UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 Form 10-Q (Mark one) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE 
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30,
2004 |_| TRANSITION REPORT UNDER SECTION 13 OR 15
(d) OF THE 
SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission file number: 0-16179 Gexa Corp.(Exact name of
registrant as specified in its charter) Texas
  
  76-0670175(State or other jurisdiction of incorporation or organization)
  
  (IRS
  Employer Identification No.)20
  Greenway Plaza, Suite 600, Houston, TX
  
  77046(Address
  of principal executive offices)
  
  (Zip
  Code)(713) 470-0400(Issuers
  telephone number) 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 |_| Indicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Yes |_| No |X| APPLICABLE ONLY TO CORPORATE ISSUERS Indicate
the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date:Common Stock, $.01 par value 8,645,070
shares outstanding as of October 30, 2004 1   TABLE OF CONTENTS
PART I. FINANCIAL
  INFORMATION
  PageItem 1. Condensed Financial Statements
  3Item 2. Managements Discussion and Analysis of Financial
  Condition and Results of Operations
  19Item 3. Quantitative and Qualitative Disclosures about Market
  Risk
  26Item 4. Controls and Procedures
  27PART II. OTHER INFORMATIONItem 1. Legal Proceedings
  29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  30Item 3. Defaults Upon Senior Securities
  30Item 4. Submission of Matters to a Vote of Security Holders
  30Item 5. Other Information
  30Item 6. Exhibits
  302


PART I. FINANCIAL INFORMATION

Item 1. Condensed Financial
Statements

Set
forth below are the condensed financial statements for the Company for the three
and nine month periods ended September 30, 2004 and 2003.

INDEX TO CONDENSED FINANCIAL STATEMENTS
PageCondensed
  Balance Sheets as of September 30, 2004 (Unaudited) and December 31, 2003
  4Condensed
  Statements of Operations for the three and nine months ended September 30,
  2004 and 2003 (Unaudited)
  5Condensed
  Statements of Cash Flows for the nine months ended September 30, 2004 and
  2003(Unaudited)
  6Notes to Condensed Financial Statements (Unaudited)
  83


Gexa Corp.
CONDENSED BALANCE SHEETS
(In thousands, except share data)

September 30, 2004
  
  December 31, 2003(Unaudited)AssetsCurrent
  Assets:Cash and
  cash equivalents
  
  
  $
  1,529
  
  
  
  $
  10,829Cash -
  restricted
  
  
  
  11,701
  
  
  
  
  3,613Accounts
  receivable, net of allowance for doubtful accounts
  
  
  
  42,107
  
  
  
  
  22,327Deferred tax
  asset
  
  
  
  1,046
  
  
  
  
  458Other
  current assets
  
  
  
  68
  
  
  
  
  82Total
  Current Assets
  
  
  
  56,451
  
  
  
  
  37,309Property and
  equipment, net
  
  
  
  1,097
  
  
  
  
  374Deferred tax
  asset
  
  
  
  276
  
  
  
  
  292Other assets
  
  
  
  2,710
  
  
  
  
  227Total Assets
  
  
  $
  60,534
  
  
  
  $
  38,202Liabilities
  and Shareholders EquityCurrent
  Liabilities:Current
  portion of long-term debt
  
  
  $
  
  
  
  
  $
  608Accrued
  electricity costs
  
  
  
  18,448
  
  
  
  
  16,555Accounts
  payable and other accrued expenses
  
  
  
  13,179
  
  
  
  
  6,084Taxes
  payable (Federal Income, State Franchise, Sales, and GRT)
  
  
  
  7,408
  
  
  
  
  2,923Customer
  deposits
  
  
  
  5,271
  
  
  
  
  3,376Total
  Current Liabilities
  
  
  
  44,306
  
  
  
  
  29,546Long-term
  debt
  
  
  
  6,056
  
  
  
  
  2,382Puttable
  warrant obligation
  
  
  
  
  
  
  
  
  4,125Accrued
  interest payable - officer
  
  
  
  
  
  
  
  
  20Total
  Liabilities
  
  
  
  50,362
  
  
  
  
  36,073Shareholders
  Equity:Common
  stock, $0.01 par value; 75,000,000 shares authorized; 8,554,838 shares issued
  and 8,540,991 shares outstanding at September 30, 2004; 8,261,128 shares
  issued and 8,247,281 shares outstanding at December 31, 2003
  
  
  
  86
  
  
  
  
  83Additional
  paid-in capital
  
  
  
  9,180
  
  
  
  
  7,348Treasury
  stock, at cost; 13,847 shares
  
  
  
  (14
  )
  
  
  
  (14
  )Retained
  earnings (accumulated deficit)
  
  
  
  920
  
  
  
  
  (5,288
  )Total
  Shareholders Equity
  
  
  
  10,172
  
  
  
  
  2,129Total
  Liabilities and Shareholders Equity
  
  
  $
  60,534
  
  
  
  $
  38,202See accompanying notes to condensed financial
statements
4



GEXA CORP.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months
  Ended
  
  Nine Months
  EndedSeptember 30, 2004
  
  September 30, 2003
  
  September 30, 2004
  
  September 30, 2003As Restated  (See Fn 11)
  
  
  
  As Restated  (See Fn 11)(Unaudited)
  
  (Unaudited)Sales
  
  
  $
  86,781
  
  
  
  $
  39,644
  
  
  
  $
  199,319
  
  
  
  $
  74,012Cost of goods sold
  
  
  
  78,694
  
  
  
  
  34,895
  
  
  
  
  178,589
  
  
  
  
  66,596Gross profit
  
  
  
  8,087
  
  
  
  
  4,749
  
  
  
  
  20,730
  
  
  
  
  7,416General &
  administrative expenses
  
  
  
  5,293
  
  
  
  
  2,703
  
  
  
  
  12,862
  
  
  
  
  5,787Income from operations
  
  
  
  2,794
  
  
  
  
  2,046
  
  
  
  
  7,868
  
  
  
  
  1,629Interest income
  
  
  
  18
  
  
  
  
  9
  
  
  
  
  25
  
  
  
  
  19interest expense
  
  
  
  (347
  )
  
  
  
  (144
  )
  
  
  
  (767
  )
  
  
  
  (215
  )Other financing income
  (expense) (see Note 7)
  
  
  
  (415
  )
  
  
  
  (193
  )
  
  
  
  1,840
  
  
  
  
  (193
  )Earnings before income
  taxes
  
  
  
  2,050
  
  
  
  
  1,718
  
  
  
  
  8,966
  
  
  
  
  1,240Income tax expense
  
  
  
  993
  
  
  
  
  699
  
  
  
  
  2,758
  
  
  
  
  470Net income
  
  
  
  1,057
  
  
  
  
  1,019
  
  
  
  
  6,208
  
  
  
  
  770Preferred stock dividend
  
  
  
  
  
  
  
  
  (13
  )
  
  
  
  
  
  
  
  
  (38
  )Net income available to
  common stockholders
  
  
  $
  1,057
  
  
  
  $
  1,006
  
  
  
  $
  6,208
  
  
  
  $
  732Weighted average shares
  outstandingBasic
  
  
  
  8,531
  
  
  
  
  7,617
  
  
  
  
  8,453
  
  
  
  
  7,609Diluted
  
  
  
  9,706
  
  
  
  
  7,951
  
  
  
  
  9,663
  
  
  
  
  7,684Earnings per shareBasic
  
  
  $
  0.12
  
  
  
  $
  0.13
  
  
  
  $
  0.73
  
  
  
  $
  0.10Diluted
  
  
  
  0.11
  
  
  
  
  0.13
  
  
  
  
  0.64
  
  
  
  
  0.10See accompanying notes to condensed financial
statements
5



Gexa Corp.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)

Nine months endedSeptember 30, 2004
  
  September 30, 2003As Restated  (See Fn 11)(Unaudited)Cash flows
  from operating activities:Net income
  
  
  $
  6,208
  
  
  
  $
  770Adjustments
  to reconcile net income to 
  net cash provided by operating activities:Depreciation and amortization
  
  
  
  195
  
  
  
  
  78Amortization of financing costs
  
  
  
  207
  
  
  
  
  28Accretion of debt discount
  
  
  
  (153
  )
  
  
  
  Stock issued to officers, directors
  and consultants for services
  
  
  
  100
  
  
  
  
  8
  Change in puttable warrant obligation
  
  
  
  (1,840
  )
  
  
  
  193Deferred income tax benefit
  
  
  
