty, Virtual Laser, Psssssst®, Stoppers-4®, Bath Lounge, Vita-C2, Firminol-10® and TurboShave®. With our portfolio of products, we offer consumers affordable alternatives to expensive dermatologist treatments, while also offering retailers profitable and in-demand products. Our products can currently be found in over 22,000 retail locations across the United States and Canada. For the fiscal year ended December 31, 2006, our top customers included Walgreens, CVS, and Rite-Aid.
All of our manufacturing, production and onsite assembly are presently outsourced to third-parties, allowing us to focus on our core strength of discovering, developing and marketing niche personal care products. Most of our material warehousing and distribution functions are handled in-house and supervised by Woodridge management.
Product Recall
On March 13, 2007, our wholly-owned subsidiary, Woodridge, initiated a voluntary recall of certain of its DermaFreeze365 products. This recall was a result of certain limited lots testing positive for the Pseudomonas aeruginosa bacteria. We made a provision for the recall in our consolidated financial statements as of and for the year ended December 31, 2006 whereby net sales and accounts receivable were reduced by $2.3 million and inventories were written down by $0.2 million through a charge to cost of sales. Additionally, we made an additional provision of $0.2 million during the three-month period ended March 31, 2007 for the expected customer charge-backs related to 2007 sales of the affected products. No additional provisions have been made for the recall during the three-month period ended September 30, 2007.
Secured Credit Facility
In connection with the acquisition of the Woodridge business on March 9, 2006, we entered into a senior secured credit facility, which was subsequently amended in March 2007, April 2007 and again on November 7, 2007. We refer to our amended senior secured credit facility in this report as the Credit Agreement. The Credit Agreement originally consisted of a $10 million fully-drawn term loan, of which approximately $9.5 million was outstanding at December 31, 2006, and a four-year $5.0 million revolving credit facility, of which approximately $2.2 million was outstanding on December 31, 2006. Under the terms of the April 2007 amendment, the revolving credit facility was reduced to $2.75 million. Under the terms of the November 2007 amendment, the Company obtained additional bridge loan financing of $2.5 million due no later than the final maturity of May 31, 2008. Additionally, the financial covenants were waived for periods prior to November 7, 2007 and modified thereafter. The maturities of the term loan and the revolving credit facility were also accelerated to March 31, 2009. At September 30, 2007, the revolving credit facility was fully drawn down. At September 30, 2007 the Company failed to meet certain conditions as described under the Financing Arrangements to the Note to Unaudited Condensed Consolidated Financial Statements.
Heavy Duty Acquisition
On March 8, 2007, we entered into a purchase agreement with Heavy Duty Company and Alexandra Volkmann, whereby we acquired certain assets, including the Heavy Duty and other trademarks and a copyright. The total purchase price, which includes approximately $0.1 million of deal costs, was approximately $0.3 million. We will pay a royalty to Heavy Duty Company with respect to certain future sales of products under the trademarks acquired from Heavy Duty Company and Alexandra Volkmann.
20
KKG BodyFuel Foods License Agreement
On June 21, 2007, we entered into an Intellectual Property License Agreement with KKG BodyFuel Foods Enterprises, Incorporated and Keri Glassman, whereby we acquired certain rights and licenses to use various trademarks names and slogans. The consideration consisted of a non-refundable guaranteed royalty payment of $0.1 million in the first year and minimum royalty payments of $0.1 million in each of the next three years.
Additionally, on June 25, 2007 we entered into an Independent Contractor Agreement with KKG BodyFuel Foods Enterprises which provides a monthly fee of $5,000 plus expenses, a stock issuance of 200,000 shares of our Class A Common Stock and a stock option to purchase 400,000 shares of our Class A Common Stock in exchange for promotional services from Keri Glassman. The effective date of the agreement is July 24, 2007.
Comparison of the Three Months Ended September 30, 2007 and 2006
Net Sales . Sales are recorded net of estimated returns and other allowances. The provision for sales returns represents managements estimate of future returns based on historical experience and considering current external factors and market conditions. Net sales for the three months ended September 30, 2007 de creased $2.1 million, or 55%, to $1.7 million from $3.8 million for the same period last year. The net sales decrease in the current period related to a decrease in both unit quantities shipped of 22%, and an average unit price decrease of 23%, as well as an increase in customer credits of $0.1 million. Additionally, $1.7 million of the decrease in net sales relates to the sales of the Virtual Laser product line in the third quarter of 2006.
