UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWashington, DC 20549 Form 10-Q (Mark one) |X| QUARTERLY
REPORT UNDER SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934 For the quarterly
period ended: June 30, 2004 |_| TRANSITION REPORT
UNDER SECTION 13 OR 15 (d) OF THESECURITIES 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 
      (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
(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 8,530,185 shares
outstanding as of June 30th, 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
    
    18Item
      3. Quantitative and Qualitative Disclosures About Market Risk
    
    24Item
      4. Controls and Procedures
    
    24PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
    
    26Item
      2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
      Securities
    
    27Item
      3. Defaults Upon Senior Securities
    
    27Item
      4. Submission of Matters to a Vote of Security Holders
    
    27Item
      5. Other Information
    
    27Item
      6. Exhibits and Reports on Form 8-K
    
    27  2   PART I.
FINANCIAL INFORMATION Item 1.
Condensed Financial Statements Set forth below are the
condensed financial statements for the Company for the three and six month
periods ended June 30, 2004 and 2003. INDEX TO CONDENSED
FINANCIAL STATEMENTS  PageCondensed
      Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003
    4Condensed
      Statements of Operations for the three and six months ended June 30, 2004
      and 2003
      (Unaudited)
    5Condensed
      Statements of Cash Flows for the six months ended June 30, 2004 and 2003
      (Unaudited)
    6Notes
      to Condensed Financial Statements (Unaudited)
    8  3     Gexa Corp.
CONDENSED BALANCE SHEETS(In thousands, except share data)  June
      30, 2004
    
    December
      31, 2003Assets
    (Unaudited)Current
      Assets:Cash
      and cash equivalents
    $
    21,430
    
    $
    10,829Cash
      - restricted
    
    5,054
    
    
    3,613Accounts
      receivable, net of allowance for doubtful accounts
    
    34,714
    
    
    22,327Deferred
      tax asset
    
    909
    
    
    458Other
      current assets
    
    82
    
    
    82Total
      current assets
    
    62,189
    
    
    37,309Property
      and equipment, net
    
    680
    
    
    374Deferred
      tax asset
    
    281
    
    
    292Other
      assets
    
    453
    
    
    227Total
      Assets
    $
    63,603
    
    $
    38,202Liabilities
      and Shareholders EquityCurrent
      Liabilities:Term
      loans - current portion
    $
    811
    
    $
    608Accrued
      electricity costs
    
    30,209
    
    
    16,555Accounts
      payable and other accrued expenses
    
    10,243
    
    
    6,084Taxes
      payable
    
    5,361
    
    
    2,923Customer
      deposits
    
    4,863
    
    
    3,376Total
      current liabilities
    
    51,487
    
    
    29,546Term
      loans: long-term portion, net of discount
    
    2,040
    
    
    2,382Puttable
      warrant obligation
    
    1,870
    
    
    4,125Accrued
      interest payable - officer
    
    24
    
    
    20Total
      Liabilities
    
    55,421
    
    
    36,073Shareholders
      equity:Common
      stock, $0.01 par value; 75,000,000 shares authorized;8,544,032
      shares issued and 8,530,185 shares outstanding atJune
      30, 2004; 8,261,128 shares issued and 8,247,281 sharesoutstanding
      at December 31, 2003
    
    86
    
    
    83Additional
      paid-in capital
    
    8,245
    
    
    7,348Treasury
      stock, at cost; 13,847 shares
    
    (14
    )
    
    (14
    )Accumulated
      deficit
    
    (135
    )
    
    (5,288
    )Total
      shareholders equity
    
    8,182
    
    
    2,129Total
      liabilities and shareholders equity
    $
    63,603
    
    $
    38,202  See accompanying notes
to condensed financial statements. 4    Gexa Corp.
CONDENSED STATEMENTS OF OPERATIONS(In thousands, except per share
data)  Three
      Months Ended
    
    Six
      Months EndedJune
      30, 2004
    
    June
      30, 2003
    
    June
      30, 2004
    
    June
      30, 2003As
      Restated(See Fn 11)
    
    
    
    As
      Restated(See Fn 11)(Unaudited)
    