  (572
  )
  
  
  
  (261
  )Changes in operating assets and
  liabilities:Accounts receivable
  
  
  
  (19,780
  )
  
  
  
  (17,278
  )Other current assets
  
  
  
  28
  
  
  
  
  (181
  )Other long-term assets
  
  
  
  (1,149
  )
  
  
  
  Accrued electricity costs
  
  
  
  1,893
  
  
  
  
  9,771Accounts payable and other accrued expenses
  
  
  
  6,320
  
  
  
  
  4,850Taxes payable
  
  
  
  4,485
  
  
  
  
  715Customer deposits
  
  
  
  1,895
  
  
  
  
  1,893Accrued interest payable
  
  
  
  (20
  )
  
  
  
  6Net cash
  provided by (used in) operating activities
  
  
  
  (2,183
  )
  
  
  
  592Cash flows
  from investing activities:Restricted cash
  
  
  
  (8,088
  )
  
  
  
  Purchases of equipment
  
  
  
  (904
  )
  
  
  
  (188
  )Net cash
  used in investing activities
  
  
  
  (8,992
  )
  
  
  
  (188
  )Cash flows
  from financing activities:Payments on credit facility
  
  
  
  (5,030
  )
  
  
  
  3,150Borrowings on revolving credit line
  
  
  
  6,057
  
  
  
  
  (28
  )Changes in treasury stock
  
  
  
  
  
  
  
  
  (4
  )Proceeds from sale of common stock
  
  
  
  848
  
  
  
  
  65Net cash
  provided by financing activities
  
  
  
  1,875
  
  
  
  
  3,183Net change
  in cash
  
  
  
  (9,300
  )
  
  
  
  3,587Cash and
  cash equivalents at beginning of period
  
  
  
  10,829
  
  
  
  
  3,400Cash and
  cash equivalents at end of period
  
  
  $
  1,529
  
  
  
  $
  6,987See accompanying notes to condensed financial
statements
6



Supplemental Disclosure of Cash Flow Information

Nine months endedSeptember 30, 2004
  
  September 30, 2003Cash paid
  for interest
  
  
  $
  272
  
  
  
  $
  101Cash paid
  for income taxes
  
  
  $
  173
  
  
  
  $
  435Supplemental Disclosure of Noncash Transactions
During the
three months ended September 30, 2004, the Company issued 3,306 shares of
common stock for services provided. The services were provided by Continental
Airlines for the One Pass ® partner program where the Company
provides mileage to customers in exchange for payment by the Company to
Continental of cash and Company common stock. The common stock was issued at a
market price of $4.40 on the date of issue.

During
the three months ended September 30, 2004, the Company issued 275,000 warrants
to purchase common stock. These warrants have a five year term and were issued
in conjunction with obtaining a revolving credit facility with Highbridge/Zwirn
Opportunities Fund, L.P. as follows: 150,000 warrants were issued to
Highbridge/Zwirn Opportunities Fund, L.P and the remaining 125,000 were issued
to a broker who assisted in facilitating the credit facility. The warrants were
valued using the Black Scholes valuation method.
7


GEXA CORP.Notes to the Condensed Financial Statements(unaudited)September 30, 2004
Note 1 - Basis of
Presentation
The
accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America (GAAP) for interim financial information and with the instructions
to Form 10-Q and Regulation S-K of the Securities and Exchange Commission.  Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements
and should be read in conjunction with the audited financial statements
contained in the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2003.  In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included.  Operating results for
the interim periods presented are not necessarily indicative of the results
that may be expected for the year ended December 31, 2004.
As used in
this Quarterly Report, the terms we, us, our and the Company mean Gexa
Corp., a Texas corporation.
Use of estimates
The
preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the reporting
period.  Actual results could differ
from those estimates. The significant estimates for the Company include (a)
estimation of volumes delivered to customers, including the effects of
resettlements from the Electric Reliability Council of Texas (ERCOT), (b)
estimation of rates for determination of revenues, (c) bad debt expense, and
(d) estimation of the fair value of stock options and warrants issued.
Note 2 - Revenue and
Cost Recognition
The Company
records electricity sales under the accrual method and these revenues are
recognized upon delivery of electricity to the customers meter. Electric
services not billed by month-end are accrued based upon estimated deliveries to
customers as tracked and recorded by ERCOT multiplied by the Companys average
billing rate per kilowatt hour (kwh) in effect at the time.
In November
2003, the Company changed its revenue estimation technique to one referred to
as the flow technique.  In the latter
half of 2003, the Company determined that the market was operating at a point
of efficiency such that it would be appropriate for the Company to begin
accruing revenue based on ERCOT settlements of power deliveries, and given the
limitations of the billings technique, the Company chose to change to the flow
technique.  In addition, by the end of
the fiscal year 2003, the Company had sufficient initial settlement and
resettlement data from ERCOT to arrive at a reasonable estimate for 2003
revenues assuming that the flow method had been in place since January 1,
2003.
8


The flow
technique of revenue calculation relies upon ERCOT settlement statements to
determine the estimated revenue for a given month. Supply delivered to our
customers for the month, measured on a daily basis, provides the basis for
revenues. ERCOT provides net electricity delivered data in three time frames.
Initial daily settlements become available approximately 17 days after the day
being settled. Approximately 45 days after the day being settled, a resettlement
is provided to adjust the initial settlement to the actual supply delivered
based on subsequent comparison of prior forecasts to actual meter reads
processed. A final resettlement is provided approximately 180 days after power
is delivered, marking the last routine settlement adjustment to the power
deliveries for that day.
Because
flow data for resettlements and final resettlements are not available in
sufficient time to be booked to the appropriate period, the effect of such
resettlements are booked in the month in which the cost of goods sold (COGS)
effect of those resettlements is realized. This allows for a proper matching of
revenues with COGS.
Sales
represent the total proceeds from energy sales, including pass through charges
from the Transmission and Distribution Providers (TDSPs) billed to the
customer at cost. COGS includes electric power purchased, sales commissions,
and pass through charges from the TDSPs in the areas serviced by the Company.
TDSP charges are costs for metering services and maintenance of the electric
grid. TDSP charges are established by regulation by the Public Utility
Commission of Texas (PUCT).
The energy
portion of the Companys COGS is comprised of two components: bilateral
wholesale costs and balancing/ancillary costs. 
These two cost components are incurred and recognized in different
manners.
Bilateral
wholesale costs are incurred through contractual arrangements with wholesale
power suppliers for firm delivery of power at a fixed volume and fixed
price.  The Company is invoiced for
these wholesale volumes at the end of each calendar month for the volumes
purchased for delivery during the month, with payment due 30 days after the end
of the month.
Balancing/ancillary
costs are based on the customer load and are determined by ERCOT through a
multiple step settlement process. Balancing costs/revenues are related to the
differential between supply provided by the Company through its bilateral
wholesale supply and the supply required to serve the Companys customer load.
The Company endeavors to minimize the amount of balancing/ancillary costs
through its load forecasting and forward purchasing programs.
9


Note 3 - Unbilled
Revenue and Accounts Receivable
At the end
of each calendar month, revenue is accrued to unbilled receivables based on the
estimated amount of power delivered to customers using the flow technique.  Unbilled revenue also includes accruals for
estimated TDSP charges and monthly service charges applicable to the estimated
electricity usage for the period.
All charges
that were physically billed to customers in the calendar month are recorded
from the unbilled account to the customer receivables account.  Accounts receivables are customer
obligations billed at the conclusion of a months electricity usage and due
within 16 days of the date of the invoice. Balances past due are subject to a
late fee that is assessed on that billing.
The large
number of customers and significant volume of transactions create a challenge
to manage receivables as well as to estimate the account balances that
ultimately will not be paid by the customers (bad debt write-offs).  The Company uses a variety of tools to
estimate and provide an accurate and adequate allowance for doubtful accounts
reserve; the allowance for doubtful accounts is expensed each month as a
percentage of revenue based on the historical bad debt write-off trends that
will result from that months gross revenues. As of September 30, 2004, the
Companys bad debt expense was approximately $5.2 million, or 2.6% of sales.
The Company
follows a consistent process to determine which accounts should be written off
and compares the total actual write-offs to the estimated percentage of total
revenue accrued and expensed each month. 
Past due accounts are regularly reviewed based on aging for possible
removal from service, in-house or external collections efforts, or
write-off.  For residential customers,
with some minor exceptions, the total balance for all accounts with any portion
of their balance over 60 days past due is considered to be uncollectible and is
written off, net of security deposits held for these accounts.  Delinquent commercial accounts are reviewed
individually by in-house collections, and payment arrangements, removal from
service and possible write-off of all or a portion of the receivable is
determined on a case-by-case basis.
The Company
has initiated a variety of actions targeted to reduce the amount of bad debt
incurred by the Company. The principal actions are as follows:

  Improved
  policies requiring credit reviews, deposits, and late fees, and
  Implementing
  more aggressive collection efforts including customer disconnectionsAccounts
Receivable contains billed receivables, unbilled receivables, other
receivables,  and the allowance for
doubtful accounts as follows:
10



(In thousands)
  
  September
  30, 2004
  
  December
  31, 2003Billed receivables
  
  
  $
  24,013
  
  
  
  $
  13,085Unbilled receivables
  
  
  
  20,649
  
  
  
  
  10,313Other receivables
  
  
  
  474
  
  
  
  
  229Allowance for doubtful accounts
  
  
  
  (3,029
  )
  
  
  
  (1,300
  )Accounts receivable, net
  
  
  $
  42,107
  
  
  
  $
  22,327Note 4  Earnings Per
Share
The
following table is a reconciliation of the numerators and denominators used in
the calculation of basic and diluted earnings per share that are presented on
the condensed statements of operations.

Three Months Ended
  
  Nine Months Ended(In
  thousands)
  
  September 30, 2004
  
  September 30, 2003
  
  September 30, 2004
  
  September 30, 2003Numerator:Net Income
  
  
  $
  1,057
  
  
  
  $
  1,019
  
  
  
  $
  6,208
  
  
  
  $
  770Preferred Stock dividend
  
  
  
  
  
  
  
  
  (13
  )
  
  
  
  
  
  
  
  
  (38)Net Income available to common stockholders
  
  
  $
  1,057
  
  
  
  $
  1,006
  
  
  
  $
  6,208
  
  
  
  $
  732DenominatorDenominator for basic earnings per share Weighted average
  shares outstanding
  
  
  
  8,531
  
  
  
  
  7,617
  
  
  
  
  8,453
  
  
  
  
  7,609Effect of dilutive securities:Employee and director stock options
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Warrants
  
  
  
  1,175
  
  
  
  
  334
  
  
  
  
  1,210
  
  
  
  
  75Denominator for diluted earnings per share Adjusted
  weighted average shares outstanding
  
  
  
  9,706
  
  
  
  
  7,951
  
  
  
  
  9,663
  
  
  
  
  7,684Basic earnings per share
  
  
  $
  0.12
  
  
  
  $
  0.13
  
  
  
  $
  0.73
  
  
  
  $
  0.10Diluted earnings per share
  
  
  
  0.11
  
  
  
  
  0.13
  
  
  
  
  0.64
  
  
  
  
  0.1011


Note
5 - Stock-Based Compensation

The
Company accounts for its employees stock-based compensation plans under the
intrinsic value method.  The pro forma
information below is based on a Black-Scholes valuation approach.

Three Months Ended
  
  Nine Months EndedSeptember 30, 2004
  
  September 30, 2003
  
  September 30, 2004
  
  September 30, 2003Pro Forma
  impact of fair value method (FAS 148)Reported net income
  available to common shareholders
  
  
  $
  1,057
  
  
  
  $
  1,019
  
  
  
  $
  6,208
  
  
  
  $
  770Less: fair value impact of
  employee stock based compensation
  
  
  
  (118
  )
  
  
  
  (110
  )
  
  
  
  (237
  )
  
  
  
  (331
  )Pro forma net income
  available to common shareholders
  
  
  $
  939
  
  
  
  $
  909
  
  
  
  $
  5,971
  
  
  
  $
  439Earnings
  per common shareBasic - as reported
  
  
  $
  0.12
  
  
  
  $
  0.13
  
  
  
  $
  0.73
  
  
  
  $
  0.10Diluted - as reported
  
  
  
  0.11
  
  
  
  
  0.13
  
  
  
  
  0.64
  
  
  
  
  0.10Basic - pro forma
  
  
  
  0.11
  
  
  
  
  0.12
  
  
  
  
  0.71
  
  
  
  
  0.06Diluted - pro forma
  
  
  
  0.10
  
  
  
  
  0.11
  
  
  
  
  0.62
  
  
  
  
  0.06Weighted
  average Black-Scholes value assumptionsRisk free interest rate
  
  
  
  3
  %
  
  
  
  5
  %
  
  
  
  3
  %
  
  
  
  5
  %Expected life
  
  
  
  3
  yrs
  
  
  
  
  3
  yrs
  
  
  
  
  3
  yrs
  
  
  
  
  3
  yrsExpected volatility
  
  
  
  36
  %
  
  
  
  124
  %
  
  
  
  36
  %
  
  
  
  124
  %Expected dividend yield
  
  
  
  0
  %
  
  
  
  0
  %
  
  
  
  0
  %
  
  
  
  0
  %During the
nine months ended September 30, 2004, the Board of Directors, subject to
shareholder approval, adopted the 2004 Incentive Plan, which provides for the
issuance of up to 1.5 million shares of common stock pursuant to incentive
awards under the plan. During the three months ended September 30, 2004,
180,000 stock options have been issued under the plan to officers and employees
of the Company. As of September 30, 2004, all outstanding options and warrants
were dilutive and included in the calculation of diluted earnings per share. In
addition, subsequent to September 30, 2004, 600,000 stock options were issued
to officers and employees and 100,000 stock options were issued to non-employee
directors of the Company. Also subsequent to September 30, 2004, 85,000 shares
of restricted common stock were issued to officers and employees of the
Company.
During the
third quarter of fiscal 2004, the Company reviewed its estimates and
assumptions used to determine the values assigned to the variables in the
Black-Scholes model.  In prior quarters, the Company calculated expected
volatility using our stock price history in daily increments.  Beginning
in the third quarter of fiscal 2004, the Company calculated expected volatility
using stock prices in monthly intervals.  The historical volatility was
then adjusted to consider the ways in which the Companys history is reasonably
expected to be different from the future, as prescribed by FAS 148  Accounting
for Stock-Based Compensation  Transition and Disclosure.  Factors the
Company considered included events that impacted our share price that were not
likely to be repeated in the future and were entity-specific.  The Company
also weighted more recent trading history more heavily than early trading
history in the volatility calculation.  The Company is relatively new
and experienced substantial growth during the first two years, thus, the Company
felt that recent trading during 2004 more accurately reflected expected future
volatility.


12


Note 6 - Significant
Events

On July 8,
2004, the Company entered into the (Facility) with Highbridge/Zwirn Special
Opportunities Fund, L.P. The Facility, which matures on July 8, 2007, may be
used to provide working capital for the Companys normal routine operations and
for providing a cash reserve to collateralize letters of credit that the
Company is required to post.  The
Facility is collateralized by a lien on substantially all of the Companys
assets, subject to the liens already held on such assets by TXU and/or
JPMorganChase.

Advances
under the Facility bear interest at the rate of 14% per annum and the Company
is permitted to prepay advances outstanding under the Facility at any time
without penalty upon proper notice to the lenders thereunder. If at any time
the Company has unrestricted cash or cash equivalents in excess of $1.2
million, the Company is required to make a prepayment on the advances then
outstanding under the Facility in an amount equal to the amount of such cash or
cash equivalents being held by the Company on the fifteenth and/or the last day
of any month during the term of the Facility in excess of $1.2 million, within
one business day of such occurrence. In addition, the Company has agreed to pay
to Highbridge/Zwirn Special Opportunities Fund, L.P., for the account of each
lender under the Facility, an annual fee in the amount of $150,000 and a
commitment fee, which accrues at 2% per annum on the average daily unused
amount of the line during the term of the Facility.
The
Facility contains the following covenants that are considered important in
operating the Company:

  The Company
  may not permit the leverage ratio (as defined in the Facility), as of the
  last day of each fiscal quarter, to be greater than 1.5;
  The Company
  may not permit the fixed charge coverage ratio (as defined in the Facility)
  as of the last day of each fiscal quarter to be lower than (i) 1.5 for the
  quarter ending September 30, 2004 and (ii) 1.3 for each of the quarters thereafter;
  The Company
  may not permit the interest coverage ratio (as defined in the Facility) as of
  the last day of each fiscal quarter to be lower than (i) 6.0 for the quarters
  ending September 30, 2004 and December 31, 2004 and (ii) 4.7 for each of the
  quarters thereafter;
  The Company
  may not permit TTM EBITDA (as defined in the Facility) as of the last day of
  each fiscal quarter to be less than (i) $9.7 million for the quarter ending
  September 30, 2004, (ii) $11.0 million for each of the quarters between
  October 1, 2004 and June 30, 2005 and (iii) $12.0 million for each of the
  quarters thereafter;13