Gross Profit . Gross profit for the three months ended September 30, 2007 decreased $1.6 million, or 65% to $0.9 million from $2.5 million for the same period last year. Included within gross profit for the three months ended September 30, 2006 was a $0.1 million charge associated with the amortization of the step up to fair value in the inventory acquired from Woodridge, as required by SFAS No. 142, Goodwill and Other Intangible Assets, or SFAS 142. Eliminating the prior year step up to fair value charge of $0.1 million, the comparative gross profit for the three-months ended September 30, 2007 decreased $1.7 million, or 66% from $2.6 million for the same period last year. The decline in gross profit is due to the lower volume of sales of lower margin products, increased customer credits, increased labor costs as well as an increase in charges for inventory reserves during the three-months ended September 30, 2007.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended September 30, 2007 decreased $0.5 million, or 23%, to $1.6 million from $2.1 million for the same period last year. The decrease is due to decreased spending for selling and advertising expense of $0.5 million, decrease in labor and facility costs of $0.1 million related to the transfer of the corporate offices from Boston, offset by an increase in legal and accounting professional service fees of $0.1 million.
Amortization of Intangible Assets. Amortization of intangible assets for the three months ended September 30, 2007 increased to $0.3 million or, 89%, from $0.2 million for the same period last year.
Interest Expense . Interest expense was consistent at $0.3 million for the three months ended September 30, 2007 and for the same period last year. The interest expense is attributable to the credit facility that we entered into on March 9, 2006 to partially fund the Woodridge acquisition. Our debt bears interest at the London Interbank Offered Rate or LIBOR plus 4.50%.
Provision for Income Taxes . For the three months ended September 30, 2007, our benefit from federal and state taxes amounted to $0.3 million compared to a provision of $0.5 million for the same period in 2006. The decrease in the tax provision of $0.8 million is primarily the result of the reversal of valuation allowances in which the period for examination has expired. 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.
Comparison of the Nine Months Ended September 30, 2007 and 2006
Net Sales . Sales are recorded net of estimated returns and other allowances. The provision for sales returns represents managements estimate of future returns based on historical experience and considering current external factors and market conditions. Net sales for the nine months ended September 30, 2007 de creased $1.4 million, or 16%,
21
to $7.1 million from $8.5 million for the same period last year. The net sales decrease in the current period related to a decrease in both unit quantities shipped of 19%, and an average unit price decrease of 19%, as well as an increase in customer credits of $0.5 million or 20%. Net sales for the nine months ended September 30, 2006 reflect the operating results of the Woodridge business only from the March 9, 2006 acquisition to September 30, 2006. The 2007 net sales include a $0.2 million charge for expected returns related to the March 2007 voluntary recall of certain DermaFreeze365 products sold during the nine months ended September 30, 2007.
Gross Profit . Gross profit for the nine months ended September 30, 2007 decreased $0.7 million, or 15% to $4.1 million from $4.8 million for the same period last year. Gross profit in the 2006 period only includes operating activity for the post-Woodridge acquisition period from March 9, 2006 to September 30, 2006. The 2007 gross profit includes a $0.2 million charge for expected returns related to the March 2007 product recall of related products sold during the nine months ended September 30, 2007. Included within gross profit for the period ended September 30, 2006 is a $1.4 million charge associated with the amortization of the step up to fair value in the inventory acquired from Woodridge, as required by SFAS 142.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the nine months ended September 30, 2007 and 2006 was consistent at $5.7 million. Selling, general and administrative expenses for the nine months ending September 30, 2006 reflect the operating results of the Woodridge business only from the March 9, 2006 acquisition to September 30, 2006. Although spending was consistent year over year, the composition of spending changed due to lower spending for advertising and other sales related costs of $0.9 million, offset by higher spending for legal and accounting professional services of $0.1 million, higher spending for labor and consulting cost of $0.3 million and higher facilities cost of $0.5 million.
Amortization of Intangible Assets. Amortization of intangible assets for the nine months ended September 30, 2007 increased $0.5 million to $0.8 million from $0.3 million for the same period last year. The increase from the 2006 relates to the full nine months amortization of the intangible assets acquired as part of the Woodridge acquisition.
Interest Expense . Interest expense for the nine months ended Sept 30, 2007 increased $0.2 million, or 25% to $0.9 million from $0.7 million for the same period last year. The interest expense is attributable to the Credit Agreement that we entered into on March 9, 2006 to partially fund the Woodridge acquisition. Our debt bears interest at LIBOR plus 4.50%.
Income Taxes . For the nine months ended September 30, 2007, our benefit from federal and state taxes amounted to $0.2 million compared to a provision of $0.5 million for the same period in 2006. The decrease in the tax provision of $0.7 million is primarily the result of the release of certain unrecognized tax benefits in which the period for examination has expired. 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.
