UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 For the quarterly
period ended: March 31, 2005    or |_| TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE 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
      
      (State or other jurisdiction of incorporation or organization)
    76-0670175 
      (IRS Employer Identification No.)20 Greenway
      Plaza, Suite 600, Houston, TX
      (Address of principal executive offices)
    77046
      
      (Zip Code)  (713) - 470 -
0400(Registrants 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 |_| Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes
|_|  No |X| The number of shares outstanding of
Gexa Corp. common stock, $0.01 par value, at May 12, 2005 was 10,070,819.    TABLE OF CONTENTS


PART
      I. FINANCIAL INFORMATION
    PageItem
      1. Financial Statements
    4Item
      2. Managements Discussion and Analysis of Financial Condition and Results
      of Operations
    19Item 3.
      Quantitative and Qualitative Disclosures about Market Risk
    29Item 4.
      Controls and Procedures
    29PART
      II. OTHER INFORMATIONItem 1.
      Legal Proceedings
    31Item 2.
      Unregistered Sales of Equity Securities and Use of Proceeds
    32Item 3.
      Defaults Upon Senior Securities
    32Item 4.
      Submission of Matters to a Vote of Security Holders
    32Item 5.
      Other Information
    32Item 6.
      Exhibits
    332
PART I.
FINANCIAL INFORMATION




Item 1.
Financial Statements


INDEX TO
FINANCIAL STATEMENTS

PageCondensed
      Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004
    4Condensed
      Statements of Income for the three months ended March 31, 2005(Unaudited)
      and for the three months ended March 31, 2004 (Unaudited)
    5Condensed
      Statements of Cash Flows for the three months ended March 31, 2005
    6(Unaudited)
      and for the three months ended March 31, 2004 (Unaudited)Notes to
      Financial Statements (Unaudited)
    83
Gexa Corp.
CONDENSED BALANCE SHEETS(In thousands,
except share data)



March
      31, 2005
    
    December
      31, 2004Assets
    (Unaudited)Current
      Assets:Cash
      and cash equivalents
    $
    10,709
    
    $
    8,862Cash
      - restricted
    
    7,161
    
    
    6,685Accounts
      receivable, net of allowance for doubtful accounts
    
    34,503
    
    
    35,486Deferred
      tax asset
    
    1,265
    
    
    841Other
      current assets
    
    436
    
    
    319Total
      Current Assets
    
    54,074
    
    
    52,193Property
      and equipment, net
    
    1,415
    
    
    1,195Deferred
      tax asset
    
    
    
    
    45Other assets
    
    2,576
    
    
    2,822Total
      Assets
    $
    58,065
    
    $
    56,255Liabilities
      and Shareholders EquityCurrent
      Liabilities:Accrued
      electricity costs
    $
    16,990
    
    $
    15,463Accrued
      transmission and distribution costs
    
    9,083
    
    
    8,879Accounts
      payable and other accrued expenses
    
    2,829
    
    
    2,524Sales
      tax payable
    
    2,731
    
    
    2,877Income
      tax payable
    
    862
    
    
    3,983Customer
      deposits
    
    6,657
    
    
    6,119Total
      Current Liabilities
    
    39,152
    
    
    39,845Deferred
      tax liability
    
    195
    
    
    Total
      Liabilities
    $
    39,347
    
    $
    39,845Shareholders
      Equity:Common
      stock, $0.01 par value; 75,000,000 shares authorized;10,077,007
      shares issued and 10,063,160 shares outstanding atMarch
      31, 2005; 9,757,222 shares issued and 9,743,375 sharesoutstanding
      at December 31, 2004
    
    101
    
    
    98Additional
      paid-in capital
    
    14,604
    
    
    13,727Unearned
      stock based compensation
    
    (182
    )
    
    (295
    )Treasury
      stock, at cost; 13,847 shares
    
    (15
    )
    
    (15
    )Retained
      earnings
    
    4,210
    
    
    2,895Total
      Shareholders Equity
    
    18,718
    
    
    16,410Total
      Liabilities and Shareholders Equity
    $
    58,065
    
    $
    56,255See accompanying notes
to condensed financial statements


4
GEXA CORP.
CONDENSED STATEMENTS OF INCOME(In thousands, except per share data)




Three
      Months EndedMarch
      31, 2005
    
    March
      31, 2004(Unaudited)
    
    (Unaudited)Sales
    $
    78,261
    
    $
    50,513Cost of
      goods sold
    
    68,330
    
    
    43,147Gross
      profit
    
    9,931
    
    
    7,366Selling
      general & administrative expenses
    
    7,491
    
    
    4,702Income
      from operations
    
    2,440
    
    
    2,664Interest
      income
    
    14
    
    
    5interest
      expense
    
    (382
    )
    
    (231
    )Other financing
      income
    
    
    
    
    1,980Earnings
      before income taxes
    
    2,072
    
    
    4,418Income
      tax expense
    
    757
    
    
    926Net
      income
    $
    1,315
    
    $
    3,492Weighted
      average shares outstandingBasic
    
    9,806
    
    
    8,361Diluted
    
    11,215
    
    
    9,668Earnings
      per shareBasic
    $
    0.13
    
    $
    0.42Diluted
    
    0.12
    
    
    0.36See accompanying notes
to condensed financial statements


5
Gexa Corp.
CONDENSED STATEMENTS OF CASH FLOWS(In thousands)


Three
      Months EndedMarch
      31, 2005
    
    March
      31, 2004(Unaudited)Cash
      flows from operating activities:Net income
    $
    1,315
    
    $
    3,492Adjustments
      to reconcile net income tonet       cash provided by (used in)  operating activities:Depreciation
      and amortization
    
    142
    
    
    59Amortization
      of financing costs
    
    191
    
    
    7Accretion
      of debt discount
    
    
    
    
    33Stock
      issued to officers, directorsand
      consultants for services
    
    260
    
    
    95Change
      in puttable warrant obligation
    
    
    
    
    (1,980
    )Deferred
      income tax benefit
    
    (433
    )
    
    (269
    )Changes
      in operating assets and liabilities:Accounts
      receivable
    
    1,070
    
    
    (3,193
    )Other
      current assets
    
    (117
    )
    
    (101
    )Other
      long-term assets
    
    18
    
    
    (76
    )Accrued
      electricity costs
    
    1,527
    
    
    (6,511
    )Accrued
      TDSP costs
    
    204
    
    
    3,068Accounts
      payable and other accrued expenses
    
    305
    
    
    268Sales
      tax payable
    
    (146
    )
    