  The Company
  may not permit the current ratio (as defined in the Facility) as of the last
  day of any fiscal quarter to be lower than 1.1;
  The Company
  may not permit the amount of general and administrative costs (as defined in
  the Facility), which does not include bad debt, for any fiscal quarter to be
  greater than 6% of the Companys sales; and
  The Company
  may not make any capital expenditures in the aggregate in an amount greater
  than the capital budget approved by the administrative agent under the
  Facility.The
Facility also contains other restrictions with respect to: the incurrence of
debt and liens; the making of restricted payments, investments, loans and
advances; entering into leases or sale and leasebacks; the sale or discount of
receivables; the merger of the Company; the sale of its properties; entering
into transactions with affiliates or into material agreements; and entering
into negative pledge agreements, certain dividend restrictions and certain swap
agreements.
In
connection with the closing of the Facility, the Company issued to
Highbridge/Zwirn Special Opportunities Fund, L.P. warrants to acquire 150,000
shares of Company common stock for an exercise price of $4.00 per share.  The warrants are currently exercisable,
expire on July 9, 2009 and contain anti-dilution protection for the holder of
the warrants. Specifically, if the Company issues additional shares of common
stock or other securities that are convertible into shares of the Companys
common stock, and the consideration for the shares is less than $4.00 per
share, the exercise price for the warrants immediately preceding such issuance
will be reduced according to the formula specified in the warrants. The
warrants have been valued using the Black-Scholes valuation model and recorded
as deferred financing costs and amortized over the life of the agreement.
The Company
also granted the holder of the warrants certain demand and piggyback
registration rights pursuant to the terms of the warrants.  After July 8, 2005, the holder of the
warrants may, on one occasion, request that the Company register the sale of
all or part of the Companys common stock underlying the warrants under the
Securities Act of 1933, as amended (the Securities Act).  With respect to the piggyback registration
rights, the Company must promptly notify the holder of the warrants of any
proposed filing of certain registration statements under the Securities Act
relating to underwritten offerings before such filing is to be made.  The Company must also cause the holders
securities to be included in the registration statement unless the Companys
underwritten offering becomes too large (as determined by the underwriter) to
accommodate the securities of the holder, in which case the accounts of all
persons with shares to be included in the offering may be reduced pro rata.

In
connection with the closing of the Credit Facility, the Company paid a broker
$200,000 in cash and issued to the broker warrants to acquire 125,000 shares of
Company common stock for an exercise price of $4.00 per share as commission.
The holder of the warrants was also granted piggyback registration rights
similar to the piggyback registration rights discussed in the prior
paragraph. The broker fees will be recorded as deferred financing costs and
amortized over the life of the Facility. The warrants were valued using the
Black-Scholes stock option pricing model and recorded as deferred financing
costs and are being amortized over the life of the Facility.
14


In
connection with the closing of the Facility and pursuant to a Termination
Agreement, the Company repaid The Catalyst Fund, Ltd. (Catalyst)
approximately $2.5 million, which represented all amounts outstanding under a
Loan Agreement with Catalyst. The Company also repaid JTS Enterprises
approximately $0.5 million and repaid Neil Leibman, the Companys Chairman,
President and CEO approximately $125,000 for outstanding loans. The Termination
Agreement also terminated the loan documents executed in connection with the
Catalyst loan, including a Security Agreement, Consulting Agreement and
Registration Rights Agreement.
In
addition, the Company purchased from Catalyst for approximately $1.6 million,
warrants to acquire 458,333 shares of the Companys common stock that were
granted to Catalyst in connection with the Loan Agreement in order to eliminate
the put option contained in such warrants in favor of the holder of such
warrants. The Company also amended 91,667 warrants to delete the put option
feature. See
footnote 7  Put Warrant Obligation.

Catalyst
was granted a look back right with respect to the exercise price of the
warrants to acquire 458,333 shares of the Companys common stock as
follows.  In the event the Company
consummates within one year, the disposition, by way of a sale, business
combination, merger or other transaction by a corporation or other business
entity, of all or part of the Companys outstanding capital stock or all or
substantially all of the Companys assets (each such transaction being herein
called a Transaction), and the price per share of the Companys common stock
actually received by the Companys shareholders or the Company pursuant to the
terms of the Transaction is greater than $4.00, then, upon the consummation of
the Transaction, the Company is required to pay Catalyst an amount equal to the
product of (a) 458,333 and (b) the difference between (i) the price
per share of the Companys common stock actually received by the Companys
shareholders or the Company pursuant to the terms of the Transaction and (ii)
$4.00.
On
September 29, 2004, the Company announced that James Burke resigned as
President and COO to pursue other opportunities. During the interim period,
Neil Leibman, Chairman and CEO, assumed the role of President. The Company
immediately began a search for a new COO. The Company entered into a severance
agreement with James Burke on October 1, 2004.
Note 7 - Put Warrant
Obligation
SFAS No.
150, Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity, was issued in May 2003 and requires issuers to classify as
liabilities (or assets under certain circumstances) free standing financial
instruments which, at inception, require or may require an issuer to settle an
obligation by transferring assets. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and is otherwise
effective at the beginning of the first interim period beginning after June 15,
2003.
15



SFAS No.
150 requires warrants issued under a term loan agreement with The Catalyst Fund
Ltd. and certain other warrants held by affiliates to be classified as a
liability. In January of 2005, the holders of the warrants could have exercised
their rights to force the Company to repurchase the 550,000 common shares at
the current market price on the common stock, less the warrant exercise price
of $1.00. The put feature could have been accelerated by a change of control or
a capital offering in excess of $10 million; therefore, the Company could have
been forced to purchase up to 550,000 shares of its own common stock at the
market price (less the $1 warrant exercise price) on the day the put option is
exercised.
On July 8,
2004, 458,333 of these warrants were repurchased and the remaining 91,667
warrants were amended to delete the put option. At July 8, 2004, the Companys
stock closed at $4.75 per share. The increase in the market price from the
valuation at June 30, 2004 based on a June 30, 2004 close price of $4.40 per
share required the Company to record an increase in the value of the puttable
warrant obligation of $193,000 for the three months ended September 30, 2004 as
other financing expense in accordance with SFAS No. 150. An additional $222,000
in other finance expense was recorded in the third quarter of 2004 related to
the extinguishment of this debt. As a result of the repurchase and amendment of
warrants, the income (expense) effect arising from their existence as described
above will no longer be applicable to the Company after this quarter.
Note 8 - Related
Party Transactions
During the
nine months ended September 30, 2004, the Company repaid Neil Leibman,
Chairman, President and CEO, approximately $125,000 for outstanding loans.
Additionally, in connection with repaying and terminating the Catalyst loan, a
Consulting Agreement executed in connection with the Catalyst loan was also
terminated during this period. Neil Leibman, Chairman, President and CEO, and
non-employee directors Bobby Orr, Don Aron and Stuart Gaylor received the
amounts due to them under the Consulting Agreement, which were one-time cash
payments equal to approximately $9,000, $9,000, $18,000, and $9,000
respectively.
Note 9 - Income taxes

The
effective income tax rate reflected in the Income tax expense (benefit) item
of the Statement of  Operations  for the nine months ended September 30, 2004
is lower than the Companys expected effective tax rate of approximately 37%.  Included in Income before taxes is
approximately $1.8 million Other financing income related to puttable
warrants (see
Footnote 7, Puttable Warrant Obligations) for the nine months ended
September 30, 2004; the income related to the puttable warrants is not
taxable.  Therefore, Income before
Income tax expense (benefit) is reduced by the amount of the Other financing
income prior to calculating Income tax expense (benefit), thereby lowering
the effective tax rate.