Liquidity and Capital Resources
Working capital was deficit a $1.9 million on September 30, 2007, compared with a working capital of deficit $0.8 million on December 31, 2006. Included in working capital were cash and cash equivalents of $0.4 million and $0.6 million on September 30, 2007 and December 31, 2006, respectively.
Net cash used in operating activities was $4.9 million for the nine months ended September 30, 2007. Included in the net cash used in operating activities was the net loss of $3.0 million. Non-cash operating charges including depreciation, amortization, compensation expense and reserves were $2.4 million were offset by $4.3 million of changes in operating assets and liabilities.
Net cash provided in investing activities was $1.7 million for the nine months ended September 30, 2007 , $2.0 million relating to cash received from the Woodridge acquisition escrow account, offset by $0.3 million relating to the purchase of the Heavy Duty intellectual property and issuance costs.
Net cash provided in financing activities was $3.0 million for the nine months ended September 30, 2007 , $2.5 million relating to cash recovered from the issuance of a note payable and $2.7 million relating to the draw down of the credit revolver, offset by $2.2 million relating to the paydown of the revolving credit agreement.
22
Our primary source of liquidity is our cash and cash equivalents, our cash generated from operations, and availability under our revolving credit facility. We believe that our current cash on hand and sources of cash are sufficient to meet all expenditures over the next twelve months. The cash generated by the operations of Woodridge and borrowed by Woodridge under the revolving credit facility is subject to restrictions as to the amount of funds that may be paid through a dividend to Nextera to pay corporate expenses . We believe that additional liquidity sources, if necessary, could be obtained by borrowing funds from a third party or raising equity through a public or private transaction, although these are subject to restrictions under our Credit Agreement as amended.
On April 17, 2007, we 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, we entered into an amendment agreement under the Credit Agreement (the Third Amendment). Under the terms of the Third Amendment, we 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 us. 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.
We have 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, we 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%, we 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.
Under the Credit Agreement, as amended, we are subject to certain limitations, including limitations on our 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, we 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, our obligations under the Credit Agreement may be accelerated and the lending commitments terminated. Such events of default include, but are not limited to: (i) our failure to pay principal or interest when due, (ii) our 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) our filing of a petition in bankruptcy, (v) the entry of a judgment or a court order against us 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 our board of directors or the chief executive officer of Woodridge prior to March 9, 2010, except for certain specified reasons.
Funding Agreement and Note Conversion Agreements
On April 16, 2007, we entered into a Funding Agreement with Woodridge, Mounte and Jocott (the Funding Agreement). Under the terms of the Funding Agreement, Mounte and Jocott loaned us 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 payable at the maturity date of April 1, 2012. We were prohibited from paying interest in cash on these notes under the terms of our Credit Agreement. Accordingly, interest was accrued and added to the
23
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 we, Woodridge or any of our 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 our 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 our outstanding preferred stock the Triggering Event, we will take the following actions:
a) Within 15 business days after the occurrence of a Triggering Event, we will issue to Jocott shares of 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 Jocotts irrevocable payment of the $2.0 million indemnity deposit and Jocotts 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 us pursuant to the promissory note issued by Jocott until the date of the any issuance of the additional shares of Series B Preferred to Jocott.
b) Within 15 business days after the occurrence of a Triggering Event, we will also issue to Jocott the same number of shares of our Series C Cumulative Non-Convertible Preferred Stock or Series C Preferred, 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 ours 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 we, Woodridge or any of our affiliates is a party. Such shares of Series C Preferred will be issued to Jocott in consideration of Jocotts irrevocable payment of the $2.0 million indemnity deposit and Jocotts compromise and settlement of the past, pending and future specified claims.
c) We will grant to the holders of Series A Preferred, Series B Preferred and Series C Preferred the right or 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 our 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, we will issue warrants to purchase our 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 our Class A Common Stock for which such warrants will be exercisable will be 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 our board of directors.
On June 15, 2007, we entered into a Note Conversion Agreement whereby we 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 Nexteras Series B Preferred, together with a cash payment in lieu of fractional shares. The Series B Preferred was issued at a price of $100 per share, has a
24
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 is not convertible into any of our other securities 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 is structured so as to qualify as Permitted Equity Interests as such term is defined in our Credit Agreement, as amended.
In connection with the issuance of Series B Preferred, we also 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, we granted Mounte and Jocott the right to purchase 3,033,945 and 2,022,630 shares, respectively, of our 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- (10) 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 $647,000. 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 Special Redemption Right is effectively redeemable at the option of the holder and ais 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.