    (Unaudited)Sales
    $
    62,025
    
    $
    21,448
    
    $
    112,538
    
    $
    34,368Cost
      of Goods Sold
    
    55,436
    
    
    19,517
    
    
    99,895
    
    
    31,701Gross
      Profit
    
    6,589
    
    
    1,931
    
    
    12,643
    
    
    2,667General
      and administrative expenses
    
    4,180
    
    
    1,962
    
    
    7,569
    
    
    3,084Income
      (loss) from operations
    
    2,409
    
    
    (31
    )
    
    5,074
    
    
    (417
    )Interest
      income
    
    2
    
    
    8
    
    
    7
    
    
    10Interest
      expense
    
    (188
    )
    
    (64
    )
    
    (419
    )
    
    (71
    )Other
      financing income (see Note 7)
    
    275
    
    
    
    
    
    2,255
    
    
    Income
      before income tax expense (benefit)
    
    2,498
    
    
    (87
    )
    
    6,917
    
    
    (478
    )Income
      tax expense (benefit)
    
    839
    
    
    (32
    )
    
    1,765
    
    
    (163
    )Net
      income (loss)
    
    1,659
    
    
    (55
    )
    
    5,152
    
    
    (315
    )Preferred
      stock dividend
    
    
    
    
    (25
    )
    
    
    
    
    (25
    )Net
      income (loss) available to common stockholders
    $
    1,659
    
    $
    (80
    )
    $
    5,152
    
    $
    (340
    )Basic
      net income (loss) per share
    $
    0.20
    
    $
    (0.01
    )
    $
    0.61
    
    $
    (0.04
    )Basic
      weighted average shares
    
    8,481
    
    
    7,605
    
    
    8,413
    
    
    7,605Diluted
      net income (loss) per share
    $
    0.17
    
    $
    (0.01
    )
    $
    0.54
    
    $
    (0.04
    )Diluted
      weighted average shares outstanding
    
    9,553
    
    
    7,605
    
    
    9,620
    
    
    7,605  5    Gexa Corp.
CONDENSED STATEMENTS OF CASH FLOWS(In thousands)  Six
      months endedJune
      30, 2004
    
    June
      30, 2003As
      Restated(See Fn 11)(Unaudited)Cash
      Flows from operating activities:Net income
      (loss)
    $
    5,152
    
    $
    (315
    )Adjustments
      to reconcile net income (loss) tonet
      cash provided by operating activities:Depreciation
    
    75
    
    
    50Amortization
      of financing costs
    
    15
    
    
    Accretion
      of debt discount
    
    (153
    )
    
    Stock
      issued to officers, directorsand
      consultants for services
    
    100
    
    
    Change
      in puttable warrant obligation
    
    (2,255
    )
    
    Deferred
      income tax benefit
    
    (440
    )
    
    38Changes
      in operating assets and liabilities:Accounts
      receivable
    
    (12,387
    )
    
    (7,624
    )Other
      current assets
    
    
    
    
    (358
    )Other
      long-term assets
    
    (226
    )
    
    Accrued
      electicity costs
    
    13,654
    
    
    Accounts
      payable and other accrued expenses
    
    4,159
    
    
    7,224Taxes
      Payable
    
    2,438
    
    
    334Customer
      deposits
    
    1,487
    
    
    1,078Accrued
      interest payable
    
    4
    
    
    4Net cash
      provided by operating activities
    
    11,623
    
    
    431Cash flows
      from investing activities:Restricted
      cash
    
    (1,441
    )
    
    Purchases
      of equipment
    
    (381
    )
    
    (125
    )Net cash
      used in investing activities
    
    (1,822
    )
    
    (125
    )Cash flows
      from financing activities:Borrowings
      on credit facility
    
    
    
    
    115Borrowings
      on revolving credit line
    
    
    
    
    322Changes
      in treasury stock
    
    
    
    
    (4
    )Proceeds
      from sale of common stock
    
    800
    
    
    Net cash
      provided by financing activities
    
    800
    
    
    433Net change
      in cash
    
    10,601
    
    
    739Cash and
      cash equivalents at beginning of period
    
    10,829
    
    
    3,400Cash and
      cash equivalents at end of period
    $
    21,430
    
    $
    4,139  6   Supplemental Disclosure
of Cash Flow Information  Six
      months endedJune
      30, 2004
    