    18Income
      tax payable
    
    (2,564
    )
    
    1,195Customer
      deposits
    
    538
    
    
    853Accrued
      interest payable
    
    
    
    
    2Net cash
      provided by (used in) operating activities
    
    2,310
    
    
    (3,040
    )Cash flows
      from investing activities:Purchases
      of equipment
    
    (412
    )
    
    (74
    )Restricted
      cash
    
    (476
    )
    
    (499
    )Net cash
      used in investing activities
    
    (888
    )
    
    (573
    )Cash flows
      from financing activities:Proceeds
      from exercise of options
    
    425
    
    
    671Net cash
      provided by financing activities
    
    425
    
    
    671Net change
      in cash
    
    1,847
    
    
    (2,942
    )Cash and
      cash equivalents at beginning of period
    
    8,862
    
    
    10,829Cash and
      cash equivalents at end of period
    $
    10,709
    
    $
    7,887Cash paid
      for interest
    $
    58
    
    $
    114Cash paid
      for income taxes
    $
    3,750
    
    $
    See accompanying notes
to condensed financial statements


6
Supplemental
Disclosure of Noncash Transactions


During
the three months ended March 31, 2005, the Company issued 19,785 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 in separate issues as follows: 4,250 shares issued at a market price of $5.01
and 15,535 shares issued at a market price of $6.40.



During
the three months ended March 31, 2005, the Company cancelled 15,000 stock options and
then reissued these options at the market price on the date of issue. These options were
employee options issued in lieu of compensation. These options were reissued on March 17,
2005, at a market price of $6.30 and had an exercise price of $4.56. The Company expensed
the difference between the exercise price and the market price of $1.74 per share for a
total cost of $26,100.


7
Gexa Corp.Notes to
Condensed Financial Statements


1. Organization


Gexa
Corp. (the Company) was incorporated in Texas on February 13, 2001. On August
2, 2001, the Company received its license from the Public Utility Commission of Texas
(PUCT) to serve as a retail provider of electricity to residential and
commercial customers in deregulated markets within the state of Texas. On January 1, 2002,
the Company began to provide retail electric services in the State of Texas.


2. Basis of
Presentation and Significant Accounting Policies


The
accompanying financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The financial statements
reflect all adjustments that are, in the opinion of management, necessary for a fair
presentation of the Companys financial results. These adjustments are of a normal
recurring nature or are otherwise disclosed in the footnotes to the condensed financial
statements.


Use of estimates


The
preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America 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:



volumes
delivered to customers, including the effects of resettlements from the Energy
Reliability Council of Texas (ERCOT);
rates
for determination of revenues;
bad
debt expense; and
fair
value of stock options and warrants issued.Reclassifications


The
Company reclassified certain prior fiscal year amounts in the accompanying financial
statements in order to be consistent with the current fiscal year presentation. During
fiscal 2004, the Company reclassified certain costs associated with sales commissions,
marketing programs and transaction processing fees from cost of goods sold to selling,
general and administrative expenses in the Companys statements of income. The
reclassified amounts decreased cost of goods sold and increased selling, general and
administrative expenses but had no impact on net income.


8
Normal Purchases and
Sales Accounting


The
Company uses a combination of long term contracts, short term contracts, month-ahead
purchases, and day-ahead purchases to match up with forecasted demand of commercial
customers on long term sales contracts, commercial customer on month-to-month contracts,
and residential customers (which are all on month-to-month contracts). The Company applied
the normal purchase and sales accounting treatment to its forward purchase supply
contracts and its customer sales contracts. Accordingly, the Company records revenue
generated from its sales contracts as energy is delivered to its retail customers, and
direct energy costs are recorded when the energy under its long-term forward physical
delivery contracts is delivered.


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.


The
Company uses a revenue estimation method referred to as the flow technique.
The flow technique of revenue calculation relies upon ERCOT settlement statements to
determine the estimated revenue for a given month. Supply delivered to 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
represents 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 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.


9
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.


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 to 30 days of the date of the invoice depending on customer payment terms.
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. For the three months ended March 31, 2005, and the three
months ended March 31, 2004, the Companys bad debt expense was approximately $1.8
million, or 2.3% of sales and $1.3 million, or 2.6% of sales, respectively.


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 and commercial customers with a balance under $700.00, 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 with balances
greater than $700.00 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.


10
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
implemented
more aggressive collection efforts including customer disconnections.Cash and Cash
Equivalents


The
Company considers all highly liquid short-term investments purchased with a maturity of
three months or less at the date of purchase to be cash equivalents.


Restricted Cash


The
Company has restricted cash related to customer deposits and certificates of deposit used
to secure letters of credit for the purchase of electricity, the payment of TDSP pass
through charges, and operations. Customer deposit cash must be held by the Company and may
not be directly spent on any operational or other expense. Restricted cash securing
letters of credit may not be used for any purpose by the Company unless the underlying
obligation being secured is relieved or secured with other collateral.


Fair Value of
Financial Instruments


The
Companys financial instruments consist primarily of cash and cash equivalents,
accounts receivable, and accounts payable. The carrying amounts of these financial
instruments are reflected in the accompanying balance sheets at amounts considered by
management to approximate their fair values due to their short-term nature.


Equipment


Equipment
is stated at cost. Maintenance and repairs are expensed when incurred. The Companys
fixed assets are classified as furniture, computer hardware, computer software,
telephones, and leasehold improvements. The Company considers leasehold improvements to be
improvements that can not be removed without substantially damaging or requiring
substantial repair to the leased asset. The Company depreciates these items over the term
of the lease or the service life of the improvement, whichever is shorter. Depreciation
expense, including amortization expense on capitalized software for the three months ended
March 31, 2005 and the three months ended March 31, 2004, was $142,000, and $59,000,
respectively.


Income Taxes


The
Company accounts for income taxes pursuant to the asset and liability method which
requires deferred income tax assets and liabilities to be computed for temporary
differences between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect taxable
income. Valuation allowances will be


11
established when necessary to reduce
deferred tax assets to the amount expected to be realized. No allowances have been
established through the three months ended March 31, 2005.