Certain Contractual Obligations, Commitments and Contingencies
The following summarizes our significant contractual obligations and commitments at September 30, 2007 that impact our liquidity.
|
|
Payments due by Period |
|
|||||||||||||
Contractual Obligations
|
|
Total |
|
Less than 1
|
|
1-3 years |
|
4-5 years |
|
After 5 years |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Long-term debt |
|
$ |
9,500 |
|
$ |
750 |
|
$ |
8,750 |
|
$ |
|
|
$ |
|
|
Leases |
|
1,702 |
|
445 |
|
862 |
|
395 |
|
|
|
|||||
Total |
|
$ |
11,202 |
|
$ |
1,195 |
|
$ |
9,612 |
|
$ |
395 |
|
$ |
|
|
Off Balance Sheet Arrangements
We have not entered into any off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.
We believe the accounting policies below represent our critical accounting policies. See our Annual Report on Form 10-K for the year ended December 31, 2006 for a detailed discussion on the application of these and other accounting policies.
Revenue Recognition, Allowances for Sales Returns and Markdowns We recognize sales when title and risk of loss transfer to the customer, the sales price is fixed or determinable and collection of the resulting receivable is probable. Sales are recorded net of estimated returns and other allowances. Our provision for sales returns represents managements estimate of future returns based on historical experience and considering current external factors and market conditions.
25
Our sales-return accrual is a subjective critical estimate that has a direct impact on reported net sales. As is customary in the industry, we grant certain of our customers, subject to authorization and approval, the right to either return products or to receive a markdown allowance for certain promotional product. Upon sale, we record a provision for product returns and markdowns estimated based on our 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 we have considered, and will continue to consider, include, but are not limited to, the solvency of our customers, store closings by retailers, changes in the retail environment, including mergers and acquisitions, and our decision to continue or support new and existing products. Actual sales returns and markdowns may differ significantly, either favorably or unfavorably, from these estimates.
Provisions for Inventory Obsolescence We record 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.
Accounting for Acquisitions and Intangible Assets We have accounted for our 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.
Our 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, we often obtain appraisals from independent valuation firms for certain intangible assets.
Our 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 we experience declines in operating results or experience significant negative industry or economic trends. We periodically review 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 We review 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
As of September 30, 2007, we had $9.5 million in floating rate debt under the term loan of our Credit Agreement. Changes in interest rates would not significantly affect the fair value of our outstanding indebtedness. Our term loan currently bears interest at the six-month LIBOR rate plus 4.50%. Our revolving credit facility bears interest at different rates, ranging from one-month and three-month LIBOR plus 4.50% to base rate plus 3.25%. We have an interest rate collar agreement pertaining to $5.0 million of our term loan with respect to the three-month LIBOR rate, which effectively caps the rate at 6% and provides for a 5% floor. Assuming the outstanding balance on our floating rate indebtedness remains constant over a year, a 100 basis point increase in the interest rate would decrease pre-tax income and cash flow by approximately $0.12 million.
26
Foreign Currency Risk
We are not currently exposed to foreign currency risk because we do not currently have material business operations in foreign countries or any related sales and expenses
ITEM 4. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to management, including our President and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our President and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2007.
There have been no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting .
27
Risk factors describing the major risks to our business can be found under Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, from which Item 1A. is hereby incorporated by reference. There has been no material change in our risk factors from those previously discussed in the Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On July 24, 2007, Nextera issued shares of Class A Common Stock to KKG BodyFuels Foods in connection with Independent Contractor Agreement. which transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D. Nextera previously disclosed these transactions in a Quarterly Report on Form 10-Q dated June 30, 2007 filed with the SEC on August 13, 2007, which disclosure is incorporated herein by reference.
(a) Exhibits
10.1(1) |
|
Amendment Agreement under the Woodridge Labs Credit Agreement dated as of November 7, 2007 by and among Nextera Enterprises, Inc., Woodridge Labs, Inc. the lenders party thereto and NewStar Financial, Inc. (as administrative agent for the lenders) |
31.1 * |
|
Rule 13a-14(a)/15d-14(a) Certification |
31.2* |
|
Rule 13a-14(a)/15d-14(a) Certification |
32.1*** |
|
Section 1350 Certification |
32.2*** |
|
Section 1350 Certification |
(1) Filed as an exhibit to Nexteras Current Report on Form 8-K dated November 9, 2007 filed wit the SEC on November 9, 2007.
* 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.
28
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
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NEXTERA ENTERPRISES, INC. |
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|
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(Registrant) |
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|
|
|
|
|
|
|
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Date: November 14, 2007 |
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By: /s/ Joseph J. Millin |
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Joseph J. Millin |
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President |
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|
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(Principal Executive Officer) |
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|
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Date: November 14, 2007 |
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By: /s/ Antonio Rodriquez |
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|
|
Antonio Rodriquez |
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|
|
Chief Financial Officer |
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|
|
(Principal Financial Officer) |
29
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