    June
      30, 2003Cash
      paid for interest
    $
    211
    
    $
    69Cash paid
      for income taxes
    $
    173
    
    $
      Supplemental Disclosure
of Noncash Transactions During
the six months ended June 30, 2004,  certain broker  commissions  were paid with 7,400
shares of common stock valued at market price on date of issue,  averaging  $7.17 per
share. During
the six months ended June 30,  2004,  employees of the Company were  granted  6,750
 shares of common  stock,  that were valued at an average  market price of $5.33 per
share, in lieu of compensation. 7    GEXA CORP.
Notes to the Condensed Financial Statements(unaudited)June 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 fiscal year
ended December 31, 2003. In the opinion of management,  all adjustments  (consisting of
normal recurring accruals)  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, and (c) bad debt expense. 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  in the commercial and
 residential  retail energy business create a challenge to manage  receivables as well as
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. 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.  Accounts
Receivable contains billed receivables, unbilled receivables, other receivables,  and the
allowance for doubtful accounts as follows:  (In
      thousands)
    
    June
      30, 2004
    
    December
      31, 2003Billed
      receivables
    
    $
    19,311
    
    $
    13,126Unbilled
      receivables
    
    
    17,800
    
    
    10,313Other
      receivables
    
    
    230
    
    
    188Allowance
      for doubtful accounts
    
    
    (2,627
    )
    
    (1,300
    )Accounts
      receivable, net
    
    $
    34,714
    
    $
    22,327  10  Note 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
    
    Six
      Months Ended(In
      thousands)
    June
      30, 2004
    
    June
      30, 2003
    
    June
      30, 2004
    
    June
      30, 2003Numerator:Net
      Income (loss)
    $
    1,659
    
    $
    (55
    )
    $
    5,152
    
    $
    (315
    )Preferred
      Stock dividend
    
    
    
    
    (25
    )
    
    
    
    
    (25
    )Net
      Income (loss) available to common stockholders
    $
    1,659
    
    $
    (80
    )
    $
    5,152
    
    $
    (340
    )DenominatorDenominator
      for basic earnings per shareWeighted
      average shares outstanding
    
    8,481
    
    
    7,605
    
    
    8,413
    
    
    7,605Effect
      of dilutive securities:Employee
      and director stock options
    
    971
    
    
    
    
    
    1,080
    
    
    Warrants
    
    101
    
    
    
    
    
    127
    
    
    Denominator
      for diluted earnings per shareAdjusted
      weighted average shares outstanding
    
    9,553
    
    
    7,605
    
    
    9,620
    
    
    7,605Basic earnings
      per share
    $
    0.20
    
    $
    (0.01
    )
    $
    0.61
    
    $
    (0.04
    )Diluted
      earnings per share
    
    0.17
    
    
    (0.01
    )
    
    0.54
    
    
    (0.04
    )  11   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 fair value approach.  Three
      Months Ended
    
    Six
      Months EndedJune
      30, 2004
    
    June
      30, 2003
    
    June
      30, 2004
    
    June
      30, 2003Pro
      Forma impact of fair value method (FAS 148)Reported
      net income available to common shareholders
    $
    1,659
    
    $
    (80
    )
    $
    5,152
    
    $
    (340
    )Less: fair
      value impact of employee stock compensation
    
    (127
    )
    
    (100
    )
    
    (254
    )
    
    (200
    )Pro forma
      net income available to common shareholders
    $
    1,532
    
    $
    (180
    )
    $
    4,898
    
    $
    (540
    )Earnings
      per common shareBasic - as
      reported
    $
    0.20
    
    $
    (0.01
    )
    $
    0.61
    
    $
    (0.04
    )Diluted -
      as reported
    
    0.17
    
    
    (0.01
    )
    
    0.54
    
    $
    (0.04
    )Basic - pro
      forma
    
    0.18
    
    
    (0.02
    )
    
    0.58
    
    
    (0.07
    )Diluted -
      pro forma
    
    0.16
    
    
    
    
    
    0.51
    
    
    Weighted
      average Black-Scholes fair value assumptionsRisk free
      interest rate
    
    3
    %
    
    5
    %
    
    3
    %
    
    5
    %Expected
      life
    
    3
      yrs
    
    
    3
      yrs
    .
    