Deferred Financing
Costs


The
Company defers costs incurred in connection with financing and amortizes the costs over
the life of the related debt in accordance with the effective interest method. During the
three months ended March 31, 2005, the Company expensed $191,000 in fees and other costs
related to its financing obligation as compared with $32,000 during the three months ended
March 31, 2004. The Company had $1.7 million in deferred financing costs classified as
Other long-term assets on March 31, 2005, compared with approximately $116,000
on March 31, 2004.


Net Income (loss) per
share


The
Company presents basic net income per share and diluted net income
per share. Basic net income per share is calculated by dividing net income available to
common shareholders by the weighted average number of shares outstanding during each
period. The calculation of diluted net income available to common shareholders per share
is similar to that of basic earnings per share, except that the denominator is increased
to include the number of additional common shares that would have been outstanding if all
of the potential common share equivalents were exercised. See Note 4 Earnings Per Share
for more details.


Comprehensive income


Comprehensive
income represents any non-owner changes in equity besides income and dividends. The
Companys comprehensive income for the three months ended March 31, 2005, and the
three months ended March 31, 2004, was equal to net income as reported herein.


Recent Accounting
Standards


In
October 2004, the FASB concluded that SFAS No. 123R, Share-Based Payment, which
would require all companies to measure compensation cost for all share-based payments
(including employee stock options) at fair value, would be effective for the Company for
interim or annual period beginning after December 15, 2005. The Company will adopt SFAS
No. 123R on January 1, 2006 and does not believe the adoption will have a material
impact on its financial statements.


12
3. Accounts
Receivable, Net


Accounts
receivable consisted of billed receivables, unbilled receivables and the allowance for
doubtful accounts as follows:


(In
      thousands)
    March
      31, 2005
    
    December
      31, 2004Billed
      receivables
    $
    19,735
    
    $
    20,259Unbilled
      receivables
    
    17,902
    
    
    17,661Allowance
      for doubtful accounts
    
    (3,134
    )
    
    (2,434
    )Accounts
      receivable, net
    $
    34,503
    
    $
    35,4864. 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 statements
of operations.

(In
      thousands)
    Three
      Months EndedMarch
      31, 2005
    
    March
      31, 2004Numerator:Net
      Income
    $
    1,315
    
    $
    3,492DenominatorDenominator
      for basic earnings per shareWeighted
      average shares outstanding
    
    9,806
    
    
    8,361Effect
      of dilutive securities:Employee
      and director stock options and warrants
    
    1,409
    
    
    1,306Denominator
      for diluted earnings per shareAdjusted
      weighted average shares outstanding
    
    11,215
    
    
    9,668Basic
      earnings per share
    $
    0.13
    
    $
    0.42Diluted
      earnings per share
    $
    0.12
    
    $
    0.365. Stock-Based
Compensation


The
Company accounts for stock based compensation to employees using the intrinsic value
method. Pro forma information regarding net income and net income per share available to
common shareholders is required by SFAS No. 148 and has been determined as if the Company
had accounted for its stock options under the fair value method as provided therein.



For
purposes of pro forma disclosures, the estimated fair value of the options is amortized
over the options graded vesting period.


13
In
December 2002, the Financial Accounting Standards Board (FASB) amended the
transition and disclosure requirements of SFAS No. 123 through the issuance of SFAS No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure.SFAS No. 148 amends the existing disclosures to make more frequent and prominent
disclosure of stock-based compensation expense beginning with financial statements for
fiscal years ending after December 15, 2002. The Company has adopted the disclosure
provisions of SFAS No. 148.


If
the Company had accounted for its stock-based employee and outside directors
compensation under the minimum fair value recognition and measurement principles, the
Companys reported net income amounts would have been adjusted to the pro forma net
income amounts presented below:



(In
      thousands)
    Three
      Months EndedMarch
      31, 2005
    
    March
      31, 2004Pro
      Forma impact of fair value method (FAS 148)Reported
      net income available to common shareholders
    $
    1,315
    
    $
    3,492Less: Total
      stock-based compensationexpense
      determined under fair value basedmethod
      for all awards, net of related tax effects
    
    (173
    )
    
    (106
    )Pro forma
      net income available to common shareholders
    $
    1,142
    
    $
    3,386Earnings
      per common shareBasic -
      as reported
    $
    0.13
    
    $
    0.42Diluted
      - as reported
    
    0.12
    
    
    0.36Basic -
      pro forma
    
    0.12
    
    
    0.40Diluted
      - pro forma
    
    0.10
    
    
    0.35Weighted
      average Black-Scholes value assumptionsRisk free
      interest rate
    
    3
    %
    
    5
    %Expected
      life
    
    3
      yrs
    
    
    3
      yrsExpected
      volatility
    
    36%
      - 183
    %
    
    87%
      - 183
    %Expected
      dividend yield
    
    0
    %
    
    0
    %6. Related
Party Transactions


During
the three months ended March 31, 2005, the Company had no related party transactions.


14
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.


At
March 31, 2004, the Companys stock closed at $4.90 per share. The decrease in the
market price from the valuation at December 31, 2003, based on a December 31, 2003 close
price of $8.50 per share required the Company to record a decrease in the value of the
puttable warrant obligation of $2.0 million for the three months ended March 31, 2004, as
other financing income in accordance with SFAS No. 150.


On
July 8, 2004, 458,333 of these warrants were repurchased and the remaining 91,667 warrants
were amended to delete the put option.


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.


As
of the three months ended March 31, 2005, the Company has no puttable warrant obligations.


8.
Contingencies


During
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 its common stock.  The complaint seeks unspecified
damages.  On March 15, 2005, this case was dismissed without prejudice for failure to
state a claim. On April 12, 2005 this case was appealed. While this lawsuit is being
appealed, the Company believes the case has no merit and will continue to contest this
suit 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 alleged,


15
among other things, that 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 the Companys securities. Specifically, the complaint alleged 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 alleged that the Companys
conduct and the conduct of 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 sought unspecified damages. On December 20, 2004, the lawsuit was
dismissed without prejudice. While this lawsuit could be refiled at a later date, the
Company believes the lawsuit has no merit and will vigorously defend any such refiled
action.



On
November 30, 2004, the Company entered into a settlement with Cappello Capital Corp., or
Cappello, relating to the matter of Cappello Capital Corp. vs. Gexa Corp.,
originally filed in the Los Angeles Superior Court-West District. Cappellos
complaint alleged a breach of contract regarding investment banker fees being claimed by
Cappello in connection with the credit facility with Highbridge/Zwirn Special
Opportunities Fund, L.P. In exchange for Cappellos agreement to dismiss the lawsuit
and release its claims against the Company, the Company agreed to: (i) pay Cappello
$275,000, (ii) issue to Cappello warrants dated November 1, 2004, to purchase 400,000
shares of Company common stock at an exercise price of $4.50 per share, and (iii) issue to
Cappello an interest free unsecured promissory note in the principal amount of $500,000.
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
Highbridge facility.