16


Note 10 - Subsequent
Events
On October
1, 2004, the Company entered into a Severance Agreement with James Burke, the
Companys former President and Chief Operating Officer. See exhibit in Item 6 of Part II Other
Information.
On October
28, 2004, 600,000 options were issued to officers and employees and 100,000
options were issued to non-employee directors under the 2004 stock incentive
plan.During the nine months ended September 30, 2004, the Board of Directors,
subject to shareholder approval, adopted the 2004 Incentive Plan, which
provides for the issuance of up to 1.5 million shares of common stock pursuant
to incentive awards under the plan.
On
October 28, 2004, the Company entered into an Amended and Restated Employment
Agreement with Neil M. Leibman, the Companys Chairman, President and CEO. See exhibit
in Item 6 of Part II Other Information.
On
October 28, 2004, the Company entered into the First Amendment to Employment
Agreement with David Holeman, the Companys Vice President and Chief Financial
Officer. In addition, the Company also entered into a Restricted Stock
Agreement and a Nonstatutory Stock Option Agreement with Mr. Holeman. See exhibit
in Item 6 of Part II Other Information.
On
October 28, 2004, the Company entered into Employment Agreements with Rod
Danielson, David Atiqi and Sharon Mattingly, the Companys Vice President of
Supply & Forecasting, Vice President of Sales, and Vice President of
Partner Programs, respectively. In addition, the Company also entered into
Restricted Stock Agreements and Nonstatutory Stock Option Agreements with Mr.
Danielson, Mr. Atiqi and Ms. Mattingly. See exhibit in Item 6 of Part II Other
Information.

Subsequent
to September 30, 2004, the Company negotiated 
an agreement in principle to settle a lawsuit with Capello Capital Corp.
On August 2, 2004, the Company was sued in the matter of Capello
Capital Corp. vs. Gexa Corp in the Los Angeles Superior Court-West
District. The complaint alleged a breach of contract regarding investment
banker fees being claimed by Capello Capital Corp. in connection with the
Facility with Highbridge/Zwirn Special Opportunities Fund, L.P. The settlement
involves a cash payment of approximately $775,000 over a period of time ending
on November 1, 2005, and the issuance of 400,000 warrants with an exercise
price of $4.50 to Cappello. As of the date of this report, no formal settlement
has been signed. The Company accrued $1.2 million in the third quarter of 2004
in investment banking charges to other assets as deferred financing costs to be
amortized over the life of the Facility.
17


Note 11  Restatement
of Prior Periods
The Company
determined that its revenue reported on Form 10-QSB for the three months and
nine months ended September 2003 (which were based on the billings technique
for estimating volumes delivered to customers) did not reflect the
consideration of all the information available at the time to calculate a
reasonable estimate of the Companys revenue in accordance with GAAP. As such,
the Company adjusted the operating results for the periods listed above and
included the adjusted information in Note 11 of the Companys Annual Report on Form 10-KSB
for the year ended December 31, 2003. For further discussion, see Note 11 of
the Companys Annual Report on Form 10-KSB for the year ended December 31,
2003.
The following
represents adjusted data for the three months and nine months ended September
30, 2003 as presented in the Companys Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2003:

Three
  months ended September 30, 2003
  
  As
  Reported
  Previously
  
  As
  AdjustedSales
  
  
  $
  41,690
  
  
  
  $
  39,644Income from
  operations
  
  
  
  3,664
  
  
  
  
  2,046Net Income
  available to common shareholders
  
  
  
  2,027
  
  
  
  
  1,006Basic net
  income per share
  
  
  
  0.27
  
  
  
  
  0.13Diluted net
  income per share
  
  
  $
  0.25
  
  
  
  $
  0.13Nine months ended September 30, 2003
  
  As Reported
  Previously
  
  As AdjustedSales
  
  
  $
  78,127
  
  
  
  $
  74,012Income from
  operations
  
  
  
  4,861
  
  
  
  
  1,629Net Income
  available to common shareholders
  
  
  
  2,769
  
  
  
  
  732Basic net
  income per share
  
  
  
  0.36
  
  
  
  
  0.10Diluted net
  income per share
  
  
  $
  0.36
  
  
  
  $
  0.1018


Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations

Forward Looking Statements

This
quarterly report on Form 10-Q includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the Securities
Act), and Section 21E of the Securities Exchange Act of 1934, as amended
(Exchange Act).  All statements other
than statements of historical fact are forward-looking statements.  Forward-looking statements are subject to
certain risks, trends and uncertainties that could cause actual results to
differ materially from those projected. 
Among those risks, trends and uncertainties are our estimates of the
sufficiency of existing capital sources, our ability to raise additional
capital to fund cash requirements for future operations, our assumptions
regarding the competitive restructuring and deregulation of the electricity
market, our competition from utility companies, our dependence on the services
of certain key personnel and our ability to manage our growth
successfully.  Although we believe that
in making such forward-looking statements our expectations are based upon
reasonable assumptions, such statements may be influenced by factors that could
cause actual outcomes and results to be materially different from those
projected.  We cannot assure you that
the assumptions upon which these statements are based will prove to have been
correct.

When used
in this Form 10-Q, the words expect, anticipate, intend, plan,
believe, seek, estimate and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words.  Because these
forward-looking statements involve risks and uncertainties, actual results
could differ materially from those expressed or implied by these
forward-looking statements for a number of important reasons, including those
discussed under Managements Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this Form 10-Q.
You should
read these statements carefully because they discuss our expectations about our
future performance, contain projections of our future operating results or our
future financial condition, or state other forward-looking information.  Before you invest in our stock, you should
be aware that the occurrence of any of the events described in Managements
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this Form 10-Q could substantially harm our business, results of
operations and financial condition and that upon the occurrence of any of these
events, the trading price of our common stock could decline and you could lose
all or part of your investment.

We cannot guarantee
any future results, levels of activity, performance or achievements. Except as
required by law, we undertake no obligation to update any of the
forward-looking statements in this Form 10-Q after the date of this Form 10-Q.
19


Results of Operations
for the Three Months and Nine Months ended September 30, 2004

Revenues

We have
continued our strong pattern of growth, as evidenced by revenue of
approximately $86.8 million in the three months ended September 30, 2004 as
compared with revenues of approximately $39.6 million for the three months
ended September 30, 2003, representing an increase of 119%. As of September 30,
2004, we served approximately 92,000 meters as compared with approximately
56,000 meters as of September 30, 2003, an increase of 64%. In addition, for
the three months ended September 30, 2004, our customers consumed approximately
1,041,000 megawatt hours (mwh) as compared to approximately517,000mwhs
consumed for the three months ended September 30, 2003. The volume increase of
101% during the three months ended September 30, 2004 as compared with the
three months ended September 30, 2003 was driven by an increase in meters
served as well as by an increase in the average size of the customer being
served. To further highlight our growth, we reached a record peak customer
demand of approximately 780 megawatts during the month of August 2004
compared to our prior peak customer demand of 600 megawatts during the month of
June 2004.

For the
nine months ended September 30, 2004, revenues were approximately $199.3
million as compared to revenues of approximately $74.0 million for the nine
months ended September 30, 2003, an increase of 169%.
We have
continued to experience growth in our three customer target groups. Single
family residential has grown due to recently launched affinity partner
programs, including Continental OnePass ®, American AAdvantage ®, Chase ® credit cards, and American Express ® credit cards. Multi-family residential has grown through
expansion of marketing relationships with large property management firms,
including Walden Management, Alliance Residential Management and Wells
Management. Commercial sales have expanded due to the enrollment of  several Texas-based facilities of several
Fortune 500 companies as well as with continued expansion of our independent
contractor network.
Gross profit
Cost of
goods sold was approximately $78.7 million, or 91% of sales for the three
months ended September 30, 2004 as compared with approximately $34.9 million or
88% of sales for the three months ended September 30, 2003. For the nine months
ended September 30, 2004, cost of goods sold was approximately $178.6 million, or
90% of sales as compared with approximately $66.6 million, or 90% of sales for
the nine months ended September 30, 2003.
20


Three Months Ended
 
 Nine Months EndedSeptember
 30, 2004
 
 September
 30, 2003
 
 September
 30, 2004
 
 September
 30, 2003Sales
 
 
 $
 86,781
 
 
 
 $
 39,644
 
 
 
 $
 199,319
 
 
 
 $
 74,012Cost
 of goods sold
 
 
 
 78,694
 
 
 
 
 34,895
 
 
 
 
 178,589
 
 
 
 
 66,596Gross profit
 
 
 
 8,087
 
 
 
 
 4,749
 
 
 
 
 20,730
 
 
 
 
 7,416Cost
 of Goods Sold %
 
 
 
 91
 %
 
 
 
 88
 %
 
 
 
 90
 %
 
 
 
 90
 %Gross
 Profit %
 
 
 
 9
 %
 
 
 
 12
 %
 
 
 
 10
 %
 
 
 