    3
      yrs
    
    
    3
      yrs
    .Expected
      volatility
    
    176
    %
    
    124
    %
    
    176
    %
    
    124
    %Expected
      dividend yield
    
    0
    %
    
    0
    %
    
    0
    %
    
    0
    %  During
the six months ended June 30, 2004, 6,750 shares of stock were granted to Company
employees in lieu of compensation. During
the three months ended June 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. As of June
30, 2004, no incentive awards had been issued under the plan. Note 6  Significant
Events On
May 28, 2004, the Company announced it had entered into a marketing agreement with the
American Airlines, Inc. AAdvantage ® program. Beginning on June 1, 2004, the Company
will market electricity services to AAdvantage ® members, enabling them to save money
on their electricity bills while earning AAdvantage ® miles. 12   On
June 21, 2004, the Company announced that it had relocated its offices from 24
Greenway Plaza, Houston, Texas, 77046, to 20 Greenway Plaza in Houston, Texas,
77046, and changed its telephone number to 713-470-0400. On
July 15, 2004, a class action lawsuit captioned Frederick T. Pappey 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. The complaint also alleges that the conduct of the Company and the
other defendants violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and seeks unspecified damages. The Company believes that the lawsuit
is without merit and intends to contest the matter vigorously. 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 Highbridge/Zwirn
Special Opportunities Fund, L.P. The Company believes that the lawsuit is
without merit and intends to contest the matter vigorously. 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. SFAS
No. 150 requires warrants issued under a term loan agreement with The Catalyst
Fund Ltd. 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. As
of June 30, 2004, the Companys stock closed at $4.40 per share. The
decrease in the market price from $8.50 at December 31, 2003 to $4.90 at March
31, 2004 required the Company to record a decrease in the value of the puttable
warrant obligation of approximately $0.3 million and $2.3 million for the three
months ended June 30, 2004 and the six months ended June 30, 2004 respectively,
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 their put option feature; therefore, the
income (expense) effect arising from their existence as described above will no
longer be applicable to the Company. See footnote 10, Subsequent Events, for
further discussion of the repurchase of the warrants. 13   Note 8  Related
Party Transactions The
Company had no related party transactions during the three months ended June 30,
2004. Subsequent to June 30, 2004, the Company repaid loans to its officers and
directors. See Footnote 10, Subsequent Events for further discussion. Note 9  Income
taxes The
effective income tax rate reflected in the Income tax expense
(benefit) item of the Statement of Operations for the three and six months
ended June 30, 2004 is lower than the Companys expected effective tax rate
of approximately 37%. Included in Income before taxes is
approximately $0.3 and $2.3 million of Other financing income
related to puttable warrants (see Footnote 7, Puttable Warrant Obligations) for
the three and six months ended June 30, 2004, respectively; 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. Note 10  Subsequent
Events Credit
Facility and Warrants On
July 8, 2004, the Company entered into a $15.0 million revolving credit facility
(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. No advances were made under the Facility at closing. 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. At
closing, the Company paid Highbridge/Zwirn Special Opportunities Fund, L.P., for
the account of each lender under the Facility, a fee in the amount of $0.3
million. 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 $15.0 million during the
term of the Facility. 14   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;  