On
December 2, 2004, the Company was sued in the matter of Essential Utilities Corporation
v. Gexa Energy Corp., Cause No. 04-12056, in the 191st District Court of Dallas County,
Texas. The petition alleges breach of contract, quantum meruit, conversion and unjust
enrichment in connection with the alleged nonpayment of consultation fees. The amount of
the claim is unknown. This case is in the preliminary stages, and the Company intends to
contest this suit vigorously.



On
January 31, 2005, a lawsuit styled Griffin/Juban Capital Management, L.L.C. d/b/a GC
Realty Services v. Gexa Corporationwas filed in the 11th Judicial District Court of
Harris County, Texas. This lawsuit claims that the Company agreed to provide Continental
frequent flyer miles to the plaintiff in turn for doing business with the Company. The
plaintiff has sued the Company for breach of contract, fraud and negligent
misrepresentation. The amount of damages sought in the lawsuit is unknown. This case is in
the preliminary stages, and the Company intends to contest this suit vigorously.


On
or about February 11, 2005, the Company was made aware of a potential lawsuit that may be
filed by Prenova, Inc. and 24 Hour Fitness USA, Inc. against the Company and XERS, Inc.
d/b/a XCEL Energy, Inc. The proposed complaint claims that the Company failed to timely
provide electrical service to 24 Hour Fitness and, as a result, they incurred substantial
damages in the form of significantly higher rates for several months in 2004. The
claimants have alleged damages in the amount of $150,000.00 plus interest and
attorneys fees. If filed, the Company intends to contest this suit vigorously.


16
The
Company is also 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
its financial position or results of operations.


9. Income taxes


The
effective income tax rate reflected in the Income tax expense item of the
Statement of Income for the three months ended March 31, 2004 is lower than the
Companys expected effective tax rate of approximately 37%. Included in Income
before taxes is approximately $2.0 million Other financing income
related to puttable warrants; the income related to the puttable warrants is not taxable.
Therefore, Income before Income tax expense is reduced by the amount of the
Other financing income prior to calculating Income tax expense,
lowering the effective tax rate. For the three months ended March 31, 2005, there was no
puttable warrant income included in Income before Income tax expense.


10.
Significant events


On
March 28, 2005 the Company and FPL Group, Inc., a Florida corporation (FPL
Group), announced the execution of an Agreement and Plan of Merger, dated as of
March 28, 2005 (the Merger Agreement), by and among FRM Holdings, LLC, a
Delaware limited liability company (FRM Holdings), WPRM Acquisition
Subsidiary, Inc., a Texas corporation and a wholly owned subsidiary of Holdings
(Merger Sub), FPL Group and the Company, pursuant to which, subject to the
satisfaction or waiver of the conditions therein, Merger Sub will merge with and into the
Company (the Merger). As a result of the Merger, the Company will become an
indirect wholly owned subsidiary of FPL Group. The Merger is intended to qualify as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended.


At
the effective time of the Merger (the Effective Time), each share of Company
common stock issued and outstanding immediately prior to the Effective Time (other than
treasury shares) will be cancelled and automatically convert into the right to receive
$6.88, payable in shares of validly issued, fully paid and non-assessable shares of FPL
Group common stock, based on an exchange ratio equal to the quotient (rounded to four
decimal points) obtained by dividing $6.88 by the average of the daily closing sale prices
of FPL Group common stock for the 10 consecutive trading days ending on the third business
day (including such third business day) immediately prior to the closing date. In
addition, at the Effective Time, each option and warrant to purchase shares of Company
common stock outstanding immediately prior to the Effective Time will be assumed by FPL
Group and converted into the right to purchase shares of FPL Group common stock with
corresponding adjustments to the exercise price based upon the foregoing exchange ratio,
but otherwise will remain unchanged except that vesting of the options will be accelerated
at the Effective Time.


Simultaneously
with the execution of the Merger Agreement, certain directors and officers of the Company
holding approximately 36% of the outstanding Company common stock, including its Chairman
and CEO, entered into a Voting Agreement with FPL Group, pursuant to which, they agreed
to vote their shares of Company common stock in favor of the Merger, the Merger Agreement
and the transactions contemplated thereby. In the event that such


17
directors and officers fail to so
vote, the Voting Agreement provides for the grant proxies to FPL Group to vote and
otherwise act with respect to such shares of Company common stock at any meeting of
shareholders or consent in lieu of any such meeting or otherwise, on the Merger, the
Merger Agreement and the transactions contemplated thereby.


The
Company has made customary representations and warranties and covenants in the Merger
Agreement, including among others (i) to conduct its businesses in the ordinary course
between the execution of the Merger Agreement and the consummation of the Merger, (ii) to
cause a meeting of the Companys shareholders to be held to consider the adoption of
the Merger Agreement, (iii) subject to certain exceptions, for the Companys board of
directors to recommend that the Companys shareholders adopt and approve the Merger
Agreement, and (iv) subject to certain exceptions, not to (A) solicit proposals relating
to alternative business combination transactions or (B) enter into discussions concerning
or provide information in connection with alternative business combination transactions.


Consummation
of the Merger is subject to customary conditions, including, among others, (i) approval of
the Companys shareholders, (ii) expiration or termination of the applicable
Hart-Scott-Rodino Act waiting period, (iii) approval by the Public Utility Commission of
Texas (the PUCT) of an amendment application regarding the change of ownership
of the Company with respect to its retail electric provider license and, if required by
the PUCT, of an application for recertification, (iv) absence of any order or injunction
prohibiting the consummation of the Merger, (v) the Company having $13.5 million of
Working Capital (as defined in the Merger Agreement) as of month end not ending more than
60 days prior to closing, (vi) subject to certain exceptions, the accuracy of
representations and warranties with respect to the Companys or FPL Groups
business, as applicable, and (vii) receipt of customary tax opinions. The Merger
Agreement contains certain termination rights and provides that, upon the termination of
the Merger Agreement under specified circumstances, the Company will be required to pay
FPL Group a termination fee of $3.25 million.