 10
 %Gross
profit was approximately $8.1 million or 9% of sales for the three months ended
September 30, 2004, compared with approximately $4.7 million or 12% of sales
for the three months ended September 30, 2003. For the nine months ended
September 30, 2004, gross profit was approximately $20.7 million or 10% of
sales, compared to approximately $7.4 million or 10% of sales for the nine
months ended September 30, 2003.
Our gross
profit increased over the prior year for the three and nine months ended
September 30, 2004 by $3.3 million and $13.3 million, respectively.  While larger sales volumes increased our
gross profit over the prior year for the third quarter, our gross profit
percentage for the quarter decreased. 
The major factors that may impact gross profit percentage include:


 Customer
 mix: Due to competitive market forces, pricing for commercial contracts
 typically yield lower margins per kwh than pricing for residential contracts.
 Despite typically lower margins for commercial accounts, we believe the
 administrative costs (as a percentage of sales) for commercial accounts are
 significantly lower than for single and multi-family customers, and
 commercial accounts provide attractive profit opportunities. In general, when
 commercial accounts increase as a percentage of our portfolio, our overall
 gross profit per kwh will decrease.
 Cost of
 electricity supply purchases: The price of natural gas is the primary driver
 of our electricity supply cost.  We
 attempt to mitigate our exposure to price volatility by matching, as accurately
 as possible, power purchases to expected demand.  For term customers, we generally purchase electricity supply to
 match the length of the customers contract. 
 Single and multi-family customers are on the equivalent of
 month-to-month contracts, for which we purchase electricity on month-ahead
 and day-ahead contracts.  In an
 environment of rapidly rising natural gas prices, we are unlikely to raise
 our month-to-month customers prices as quickly as our cost increases.  This factor was the main driver for the
 change in our gross profit percentage for the three months ended September
 30, 2004 from the comparable period in 2003. During the fourth quarter, we
 expect to see an increase in margin by taking advantage of the price
 increases that became effective at the end of the third quarter.21



 Competitive
 pricing: As a retail electric provider (REP) operating in the deregulated
 retail electricity market in Texas, part of our strategy is to offer electricity rates at a discount
to the affiliated REP's Price-To-Beat rates. While this strategy has led to significant
growth in our customer base, it can cause our margins to decrease during periods of rising supply
costs if Price-To-Beat rates are not increased.  During the
 third quarter of 2004, the Price-To-Beat rates did not increase with the
supply costs for every market we serve, limiting our ability to raise rates in those markets. More
recently, certain affiliated Reps have applied for increases in their Price-To-Beat rates
and we expect other affiliated Reps to follow. We believe this will allow us to increase our rates
while continuing to offer the discount we feel is necessary to further increase our customer base. We attempt to price our products at a discount to the
 Price-To-Beat, which can cause our margins to decrease during periods of
 rising natural gas prices if the Price-To-Beat is not increased. 
 The Price-To-Beat rule requires
 affiliated REPs to charge only one rate in their respective incumbent markets
 until certain conditions are met.  The
 affiliated REPs in the markets we serve have recently applied for increases
 to the Price-To-Beat. We believe this will allow us to increase our rates
 while maintaining the discount we feel is necessary to continue to grow our
 customer base.  For further
 information on the Price-To-Beat and the deregulated retail electricity
 market in Texas, refer to our Form 10-KSB for the year ended December 31,
 2003.
 Weather
 Impact: We purchase supply based on a customers forecasted use, historical
 use throughout the term of their contract and normalized temperatures. We
 experienced milder summer weather which resulted in instances of us having to
 sell excess purchased electricity into the balancing market at prices lower
 then we paid.General and administrative expenses
General and
administrative expenses (including bad debt expense) for the three months ended
September 30, 2004 were approximately $5.3 million or 6% of sales, compared
with approximately $2.7 million or 7% of sales for the three months ended
September 30, 2003. For the nine months ended September 30, 2004, general and
administrative expenses were approximately $12.9 million or 6% of sales,
compared to $5.8 million or 8% of sales for the nine months ended September 30,
2003.
Our largest
general and administrative expense account is bad debt expense. Bad debt
expense for the three months ended September 30, 2004 was $2.3 million or 43%
of general and administrative expenses compared with $1.4 million or 52% of
general and administrative expenses for the three months ended September 30,
2003. For the nine months ended September 30, 2004, bad debt expense was $5.2
million or 40% of general and administrative expenses compared with $2.8
million or 48% of general and administrative expenses for the nine months ended
September 30, 2003. Bad debt expense has decreased from approximately 3.6% of
sales during the three and nine months ending September 2003 compared with
approximately 2.6% of sales during the three and nine months ending September
2004. This decrease is attributed to more aggressive collection policies, a
lower number of write offs as a percentage of customer receivables, and the
ability to directly disconnect delinquent customer accounts that we have in
fiscal 2004 that was not available to the Company during fiscal 2003.

22


We are
continuing to benefit from the fixed cost leverage of our operating platform.
Improved economies of scale largely account for the improved ratio of general
and administrative expenses for the three and nine months ended September 30,
2004. During the past year we have also automated many processes, including
payment processing, and have greatly improved the efficiency of data entry and
receivables management. These enhancements have increased productivity,
reducing general and administrative costs per account.
Salary
expense overall will continue to increase in 2004 as a result of normal staff
additions to accommodate growth and, as necessary, to improve our system of
internal controls as discussed in Item 4. Controls and Procedures. The
positions added during the three months ended September 30, 2004 include
Corporate Controller, Manager of Financial Reporting, Director of Operations,
and several information technology resources related to our relocating the
Radiant Billing system from Atlanta, Georgia to Houston, Texas. However, we
anticipate that the overall rate of increase in general and administrative
expenses will be lower than the overall growth rate in sales.
Other financing income (expense)

On July 16,
2003, warrants to acquire 550,000 shares of common stock were granted to The
Catalyst Fund Ltd. and certain other affiliates in consideration of a term
loan. These warrants contained a put feature allowing the holders to exercise
the warrants at a $1.00 per share exercise price, and then force us to
repurchase them at market value upon the occurrence of certain events. In
accordance with SFAS No. 150, the warrants were initially recorded as a
discount to debt based on the close price of our common stock on the date of
issuance ($1.90) minus the exercise price, multiplied by the number of
warrants, or approximately $0.5 million. At each balance sheet date, any change
in the close price of the common stock must be used to calculate and record
financing expense or income amount to reflect the difference on that date between
the market price of our stock and the exercise price of the warrants.

On July 8,
2004, 458,333 of these warrants were repurchased and the remaining 91,667
warrants were amended to delete the put option. At July 8, 2004, our stock
closed at $4.75 per share. The increase in the market price from the valuation
at June 30, 2004 based on a June 30, 2004 close price of $4.40 per share
required us to record an increase in the value of the puttable warrant
obligation of $193,000 for the three months ended September 30, 2004 as other
financing expense in accordance with SFAS No. 150. An additional $222,000 in
other finance expense was recorded in the third quarter of 2004 related to the
extinguishment of this debt. As a result of the repurchase and amendment of
warrants the income (expense) effect arising from their existence as described
above will no longer be applicable to us after this quarter.
Liquidity and Capital Resources
In this
section, we discuss the principal sources of capital required for us to operate
our business.  We also identify known
trends, demands, commitments, events or uncertainties which may affect our
current and future liquidity or capital resources.  Our principal sources of liquidity and capital resources are cash
from operations, private equity placements, revolving credit lines, payment
terms from suppliers and term loan debt.
23



Working
capital (current assets less current liabilities) increased to $12.1 million at
September 30, 2004 from $7.8 million at December 31, 2003. The primary
components of the increase are:

 Increase in
 current assets of $19.1 million. This is primarily a result of an increase in
 customer accounts receivable of $19.8 million. This increase is due primarily
 to customer growth and seasonality. The third quarter contains the highest
 electricity usage due to significant air conditioner usage resulting in a
 high accounts receivable balance.
 Increase in
 current liabilities of $14.8 million. The primary increases are as follows:
 Accrued
 electricity, accounts payable and other accrued expenses increased by $9.0
 million due primarily to customer growth and seasonality.
 Customer
 deposits increased by $1.9 million due to customer growth.
 Taxes
 Payable increased by $4.5 million due to increased profitability resulting in
 higher federal income taxes payable.Our use of
capital is primarily driven by working capital needed to operate as a REP. We
experience a time delay between purchasing electricity to flow to customers and
receiving payments from our customers. This working capital cycle is impacted
by seasonality and customer count growth rates.  As of September 30, 2004, our days sales outstanding was
approximately 43 days when considering both the billed and unbilled receivables
concurrently. Pursuant to our agreement with TXU PM, payments to TXU PM for
monthly electricity purchases are made on the last business day of the month
following delivery.
Seasonality
impacts our working capital needs, as the hotter summer months (driven by air
conditioning) increase our electricity needs during the second and third
quarters, and commensurately reduces those needs in the first and fourth
quarters. With respect to customer growth rates, our constant addition of
customers drives an increasing need for working capital funding for electricity
purchases. Over time, should our growth rate level off, we would anticipate
funding working capital from cash reserves on hand. However, given our growth
rates, we have continued needs for additional sources of working capital
financing to purchase electricity and expand our operations. In addition to
working capital, we spend capital for investments in operational infrastructure
to serve our customers; however this amount is relatively minor compared to the
working capital required for electricity purchases.