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 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 will be valued using a
Black-Scholes model and recorded as deferred financing costs and amortized
accordingly in the third quarter. 15   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 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
$50,000 in cash and issued to the broker warrants to acquire 25,000 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 accordingly. The warrants will be fair valued using a
Black-Scholes model and recorded as deferred financing costs and amortized
accordingly. Repayment of
Catalyst Term Loan and Purchase of Catalyst Warrants 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 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 purchased the warrants to eliminate the unfavorable
accounting treatment of the warrants required by SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity (SFAS 150). See footnote 7. 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. 16   In
connection with their participation in the Catalyst loan, warrants to acquire an
aggregate of 91,667 shares of the Companys common stock had been issued to
Neil M. Leibman, an officer and director of the Company, Robert C. Orr, a
director of the Company, Don Aron, a director of the Company, and Gaylor
Investment Trust Partnership, the general partner of which is Stuart Gaylor, a
director of the Company, (collectively, the Company Related
Parties). Pursuant to the Termination Agreement, the Company Related
Parties agreed to remove the put option provisions contained in their warrants
in order to eliminate the previously discussed unfavorable accounting treatment
of the warrants required by SFAS 150. In addition, since the Registration
Rights Agreement executed in connection with the Catalyst loan was terminated by
the Termination Agreement, the Company Related Parties were granted lesser
registration rights with respect to the shares of the Companys common
stock underlying the warrants. Under the Registration Rights Agreement, the
Company Related Parties were entitled to both demand and piggyback registration
rights, and now under the Termination Agreement, they are only entitled to
piggyback registration rights. With respect to such piggyback registration
rights, the Company must notify the holders of the warrants of any proposed
filing of certain registration statements under the Securities Act at least 20
days 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. Since
the Consulting Agreement executed in connection with the Catalyst loan was also
terminated, Leibman, Orr, Aron and 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 11  Restatement
of Prior Periods The
Company determined that its revenue reported on Form 10-QSB for the three months
and six months ended June 30, 2003 and the 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. 17   The following represents
adjusted data for the three months and six months ended June 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 June 30, 2003
    