The
foregoing description of the Merger Agreement does not purport to be complete and is
qualified in its entirety by reference to the full text of the Merger Agreement, included
as Exhibit 2.1 to the Companys current report on Form 8-K, as filed with the
Securities and Exchange Commission on March 28, 2005.


The
Company also amended the Amended and Restated Employment Agreement, dated as of October
28, 2004, between the Company and Neil M. Leibman, the Companys Chairman and CEO
(the Employment Agreement), to exclude the consummation of the Merger and the
other transactions contemplated by the Merger Agreement from certain payments he would
otherwise be entitled to receive in the event of a change in control transaction. The
foregoing description of the amendment to the Employment Agreement does not purport to be
complete and is qualified in its entirety by reference to the full text of the amendment
to the Employment Agreement, included as Exhibit 10.1 to the Companys current report
on Form 8-K, as filed with the Securities and Exchange Commission on March 28, 2005.


At
the Effective Time, Mr. Leibman will be employed by the Company as its President, and will
be compensated pursuant to a new Employment Agreement with the Company, and the Employment
Agreement, as amended by the amendment to the Employment Agreement, will automatically be
terminated.


18
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 the pending merger with
the FPL Group Inc., our estimate 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, 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, predicts, projects, targets,
will likely result, may, could 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.


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 Item 3 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



(In
      thousands)
    Three
      Months EndedMarch
      31, 2005
    
    March
      31, 2004(Unaudited)
    
    (Unaudited)Sales
    $
    78,261
    
    $
    50,513Cost of
      goods sold
    
    68,330
    
    
    43,147Gross
      profit
    
    9,931
    
    
    7,366Selling,
      general & administrative expenses
    
    7,491
    
    
    4,702Income
      from operations
    $
    2,440
    
    $
    2,664Cost of
      goods sold %
    
    87.3
    %
    
    85.4
    %Gross profit
      %
    
    12.7
    %
    
    14.6
    %Revenues


Operating
revenue for the three months ended March 31, 2005 was $78.3 million compared with
operating revenue of $50.5 million for the three months ended March 31, 2004, an increase
of 55%. The increased revenues were driven by higher volumes and commodity prices. We
believe the volume was favorably impacted by consumer confidence in the deregulated
markets and the continued success of our marketing strategy. The majority of our revenues
come from the flow of electricity to customers. However, we also generate revenues from
pass through of TDSP charges, a standard base charge to each customer,
contract cancellation fees, disconnection fees, and late fees. As of March 31, 2005, we
had approximately 113,000 customer meters compared with approximately 70,000 customer
meters as of March 31, 2004.


In
addition, during the three months ended March 31, 2005, our marketing department continued
to contract with multi-family communities to secure their commercially paid meters and
gain access to current and future residents through direct marketing at the leasing
offices. These sales provide us with a large number of customers at low costs of
acquisition. As of March 31, 2005, we had marketing agreements with approximately 650
apartment communities as compared with approximately 600 as of December 31, 2004. As of
the date of this report, the Company has 800 apartment communities with marketing
agreements.


We
have plans to expand our internal sales force during 2005, primarily to focus on our value
added service offerings. This expansion will enable us to continue to penetrate new
markets and to cost effectively expand our presence throughout Texas.


20
Cost of Goods Sold


Cost
of goods sold, which is recognized concurrently with related energy sales, primarily
includes the aggregated cost of purchased electric power and fees incurred from
TDSPs. Our cost of goods sold increased to $68.3 million for the three months ended
March 31, 2005, an increase of $25.2 million, or 58%, from $43.1 million for the three
months ended March 31, 2004. The significant increase in cost of goods sold is primarily a
result of the following:



increase
in our customer base; and
increase
in cost per retail kwh delivered, which occurred primarily as a result of increased
natural gas costs, which are a significant factor influencing electricity costs.Our
gross profit for the quarter increased over the prior year quarter by $2.6 million. While
larger sales volumes increased our gross profit over the prior year quarter, our gross
profit percentage for the quarter decreased. The major factors that impacted our gross
profit percentage for the three months ended March 31, 2005, compared with the three
months ended March 31, 2004, were:



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 costs increase. We believe this
is the primary reason that our gross profit has decreased from the three months ended
March 31, 2005, as compared with the three months ended March 31, 2004.
Competitive
pricing: As a 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 significant21
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.Selling, General and
Administrative Expenses


Selling,
general and administrative expenses as of March 31, 2005, were $7.5 million compared with
selling, general and administrative expenses of $4.7 million for the three months ended
March 31, 2004, an increase of 59%.


(In
      thousands)
    Three
      Months EndedMarch
      31, 2005
    
    March
      31, 2004Billing
      fees
    $
    207
    
    $
    514Sales commissions
    
    1,540
    
    
    799Bad debt
    
    1,787
    
    
    1,334Salaries
      and other
    
    3,957
    
    
    2,055Total
    $
    7,491
    
    $
    4,702Billing
fees are primarily costs paid to third party EDI providers to handle transactions between
us, ERCOT and the TDSPs in order to produce customer bills. Billing fees decreased to $0.2
million for the three months ended March 31, 2005, a decrease of $0.3 million, or 60% from
$0.5 million for the three months ended March 31, 2004. Billing fees have decreased
primarily as a result of a change in EDI providers. This change resulted in savings of
approximately $0.2 million for the three months ended March 31, 2005, compared with the
three months ended March 31, 2004.


Sales
commissions are fees paid to employees and external contractors for new customer
acquisitions. Sales commissions increased to $1.5 million for the three months ended March
31, 2005, an increase of $0.7 million, or 93%, from $0.8 million for the three months
ended March 31, 2004. Sales commissions are primarily paid in three ways:



one-time
payment upon collection of the first months bill from the customer;
residual
ongoing payments as a percentage of the customers bills or an amount per kwh
delivered to the customer; and
payments
to Continental and American Airlines based on miles earned by the customer.The
increase in sales commissions for the three months ended March 31, 2005 compared with the
three months ended March 31, 2004, is primarily the result of customer growth, an increase
in new commercial customers which have a higher acquisition cost, and additional
commissions incurred in 2005 related to the Continental and American Airline partner
programs.