Our largest
cost in conducting business is the purchase of electricity. Our agreement with
TXU PM provides both a source of electricity supply and vendor financing.
  Since our term commercial customer contracts generally have durations of
one and two year terms, we endeavor to match term supply purchases to term
customers obligations. We purchase electricity from TXU PM and from third
parties based on our forecast of customer demand and monthly purchase limits
imposed by TXU PM. Additionally, TXU PM reserves the right to review the
credit-worthiness of all customers with peak demand of at least one megawatt.
We pay a monthly credit fee to TXU PM based on our monthly electricity
purchases from TXU PM, as well as small, fixed monthly administrative fees. TXU
PM also provides credit guarantees to us to enable us to purchase electricity
from third parties, in return for a monthly fee. The agreement has an initial
term of five years, expiring in April 2008, and renews thereafter on a year-to-year
basis unless either party gives notice of termination.
24


Purchasing
this electricity exposes the wholesale electricity provider to credit risk that
may exist due to any payment risk. Accordingly, TXU PM has three sources of
security from us to support this agreement. First, TXU PM has a first lien on all
of our assets. Second, our customer receipts are managed through a lockbox
arrangement controlled by TXU PM. Under the lockbox arrangement, certain cost
of goods sold items and TXU PMs monthly wholesale electricity invoice are paid
during each month with us receiving any remaining funds to be used for
operating expenses. TXU PM must approve all disbursements from our
lockbox. Third, we are required to post a cash collateralized letter of
credit in an amount determined by TXU PM pursuant to the agreement between us
and TXU PM.

As of
September 30, 2004, we had deposited approximately $9.7 million with JP Morgan
Chase Bank to obtain letters of credit allowing us to purchase power on forward
contracts from TXU PM, buy and sell power in the daily balancing markets and
pay TDSP invoices for metering charges passed through to customers on
thirty-five day terms. Due to the higher levels of power purchases required
during the third quarter of 2004, we were required to increase the amount of
the letters of credit to support those purchases. We believe that we have
sufficient liquidity (described below) to support the letters of credit that
may be required.
We have
several sources of liquidity to provide the increased level of working capital
to support our growth in customer load and purchases of power and other
services to support that customer growth:

  Cash from
  Operations: During the six months ended June 30, 2004, we generated
  approximately $11.6 million in cash from operations. During the three months
  ended September 30, 2004, we used approximately $13.8 million of cash for
  operations. The primary use of cash during the three months ended September
  30, 2004 was an increase in accounts receivable of $7.4 million and a
  decrease in accrued electricity of $11.8 million. The increase in accounts
  receivable is driven primarily by air conditioning usage in the hotter summer
  months. During these hotter months, electricity is flowed and accrued to
  revenue using the flow method as described in Footnotes 2 and 3. Accounts
  receivables are then billed at the conclusion of a months electricity usage
  and due within 16 days of the invoice. The total time from revenue
  accrual  to receipt of payment was
  approximately 43 days as of September 30, 2004. As a result of this, much of
  the revenue and accounts receivable accrued in the third quarter will be
  collected in the fourth quarter of 2004. This should result in increased cash
  flow from collections of accounts receivable in the fourth quarter of 2004.
  The decrease in accrued electricity is a result of the timing of payment of
  wholesale electricity bills. Wholesale electricity bills for the months of
  May, June, July and August were paid in the third quarter of 2004.25



  Highbridge/Zwirn
  Special Opportunities Fund, L.P. Credit Facility: On July 8, 2004, we entered
  into the Facility with Highbridge/Zwirn Special Opportunities Fund, L.P. The
  Facility, which matures on July 8, 2007, may be used to provide working
  capital for our normal routine operations and for providing a cash reserve to
  collateralize letters of credit that we are required to post.  The Facility is secured by a lien on
  substantially all of our assets, subject to the liens already held on such
  assets by TXU and/or JP Morgan Chase. For the three months ending September
  30, 2004, we were in compliance with all financial covenants under the credit
  agreement. See Footnote 6 for a detailed description of the covenants and
  restrictions under the Facility. As of September 30, 2004, we had
  approximately $6.0 million drawn from the Facility to increase the TXU Letter
  of Credit (LOC). Due to our contract with TXU and the high electricity
  bills during the summer months, TXU required us to increase our LOC.
  Subsequent to September 30, 2004, TXU has decreased our LOC by $1.2 million
  as we move into the cooler months.
  Equity:  During the nine months ended September 30,
  2004, we raised approximately $0.7 million via private placement of 168,754
  shares of our common stock of $4.00 per share and approximately $0.1 million
  through the exercise of warrants to acquire 100,000 shares of common stock by
  a director of our Company at $1.25 per share. These funds were designated to
  be used to support our continued operational expansions. On August 2, 2004,
  our common stock began trading on the Nasdaq SmallCap Market under the stock
  symbol GEXA. We believe that this will provide additional visibility and enhance the
  liquidity of our common stock.We believe
that cash flow plus the advances from the Facility will provide the required
liquidity to address our current growth rate in the Texas market in 2004.  We continue to assess new deregulated
markets in other states and subsequent to September 30, 2004, the Companys
Board of Directors approved the filing of its application to become a retail
electric provider in the deregulated electricity markets of New York and
Massachusetts. The Company intends to expand its business by leveraging its
relationship with existing customers in Texas that have operations in these
states without incurring significant additional operating costs. The Company
anticipates opening these markets in February of 2005 under the name of Gexa
Energy.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk

For an
in-depth discussion of our market risks, see Risk Factors in our Form 10-KSB
for December 31, 2003.

Commodity Price Risk
We are
exposed to the impact of market fluctuations in the prices of electricity
associated with the purchase and sale of electricity to our customers.  We enter into short and long term agreements
to purchase electricity; these contracts that qualify for the normal purchase
and sale exemptions are described in Paragraph 10 of SFAS No. 133 and DIG Issue
No. C15. For contracts qualifying for the scope exception, no recognition of
the contracts fair value in the Financial Statements is required until
settlement of the contract. We have applied this scope exception for our
contracts involving the purchase and sale of electricity at fixed prices in
future periods.  Income recognition and
realization related to normal purchases and normal sales contracts generally
coincide with the physical delivery of power.
26


Credit Risk
For an
in-depth discussion of our credit risk and credit risk management initiative,
reference Risk Factors in our Form 10-KSB for the year ended December 31,
2003.
Equity Price Risk
On July 8,
2004, 458,333 warrants were repurchased and 91,667 warrants were amended to
delete the put option feature; thus we no longer have any equity price risk. See Footnote
7, Put Warrant Obligation, for further discussion of the repurchase
and amendment of these warrants.
Interest Rate Risk
We have a
leveraged capital structure that could expose us to the risk of fluctuating
interest rates. As of September 30, 2004, all of our financial debt obligation
is fixed rate debt obligation. 
Therefore, we are not subject to material interest rate risk.
Item 4. Controls and Procedures.