    As
      Reported
      Previously
    
    As
      AdjustedSales
    
    $
    23,516
    
    $
    21,448Income
      (loss) from operations
    
    
    1,583
    
    
    (31
    )Net
      Income (loss) available to common shareholders
    
    
    937
    
    
    (80
    )Basic net
      income (loss) per share
    
    
    0.12
    
    
    (0.01
    )Diluted
      net income (loss) per share
    
    $
    0.11
    
    $
    (0.01
    )Six months
      ended June 30, 2003
    
    As
      Reported
      Previously
    
    As
      AdjustedSales
    
    $
    36,436
    
    $
    34,368Income
      (loss) from operations
    
    
    1,197
    
    
    (417
    )Net
      Income (loss) available to common shareholders
    
    
    678
    
    
    (340
    )Basic net
      income (loss) per share
    
    
    0.09
    
    
    (0.04
    )Diluted
      net income (loss) per share
    
    $
    0.09
    
    $
    (0.04
    )   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. 18   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. Results of Operations
for the Three Months and Six Months ended June 30, 2004 Revenues We
have continued our strong pattern of growth, as evidenced by revenue of
approximately $62.0 million in the three months ended June 30, 2004 as compared
with revenues of approximately $21.4 million for the three months ended June 30,
2003, representing an increase of 190%. As of June 30, 2004, we served
approximately 82,000 meters as compared with approximately 45,000 meters as of
June 30, 2003, an increase of 82%. Additionally, as of the three months ended
June 30, 2004, our customers consumed approximately 747,000 megawatt hours
(mwh) as compared to approximately 298,000 megawatt
hours (mwh) consumed for the three months ended June 30, 2003. The
volume increase of 151% during the three months ended June 30, 2004 as compared
with the three months ended June 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 600 megawatts during the month of June 2004. For
the six months ended June 30, 2004, revenues were approximately $112.5 million
as compared to revenues of approximately $34.4 million for the six months ended
June 30, 2003, an increase of 227%. 19   We
have continued to grow our customers based in our three customer target groups.
The first group, single family residential, has been growing due to recently
launched affinity partner programs, including Continental OnePass ®,
American AAdvantage ® and Chase ® credit cards. The second group, multi
family residential, has continued to grow by establishing our expanding
marketing relationships with large property management firms, including Walden
Management, Alliance Residential Management and Wells Management. The third
group, commercial, has continued its success by recently enrolling Texas-based
facilities of several Fortune 500 companies as well as continued expansion of
its independent contractor network. Cost of goods sold Cost
of goods sold was approximately $55.4 million, or 89% of sales for the three
months ended June 30, 2004 as compared to approximately $19.5 million or 91% of
sales for the three months ended June 30, 2003. For the six months ended June
30, 2004, cost of goods sold was approximately $99.9 million, or 89% of sales as
compared with approximately $31.7 million, or 92% of sales for the six months
ended June 30, 2003. We
were able to manage cost of goods sold more effectively through enhanced
procurement capabilities and strategies and have been utilizing more
sophisticated forecasting and scheduling software and methodologies to better
match our supply purchases with customer demand. Gross profit Gross
profit showed significant improvement over 2003, increasing to approximately
$6.6 million or 11% of sales for the three months ended June 30, 2004, compared
with approximately $1.9 million or 9% of sales for the three months ended June
30, 2003. For the six months ended June 30, 2004, gross profit was approximately
$12.6 million or 11% of sales, compared to approximately $2.7 million or 8% of
sales for the six months ended June 30, 2003. Our
margins increased between the comparison periods despite a higher overall
commodity cost environment and increased charges from our transmission and
distribution service utilities. We managed these increased costs by increasing
our sales prices to new and renewing customers to ensure margin preservation. As
term commercial load is added, term electricity purchases are executed to supply
that load. Our residential customer pricing generally moves in conjunction with
the movement in the price to beat (see Item 1. description of the business in
our Annual Report on Form 10-KSB for the year ended December 31, 2003 for
details of the price to beat) of the Affiliated REPs to
compensate for the increase in commodity costs. While we procure electricity
with a shorter duration for residential customer load, we maintain more price
flexibility for this class of customers. General and
administrative expenses General
and administrative expenses (including bad debt expense) for the three months
ended June 30, 2004 were approximately $4.2 million or 7% of sales, compared
with approximately $2.0 million or 9% of sales for the three months ended June
30, 2003. For the six months ended June 30, 2004, general and administrative
expenses were approximately $7.6 million or 7% of sales, compared to $3.1
million or 9% of sales for the six months ended June 30, 2003. 20   We
are benefiting 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 months ended June 30, 2004. In 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 for new employees in executive and middle
management roles, specifically in the finance function as necessary to improve
our systems of internal controls as discussed below in Item 4. Controls and
Procedures. The positions added during the three months ended June 30, 2004
include Chief Financial Officer, Controller, Manager of Financial Reporting, and
Human Resources Manager. 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 individuals 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. As
of June 30, 2004, the Companys stock closed at $4.40 per share. The
decrease in the market price from $8.50 at December 31, 2003 to $4.90 at March
31, 2004 required the Company to record a decrease in the value of the puttable
warrant obligation of approximately $0.3 million and $2.3 million for the three
months ended June 30, 2004 and the six months ended June 30, 2004 respectively,
as other financing income in accordance with SFAS No. 150. On
July 8, 2004, the subject warrants were repurchased or amended to delete the put
option; therefore, the income (expense) effect arising from their existence and
described above will not be applicable to us from that date forward. See
footnote 10, Subsequent Events, for further discussion of the repurchase of the
warrants. 21   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. Our
use of capital is primarily driven by working capital needed to operate as a
Retail Electricity Provider (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. On average, our days sales outstanding is
approximately 45-50 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. The payment for electricity of $13.5 million for the
month of May 2004 was made on July 2, 2004; as a result, cash, cash equivalents,
and accrued electricity costs as of June 30, 2004 are much larger than they
would have been had the payment been made on June 30, 2004. 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. 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. 22   As
of June 30, 2004, we had deposited approximately $3.6 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. As of June 30, 2004, approximately $3.1 million has been utilized
under those facilities to purchase letters of credit. It is expected that as a
result of the higher levels of power purchases required during the summer of
2004, we will be required to increase the amounts of 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: As the Condensed Statement of Cash Flows indicates, we generated
approximately $10.6 million in cash during the first six months of 2004.  

Highbridge/Zwirn
 Special  Opportunities  Fund,  L.P.  Credit  Facility:  On July 8, 2004, we entered into
a $15.0 million  revolving  credit  facility (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. No advances were made under the Facility at closing.  

Equity:
 During the six months ended June 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 milestone will
provide additional visibility and access to incremental investors and enhance the
liquidity of our common stock.  We
believe that the combination of cash flow from operations and advances from the
Highbridge/Zwirn Special Opportunities Fund, L.P. Credit 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; should we
decide to enter any additional markets, it is expected that additional capital
will need to be raised from the sale of equity, debt securities, or other
borrowings. 23    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. Credit Risk For
an in-depth discussion of our credit risk and credit risk management initiative,
see 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 10, Subsequent Events 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 June 30, 2004, substantially 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. 24   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
June 30, 2004: 

Instituted
new document control procedures, including an updated disaster and recovery plan  

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, and Human Resources Manager  