Bad
debt expense increased to $1.8 million for the three months ended March 31, 2005, an
increase of $0.5 million, or 34%, from $1.3 million for the three months ended March 31,
2004. Bad debt expense, as a percentage of total revenue decreased to 2.3% for the three
months ended March 31, 2005, from 2.6% for the three months ended March 31, 2004. Bad
debt expense improved as a result of the implementation of late fees, improved collection
procedures,


22
improved credit check processes and
the addition of disconnection rights, which were granted by the PUCT during 2004 and
implemented in the third quarter of 2004.


Salaries
and other increased to $4.0 million for the three months ended March 31, 2005, an increase
of $1.9 million, or 93% from $2.1 million for the three months ended March 31, 2004. The
primary increases in salaries and other are as follows:



salaries
of $1.0 million;
bank
fees of $0.3 million;
professional
fees of $0.5 million; and
telephone,
rent and other office expenses of $0.1 million.Salaries
expense has increased significantly year over year 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 2004
following the end of the first quarter included Chief Financial Officer, Corporate
Controller, Manager of Financial Reporting, Manager of Human Resources, Director of
Operations, Manager of Transaction Processing, a significant number of customer service
representatives (approximately 16), and a significant number of information technology
positions related to our relocating the GEMS billing system from Atlanta, Georgia, to
Houston, Texas. Although salaries expense has significantly increased year over year, we
anticipate that the overall rate of increase will be lower than the overall sales growth
rate.


Bank
fees are primarily related to customer lockbox processing and credit card processing.
Credit card processing fees increased year over year due to the fact that during 2004,
following the end of the first quarter, we began offering customers the alternative of
paying their bill with a credit card on a recurring basis. These costs increased in line
with our customer growth. Professional fees increased primarily as a result of legal and
investment banker fees associated with the pending Merger with the FPL Group, Inc.
Telephone, rent and other office expenses primarily increased as a result of the
relocation of our corporate offices in 2004 and an upgrade of the customer service phone
system.


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.


Working
capital (current assets less current liabilities) increased to $14.9 million as of March
31, 2005, compared with $12.3 million as of December 31, 2004. The primary components of
the increase are:



Increase
in current assets of $1.9 million. This is a result of an increase in cash of $2.3
million offset by a decrease in accounts receivable of approximately $1.0 million, an23
increase
in the deferred tax asset of approximately $0.5 million and an increase in other current
assets of $0.1 million. This increase is primarily due to customer growth and seasonality.
Decrease
in current liabilities of $0.7 million. The primary reasons are as follows:
Accrued
 electricity,  accounts payable and other accrued  expenses  increased by $2.0 million
due primarily to customer growth and                      seasonality.
Customer
deposits increased by approximately $0.6 million due to customer growth.
Taxes
Payable decreased by $3.3 million due to the payment of federal income tax for fiscal
2004 during the first quarter of 2005.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 growth rates. As of March 31, 2005, our days sales outstanding was approximately
40 days when considering both the billed and unbilled receivables concurrently. Pursuant
to our agreement with TXU Portfolio Management Company LP (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 March 31, 2005, we had deposited approximately $7.2 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. 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 three  months  ended  March 31,  2005,  we  generated
 approximately  $2.3  million in cash from                 operations.  The primary
source of cash during the three months ended March 31, 2005, was a decrease in accounts
receivable of                 $1.0 million and an increase in accrued  electricity of
$1.5 million.  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 40
days as of March 31, 2005.
Highbridge/Zwirn
 Special Opportunities Fund, L.P. Credit Facility (The 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.  As of March 31, 2005, we were in compliance  with all financial
 covenants                 under the credit agreement and we had no outstanding
borrowings under the Facility.
Equity:
 During the three months ended March 31, 2005, we raised approximately  $425,000 through
the exercise of options to acquire                 300,000 shares of common stock by a
former  officer of our Company.  Of the 300,000  shares,  250,000 shares were exercised
at                 $1.50 per share and the remaining  50,000 shares were exercised at
$1.00 per share.  These funds were designated to be used to                 support our
continued operational expansions.25
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 2005. We continue to
assess new deregulated markets in other states, and as of March 31, 2005, we are currently
providing retail electricity service to customers in Massachusetts and have received
approval to provide retail electricity service to customers in New York and Maine as of
April 2005.We intend to expand our business by leveraging our relationships with
existing customers in Texas that have operations in these other states without incurring
significant additional operating costs.


Critical Accounting
Policies


Following
are critical accounting policies adopted by us for use in the preparation of key material
financial data.


Normal Purchases and
Sales Accounting


We
use a combination of long term contracts, short term contracts, month-ahead purchases, and
day-ahead purchases to match up with forecasted demand of our commercial customers on long
term sales contracts, commercial customer on month-to-month contracts, and residential
customers (which are all on month-to-month contracts). We apply the normal purchase,
normal sale accounting treatment to our forward purchase supply contracts and our customer
sales contracts. Accordingly, we record revenue generated from our sales contracts as
energy is delivered.


Revenue and Cost
Recognition


We
record electricity sales under the accrual method and these revenues are recognized upon
delivery of electricity to the customers meter. Electric services are accrued based
upon estimated deliveries to customers as tracked and recorded by ERCOT multiplied by our
average billing rate per kwh in effect at the time.


We
use a revenue estimation method referred to as the flow technique. 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.


26
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 and pass through charges from the TDSPs in
the areas serviced by us. TDSP charges are costs for metering services and maintenance of
the electric grid. TDSP charges are established by regulation by the PUCT.


The
energy portion of our cost of goods sold 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. We are 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 us through its bilateral wholesale supply and the supply required to
serve our customer load. We endeavor to minimize the amount of balancing/ancillary costs
through our load forecasting and forward purchasing programs.


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 to 30 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). We use 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. For the three months ended March 31, 2005, and the three months ended March 31,
2004, our bad debt expense was approximately $1.8 million, or 2.3% of sales and $1.3
million, or 2.6% of sales, respectively.


We
follow a consistent process to determine which accounts should be written off and compare
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


27
removal from service, in-house or
external collections efforts, or write-off. For residential customers and commercial
customers with balances less than $700.00, 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 with balances greater than $700.00 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.