As of the
end of the period covered by this report, we
carried out an evaluation, under the supervision and
the participation of our management,
including our Chief Executive Officer
(the CEO) and our Chief
Financial Officer (the CFO), of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities and Exchange
Act of 1934, as amended (the Exchange Act). Based on this evaluation, our CEO and our CFO concluded that our disclosure controls and
procedures are (i) designed to ensure that information required
to be disclosed by us in the reports we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to our management, including the CEO and CFO,
as appropriate to allow timely decisions regarding disclosure; and (ii) that
our disclosure controls and procedures are effective.
During
the audit of our 2003 fiscal year end, our auditors issued a material weakness
letter noting significant deficiencies with our internal controls.  In addition, the Audit Committee of our
Board of Directors, with the assistance of independent counsel, began an
investigation of the issues raised by our auditors, including our revenue
calculation methods, which was completed in the first quarter of 2004. The
Audit Committee recommended that we approve an action plan (the Action Plan),
which has been reviewed and adopted by the Board of Directors.  The Action Plan requires us to immediately
undertake and complete a number of actions. 
Below is a list of key actions completed as of  September 30, 2004:

  Instituted
  new document control procedures, including an updated disaster and recovery
  plan.27



  David
  Holeman elected as Vice President and Chief Financial Officer on June 2,
  2004.
  Hired
  Controller and Manager of Financial Reporting, each with experience in SEC
  reporting and accounting. Hired Human Resources Manager.
  Created
  interim policies and procedures for the issuance of press releases and the
  preparation of SEC reports.
  Established
  an internal Disclosure Review Committee to review and coordinate SEC reports
  and prepared an interim policy regarding the notification of senior
  management and the Board of material developments.
  Conducted a
  training program for all relevant personnel regarding SEC reporting,
  Sarbanes-Oxley Act compliance, and related issues during the third quarter of
  2004.
  Selected a
  provider for Sarbanes-Oxley Act Section 404 related services and to assist us
  in a review and assessment of our accounting policies and procedures.We
have assigned a high priority to the implementation of the Action Plan and will
continue to evaluate the effectiveness of internal controls and procedures on
an on-going basis.  It should be noted
that 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 controlled objectives, and management necessarily was required to apply
its judgment and evaluating the cost benefit relationship of possible controls
and procedures.  Based on the evaluation
described above and the implementation of the Action Plan to date, our CEO and
CFO concluded that our disclosure controls and procedures were effective at
reaching that level of reasonable assurance.
There
has been no change in our internal controls over financial reporting during the
period ended September 30, 2004, with the exception of the items noted above,
that has materially affected or is reasonably likely to materially affect our
internal control over financial reporting.

28



PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In 2003,
the Company was sued in the matter of Kyle Holland vs. Gexa Corp. et al. in the
United States District Court, Western District of Texas. Mr. Holland alleged
damages in connection with his acquisition of common stock in the Company. The
case remains in the preliminary stages due to a delay on the part of the
plaintiff in completing the steps to initiate a legal proceeding. The Company
intends to contest the suit vigorously. 
The Company filed a motion to dismiss in the United States District
Court, Western District of Texas court. As of September 30, 2004 the motion is
pending and the Company intends to contest this case vigorously.

On July 15,
2004, a class action lawsuit Frederick T.
Pappey, et al vs. Gexa Corp., Neil Leibman, Marcie Zlotnik and Sarah Veach,
Civil Action No. H-04-2869, was filed in the United States District Court for
the Southern District of Texas, Houston District.  The complaint alleges that, among other things, the Companys
publicly filed reports and public statements contained false and misleading
information, which resulted in damages to the plaintiff and members of the
proposed class when they purchased securities of the Company. Specifically, the
complaint alleges that the Company overstated revenue during the second and
third quarters of 2003 by $2.07 million and $2.05 million, respectively, by
utilizing an improper accounting method for calculating sales of electric
power.  The complaint alleges that the
conduct of the Company and the other defendants violated Sections 10(b) and
10b-5 and that the individual defendants violated Section 20(a) of the Securities
Exchange Act of 1934. The complaint  seeks
unspecified damages. A motion was recently filed requesting the appointment of
lead plaintiffs in this matter.   The
Company intends to file an objection to one of the proposed lead plaintiffs
because the Company believes that he is not a proper representative of the
proposed class. In addition, once an amended complaint is filed, the Company
intends to file a motion to dismiss the case for failure to state a claim. The
Company believes the lawsuit has no merit and intends to vigorously defend the
same.
On August
2, 2004, the Company was sued in the matter of Capello Capital Corp. vs. Gexa Corp
in the Los Angeles Superior Court-West District. The complaint alleges a breach
of contract regarding investment banker fees being claimed by Capello Capital
Corp. in connection with the credit facility with Highbridge/Zwirn Special
Opportunities Fund, L.P. Subsequent to
September 30, 2004, the Company negotiated 
an agreement in principle to settle this lawsuit with Capello Capital
Corp. The settlement involves a cash payment of approximately $775,000
over a period of time ending on November 1, 2005, and the issuance of 400,000
warrants with an exercise price of $4.50 to Cappello. As of the date of this
report, no formal settlement has been signed. The company accrued $1.2 million
in the third quarter of 2004 in investment banking charges to other assets as
deferred financing cost to be amortized over the life of the Facility.

The Company
is involved in various receivable collections matters as a plaintiff. The
Company believes that there
are no pending matters that will have a significant impact on the Companys financial position
or results of operations.
29


Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
On
July 8, 2004, in connection with the closing of the Facility with
Highbridge/Zwirn Special Opportunities Fund, L.P., the Company issued to
Highbridge/Zwirn Special Opportunities Fund, L.P. five year warrants to acquire
150,000 shares of Company common stock for an exercise price of $4.00 per
share. In addition, also in connection with the closing of the Facility, the
Company issued to a broker five year warrants to acquire 125,000 shares of
Company common stock for an exercise price of $4.00 per share as commission. On
September 7, 2004, the Company issued 3306 share of common stock to Continental
Airlines for services provided for the One Pass ® partner program. The common
stock was issued at a market price of $4.40 on the date of issue. The warrants
and shares of common stock were issued in transactions exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933 as they did not involve
a public offering.
Item 3. Default Upon Senior
Securities

None.

Item 4. Submission of Matters to
a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
10.1
  Severance
  Agreement dated as of October 1, 2004, between Gexa Corp. and James Burke (incorporated
  by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
  filed on November 3, 2004).10.2
  Amended and
  Restated Employment Agreement dated as of October 28, 2004, between Gexa
  Corp. and Neil M. Leibman (incorporated by reference to Exhibit 10.2 to the
  Companys Current Report on Form 8-K filed on November 3, 2004).10.3
  First
  Amendment to Employment Agreement dated as of October 28, 2004, between Gexa
  Corp. and David Holeman (incorporated by 
  reference to Exhibit 10.3 to the Companys Current Report on Form 8-K
  filed on November 3, 2004).10.4
  Employment
  Agreement dated as of October 28, 2004, between Gexa Corp. and Rod Danielson (incorporated
  by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K
  filed on November 3, 2004).30


10.5
  Employment
  Agreement dated as of October 28, 2004, between Gexa Corp. and David Atiqi (incorporated
  by reference to Exhibit 10.5 to the Companys Current Report on Form 8-K
  filed on November 3, 2004).10.6
  Employment
  Agreement dated as of October 28, 2004, between Gexa Corp. and Sharon
  Mattingly (incorporated
  by reference to Exhibit 10.6 to the Companys Current Report on Form 8-K
  filed on November 3, 2004).10.7
  Gexa Corp.
  Amended and Restated 2004 Incentive Plan (Effective May 27, 2004) (incorporated
  by reference to Exhibit 10.7 to the Companys Current Report on Form 8-K
  filed on November 3, 2004).10.8
  Form of
  Restricted Stock Agreement between Gexa Corp. and its employees (incorporated
  by reference to Exhibit 10.8 to the Companys Current Report on Form 8-K
  filed on November 3, 2004).10.9
  Form of
  Nonstatutory Stock Option Agreement under Gexa Corp. 2004 Incentive Plan
  between Gexa Corp. and its employees (incorporated by reference to Exhibit 10.9 to the
  Companys Current Report on Form 8-K filed on November 3, 2004).10.10
  Form of
  Nonstatutory Stock Option Agreement under Gexa Corp. 2004 Incentive Plan
  between Gexa Corp. and its directors (incorporated by reference to Exhibit 10.10 to the
  Companys Current Report on Form 8-K filed on November 3, 2004).31.1
  Certification
  of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
  Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
  Certification
  of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
  Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
  Certification
  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
  Certification
  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.31


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Gexa Corp.
By: /s/ Neil
  LeibmanNeil
  Leibman, Chairman, President and CEO(Principal
  Executive Officer)Dated:
  November 15, 2004Houston, TXBy: /s/
  David HolemanDavid
  Holeman, Chief Financial Officer(Principal
  Financial Officer)Dated:
  November 15, 2004Houston,
  TexasEXHIBITS ARE ON FOLLOWING PAGES

32