Created
interim policies and procedures for the issuance of press releases and the preparation of
SEC reports; final procedures are being prepared for Board approval  

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; final policy is being prepared
for board approval  Additionally,
a list of key items currently being undertaken in connection with the action plan is
presented below: 

All
accounting policies and procedures are being reviewed and updated  

We
have interviewed three providers of Sarbanes-Oxley Act Section 404 related services, and
expect that one of those providers will be engaged and begin work during 2004  

Establishing
a training program for all relevant personnel regarding SEC reporting, Sarbanes-Oxley Act
compliance, and related issues during the third quarter of 2004  We
are assigning 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 June 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. 25   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 June 30, 2004, there have been no significant
changes to the status of this lawsuit. On
July 15, 2004, a class action lawsuit captioned Frederick T. Pappey 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. The complaint also alleges that the conduct of the Company and the
other defendants violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and seeks unspecified damages. The Company believes that the lawsuit
is without merit and intends to contest the matter vigorously. 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. The Company believes that the
lawsuit is without merit and intends to contest the matter vigorously. 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. 26    Item 2. Changes in
Securities, Use of Proceeds and Issuer Purchases of Equity Securities None.  Item 3.
Default Upon Senior Securities None.  Item 4. Submission of
Matters to a Vote of Security Holders None.  Item 5. Other
Information On
May 26, 2004, the Company entered into an employment agreement with David
Holeman, Vice President & Chief Financial Officer, providing for an initial
annual salary of $140,000 and grant of an option to purchase 50,000 shares of
the Companys common stock on the 91st calendar day after the
date of the agreement. The option will be issued pursuant to the Companys
2004 Incentive Stock Plan, which has been adopted by the Board and is to be
submitted to the shareholders of the Company for approval within 12 months of
the date of this agreement. The option will have an exercise price equal to the
closing price of the common stock on the 91st calendar day after the
date of the agreement and will vest one third on each of the first three
anniversaries of the agreement. The agreement has a term of two years and
provides for automatic one-year renewals thereafter unless either party gives 30
days written notice prior to the anniversary of the agreement. The agreement
also provides for severance of 90 days in the first year and 180 days in the
second year in the event the agreement is terminated without cause
as defined in the employment agreement. The agreement also contains confidential
information and non-solicitation provisions. On
April 12, 2004, the Company entered into a sublease agreement with Entergy
Enterprises for office space to house its principal executive offices. The lease
covers approximately 27,000 square feet of contiguous rental area at 20 Greenway
Plaza, Houston, Texas, 77046. The lease provides for a term of approximately
seven years terminating on January 31, 2011.  Item 6.
Exhibits and Reports on Form 8-K (a) Exhibits:  10.1

Lease
Agreement dated April 12, 2004, between Entergy Enterprises, Inc.
                                         and the Company.  10.2

Employment
Agreement dated May 26, 2004, between David Holeman
                                        and the Company.  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.  27   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.  (b) Reports on Form 8-K Current report on Form 8-K
dated April 14, 2004 announcing that the Company was not able to file Form 10KSB
on or before April 14, 2004 for the fiscal year ended December 31, 2003. Current report on Form 8-K
dated April 29, 2004 announcing the completion and results of a review of the
Companys internal controls by the Board of Directors Audit Committee and
their independent counsel. Current report on Form 8-K
dated May 18, 2004 announcing financial results for the year and quarter ended
December 31, 2003. Current report on Form 8-K
dated May 24, 2004 announcing financial results for the first quarter of 2004. Current report on Form 8-K dated
May 28, 2004 announcing a joint marketing partnership with American Airlines. Current report on Form 8-K
dated June 2, 2004 announcing the appointment of David Holeman as Vice President
and Chief Financial Officer of the Company. Current report on Form 8-K
dated June 21, 2004 announcing the change of the Companys physical address
to 20 Greenway Plaza, Suite 600, Houston, Texas, 77046. 28   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
Leibman       Neil Leibman,
Chairman and CEO(Principal Executive Officer)Dated: August 11,
2004Houston, TX  By: /s/ David Holeman
       David Holeman,
Chief Financial Officer(Principal Financial Officer)Dated: August 11, 2004Houston, Texas EXHIBITS ARE ON
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