We
have initiated a variety of actions targeted to reduce the amount of bad debt that we
incur. The principal actions are as follows:



improved
policies requiring credit reviews, deposits, and late fees; and
implemented
more aggressive collection efforts including customer disconnections.Accounts
Receivable contains billed receivables, unbilled receivables and the allowance for
doubtful accounts as follows:


(In
      thousands)
    March
      31, 2005
    
    December
      31, 2004Billed
      receivables
    $
    19,735
    
    $
    20,259Unbilled
      receivables
    
    17,902
    
    
    17,661Allowance
      for doubtful accounts
    
    (3,134
    )
    
    (2,434
    )Accounts
      receivable, net
    $
    34,503
    
    $
    35,48628
Item 3.
Quantitative and Qualitative Disclosures About Market Risk


In the three months ended March 31, 2005 we
used a combination of long term contracts, short term contracts, month-ahead
purchases, an day-ahead purchases to match up with forecasted demand of our
commercial customers on long term sales contracts, commercial customer on
month-to-month contracts, and residential customers (which are all on
month-to-month contracts). We apply the normal purchase, normal sale accounting
treatment to our forward purchase supply contracts. Accordingly, we record
revenue generated from our sales contracts as energy is delivered to our retail
customers, and direct energy costs are recorded when the energy under our
long-term forward physical delivery contracts is delivered. During the three
months ended March 31, 2005, we did not use financial hedging, or derivative
instruments in the future, although we may use derivatives for hedging purposes
in the future. Additionally, we do not purchase power until we have locked in
our respective customers for whom power will be supplied and purchased.





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
and our Chief Financial Officer, 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
Chief Executive Officer and our Chief Financial Officer concluded that our disclosure
controls and procedures were effective in timely accumulations and communicating to our
management of the information required to be disclosed by us in the reports that we file
or submit under the Exchange Act.


During
the audit of our fiscal year end 2004, our independent auditors, Hein & Associates LLP
(Hein), issued a material weakness letter noting significant deficiencies in
our internal controls.


On
March 25, 2005, Hein issued a material weakness letter related to the audit of our fiscal
year end 2004 identifying a deficiency in our internal controls. The deficiency identified
by Hein was that we did not adequately provide information to Hein regarding a control
deficiency over input of rates into our billing system and a resulting reserve accrual. In
addition, Hein indicated that the Company failed to fully investigate and quantify the
extent of the error caused by such control deficiency. The deficiency arose in connection
with our determination of the size of our reserve for customer credits to be issued
relating to errors in inputting rates on our billing system. The input errors were
originally discovered by our management during the third quarter of fiscal 2004, and we
set a reserve at that time of $500,000 for customer credits related to the input errors.
Prior to receiving the letter from Hein, we made a decision to increase our reserve for
customer credits related to the input errors to $918,000 as of December 31, 2004. Hein did
not believe we adequately disclosed the input errors to them prior to its audit of the
2004 financials and that we further did not fully investigate and quantify the extent of
the input errors in our original reserve estimates.


Further,
in response to the initial inquiries of Hein related to this matter, the Audit Committee
of our Board of Directors, with the assistance of external counsel, conducted a review of
this matter through discussions with the outside auditor, review of the applicable
documents and interviews and discussions with our management. The Audit Committee
recommended an action plan related to this material weakness, which was implemented
immediately and included the following findings and action items:


29

in
2004, we created a Disclosure and Materiality Committee that includes our CEO, CFO, COO
and those staff people responsible for                      SEC reporting and monitoring
of new or amended regulations, including the employee responsible for investor relations.
                     The committee shall be responsible for the determination that
disclosure of all material information has been made in                      each
applicable proposed public filing or furnishing of information by us pursuant to the
Securities Act of 1933, as                      amended, and the Securities Exchange Act
of 1934, as amended, and that all disclosures are made on a timely basis.  Our
                     outside accountants and counsel will be invited to participate in
any meeting of this committee and the timing of those                      meetings will
be set to ensure their attendance.
any
reserves suggested by our management for inclusion in our financial statements must be
disclosed to and approved by the Audit                      Committee and disclosed to
our outside auditors, in each case with sufficient detail to enable an understanding of
the                      reasons for the reserve.  Upon establishment of any such
reserve, our management shall, in subsequent financial periods,
                     perform the applicable investigation to confirm the need and size of
such reserve, as applicable, and report those                      findings to the Audit
Committee and outside auditors on a timely basis.
It
is the audit committees opinion that:
our
company  experienced two control  deficiencies:  (1) inadequate  control over rates
manually input into our billing system; and                                (2) inadequate
 disclosure to Hein and the Audit Committee of our discovery of that control  deficiency
and the                                reasons behind the creation of a reserve to our
unbilled account in its financial statements;
the
control deficiency related to differences between rates and the billing system was fixed
by us as of the third quarter of 2004                                and as of December
31, 2004, probably did not result in a material error to the Companys financial
                               statements; and
no
intentional misconduct or intentional omissions had occurred in connection with the
auditor matters or the scope of                                investigation by any of
our employees.We
will continue to evaluate the effectiveness of internal controls and procedures on an
ongoing 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 is required to apply its judgment in
evaluating the cost benefit relationship of possible controls and procedures.


30
Based
on the evaluation described above and the implementation of the action plans described
above, our Chief Executive Officer and Chief Financial Officer concluded, as of March 25,
2005, that our disclosure controls and procedures are effective at reaching that level of
reasonable assurance.


PART II.
OTHER INFORMATION




Item 1. Legal Proceedings


During
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 our common stock.  The complaint seeks unspecified
damages.  On March 15, 2005, this case was dismissed without prejudice for failure to
state a claim.  On April 12, 2005 this case was appealed. While this lawsuit is being
appealed, we believe it has no merit and we will contest this suit 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 alleged, among other things, that Gexa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 Gexas securities.
Specifically, the complaint alleged that Gexa 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 alleged
that Gexas conduct and the conduct of 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 sought unspecified damages. On December 20, 2004, the
lawsuit was dismissed without prejudice. While this lawsuit could be refiled at a later
date, Gexa believes the lawsuit has no merit and will vigorously defend any such refiled
action.


On
November 30, 2004, Gexa entered into a settlement with Cappello Capital Corp., or
Cappello, relating to the matter of Cappello Capital Corp. vs. Gexa Corp.,
originally filed in the Los Angeles Superior Court-West District. Cappellos
complaint alleged a breach of contract regarding investment banker fees being claimed by
Cappello in connection with the credit facility with Highbridge/Zwirn Special
Opportunities Fund, L.P. In exchange for Cappellos agreement to dismiss the lawsuit
and release its claims against Gexa, Gexa agreed to: (i) pay Cappello $275,000, (ii) issue
to Cappello warrants dated November 1, 2004, to purchase 400,000 shares of Gexa common
stock at an exercise price of $4.50 per share, and (iii) issue to Cappello an interest
free unsecured promissory note in the principal amount of $500,000. Gexa 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 Highbridge facility.


On
December 2, 2004, Gexa was sued in the matter of Essential Utilities Corporation v.
Gexa Energy Corp., Cause No. 04-12056, in the 191st District Court of Dallas County,
Texas. The petition alleges breach of contract, quantum meruit, conversion and
unjust enrichment in


31
connection with the alleged
nonpayment of consultation fees. The amount of the claim is unknown. This case is in the
preliminary stages, and Gexa intends to contest this suit vigorously.



On
January 31, 2005, a lawsuit styled Griffin/Juban Capital Management, L.L.C. d/b/a GC
Realty Services v. Gexa Corporationwas filed in the 11th Judicial District Court of
Harris County, Texas. This lawsuit claims that Gexa agreed to provide Continental frequent
flyer miles to the plaintiff in turn for doing business with Gexa. The plaintiff has sued
Gexa for breach of contract, fraud and negligent misrepresentation. The amount of damages
sought in the lawsuit is unknown. This case is in the preliminary stages, and Gexa intends
to contest this suit vigorously.


On
or about February 11, 2005, Gexa was made aware of a potential lawsuit that may be filed
by Prenova, Inc. and 24 Hour Fitness USA, Inc. against Gexa and XERS, Inc. d/b/a XCEL
Energy, Inc. The proposed complaint claims that Gexa failed to timely provide electrical
service to 24 Hour Fitness and, as a result, they incurred substantial damages in the form
of significantly higher rates for several months in 2004. The claimants have alleged
damages in the amount of $150,000.00 plus interest and attorneys fees. If filed,
Gexa intends to contest this suit vigorously.


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




Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds.


On
January 12, 2005 and February 7, 2005, the Company issued 4,250 and 15,535 shares of
common stock respectively to Continental Airlines for services provided for the One
Pass® partner program. The common stock was issued at market prices of $5.01 and $6.40
respectively on date of issuance. The shares of common stock were issued in transactions
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 as that
did not involve a public offering.




Item 3.
Defaults Upon Senior Securities.


None.




Item 4. Submission of
Matters to a Vote of Security Holders.


None.




Item 5. Other
Information.


None.


32
Item 6.
Exhibits.

2.1
    
    Amended
        and Restated Agreement dated as of October 21, 2003, among the Company,
        Gexa Gold Corp., Robert D. McDougal, Justin Rice, Gary Rice, and Neil
        M. Leibman
    
    Exhibit
        2.1 to Form 8-K/A, filed on December 9, 2003*2.2
    
    Agreement
        and Plan of Merger dated as of March 28, 2005, among FRM Holdings, LLC,
        WPRM Acquisition Subsidiary, Inc. FPL Group, Inc. and Gexa Corp.
    
    Exhibit
        2.1 to Form 8-K, filed on March 28, 20052.3
    
    Voting
        Agreement
    
    Exhibit
        2.2 to Form 8-K filed on March 28, 20053.1
    
    Articles
        of Incorporation of the Company.
    
    Exhibit
        3.1 to Form 8-K/A, filed on June 21, 20013.2
    
    Bylaws
        of the Company.
    
    Exhibit
        3.2 to Form 8-K/A, filed on June 21, 200110.1
    
    Form
        of Indemnification Agreement between the Company and each of its directors
        and certain officers
    
    Exhibit
        10.1 to Form 8-K, filed on January 31, 200510.2
    
    Amendment
        to Amended and Restated Employment Agreement dated as of March 28, 2005,
        between Gexa Corp. and Neil M. Leibman
    
    Exhibit
        10.1 to Form 8-K, filed on March 28, 200531.1
    
    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.
    
    Filed
        herewith31.2
    
    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.
    
    Filed
        herewith32.1
    
    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.
    
    Filed
        herewith32.2
    
    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.
    
    Filed
        herewith*

Schedules
and similar attachments to the Agreement and Plan of Merger have been omitted pursuant to
Item 601(b)(2) of Regulation S-K. The Registrant will furnish supplementally a copy of
any omitted schedule or similar attachment to the Securities and Exchange Commission upon
request.33
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 M. LeibmanNeil M.
Leibman, Chairman, President and CEO(Principal Executive Officer)Dated: May 12
2005Houston, TX


By: /s/ David K. HolemanDavid K.
Holeman, Chief Financial Officer(Principal Financial Officer)Dated: May 12,
2005Houston, Texas


EXHIBITS ARE ON
FOLLOWING PAGES


34
2.1
    
    Amended
        and Restated Agreement dated as of October 21, 2003, among the Company,
        Gexa Gold Corp., Robert D. McDougal, Justin Rice, Gary Rice, and Neil
        M. Leibman
    
    Exhibit
        2.1 to Form 8-K/A, filed on December 9, 2003*2.2
    
    Agreement
        and Plan of Merger dated as of March 28, 2005, among FRM Holdings, LLC,
        WPRM Acquisition Subsidiary, Inc. FPL Group, Inc. and Gexa Corp.
    
    Exhibit
        2.1 to Form 8-K, filed on March 28, 20052.3
    
    Voting
        Agreement
    
    Exhibit
        2.2 to Form 8-K filed on March 28, 20053.1
    
    Articles
        of Incorporation of the Company.
    
    Exhibit
        3.1 to Form 8-K/A, filed on June 21, 20013.2
    
    Bylaws
        of the Company.
    
    Exhibit
        3.2 to Form 8-K/A, filed on June 21, 200110.1
    
    Form
        of Indemnification Agreement between the Company and each of its directors
        and certain officers
    
    Exhibit
        10.1 to Form 8-K, filed on January 31, 200510.2
    
    Amendment
        to Amended and Restated Employment Agreement dated as of March 28, 2005,
        between Gexa Corp. and Neil M. Leibman
    
    Exhibit
        10.1 to Form 8-K, filed on March 28, 200531.1
    
    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.
    
    Filed
        herewith31.2
    
    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.
    
    Filed
        herewith32.1
    
    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.
    
    Filed
        herewith32.2
    
    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.
    
    Filed
        herewith*

Schedules
and similar attachments to the Agreement and Plan of Merger have been omitted pursuant to
Item 601(b)(2) of Regulation S-K. The Registrant will furnish supplementally a copy of
any omitted schedule or similar attachment to the Securities and Exchange Commission upon
request.35