Genie Energy Ltd. (GNE) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Item 1A to Part I “Risk Factors” in this Annual Report. The forward-looking statements are made as of the date of this Annual Report, and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our reports on Forms 10-Q and 8-K.

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report.

Overview

We are comprised of Genie Retail Energy ("GRE") and Genie Renewables. In the third quarter of 2022, we discontinued the operations of Lumo Finland and Sweden as discussed below. Following this discontinuance of operations, Genie Retail Energy International ("GRE International") ceased to be a segment and the remaining assets and liabilities and results of any continuing operations of GRE International were combined with corporate.

GRE owns and operates retail energy providers ("REPs"), including IDT Energy, Residents Energy, Town Square Energy ("TSE"), Southern Federal and Mirabito Natural Gas. GRE's REPs' businesses resell electricity and natural gas primarily to residential and small business customers, with the majority of the customers in the Midwestern and Eastern United States and Texas.

Genie Renewables holds 95.5% interest in Genie Solar, an integrated solar energy company that develops, constructs and operates solar energy projects for commercial and industrial customers as well as its own portfolio, a 92.8% interest in CityCom Solar, a marketer of alternative products and services complimentary to our energy offerings, a 96.0% interest in Diversegy, an energy broker for commercial customers. Genie Solar holds our
80.0% interest in Sunlight Energy, a solar energy developer and operator and
our 60.0% interest in Prism Solar Technology ("Prism") which designs and manufactures specialized
solar panels.

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Discontinued Operations in Finland and Sweden

Prior to the third quarter
of 2022, the Company had a third segment, Genie Retail Energy
International, or GRE International, which supplied electricity to residential
and small business customers in Scandinavia. However, as result of volatility in the energy market in Europe, in the third quarter of 2022, we decided to discontinue the operations of Lumo Energia Oyj ("Lumo Finland") and Lumo Energi AB ("Lumo Sweden"). In July 2022, the Company entered into a series of transactions to sell most of the electricity swap instruments held by Lumo Sweden for a gross aggregate amount of €41.1 million (equivalent to approximately $41.4 million at the dates of the transactions) before fees and other costs. The sale price is to be settled monthly based on the monthly commodity volume specified in the instruments from September 2022 to March 2025. The Company also entered into a series of transactions to transfer the customers of Lumo Finland and Lumo Sweden to other suppliers.

We determined that the discontinued operations in Finland and Sweden represented a strategic shift that would have a major effect on our operations and financial statements. We account for these businesses as discontinued operations and accordingly, present the results of operations and related cash flows as discontinued operations for all periods presented. Any remaining assets and liabilities of the discontinued operations are presented separately and are reflected within assets and liabilities from discontinued operations in the accompanying consolidated balance sheets as of December 31, 2023 and 2022. Lumo Finland and Lumo Sweden are continuing to liquidate their remaining receivables and settle any remaining liabilities.

On November 7, 2022, Lumo Finland filed a petition for bankruptcy, which was approved by the Helsinki District Court on November 9, 2022. The administration of Lumo Finland was transferred to an administrator (the "Administrator"). All assets and liabilities of Lumo Finland remain with Lumo Finland, in which we retain our ownership interest, however, the management and control of Lumo Finland were transferred to the Lumo Administrators. Since the Company lost control of the management of Lumo Finland in favor of the Lumo Administrator, the accounts of Lumo Finland were deconsolidated effective November 9, 2022.

Net loss from discontinued operations of Lumo Finland and Lumo Sweden, net of taxes was $0.4 million and $30.4 million for the years ended December 31, 2023 and 2022, respectively.

Following the discontinuance of operations of Lumo Finland and Lumo Sweden, GRE International ceased to be a segment and the remaining assets and liabilities and the results of continuing operations of GRE internal were combined with corporate.

On November 8, 2023, the Lumo Administrators, acting on behalf of the Bankruptcy Estate, filed a claim in the District Court of Helsinki against Genie Nordic, its directors, officers and affiliates, in which it alleges that the gain from the sale of swap instruments owned by Lumo Sweden amounting to €35.2 million (equivalent to $38.9 million as of December 31, 2023) belongs to the Bankruptcy Estate. We believe that the Administrator’s position is without merit, and we intend to vigorously defend our position against the Administrator’s claims.

We are also notified that the Administrator filed a claim against one of Lumo Finland’s suppliers, seeking to recover payments made by Lumo Finland amounting to €4.2 million (equivalent to $4.7 million as of December 31, 2023) prior to the bankruptcy. The Administrator has also filed a recovery claim jointly against us and the supplier amounting to €1.6 million (equivalent to $1.8 million as of December 31, 2023) related to the payment we made to the supplier under the terms of a previously supplied parental guarantee. The Administrator alleges that the payments represented preferential payments and therefore belong to the bankruptcy estate which are recoverable under the laws of Finland. We believe that the Administrator’s position is incorrect, and intend to vigorously challenge the Administrator’s claims. Nevertheless, should the Administrator succeed in clawing back the funds from the supplier, it is possible that following the conclusion of the bankruptcy proceedings, the supplier will seek to recover its losses against us, under terms of the parental guarantee. At this time, there is insufficient basis to deem any loss probable or to assess the amount of any possible loss.

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Discontinued U.K. Operations

On November 29, 2021 Orbit Energy Limited ("Orbit"), which operated in United Kingdom was declared and its customers were transferred to a “supplier of last resort.” Effective December 1, 2021, the administration of Orbit was transferred to a third party Administrators. The accounts of Orbit were deconsolidated from those of the Company effective December 1, 2021.

We determined that the discontinued operations of Orbit represented a strategic shift that would have a major effect on our operations and the financial statements. Since the appointment of the Administrators, we accounted their businesses as discontinued operations and accordingly, have presented the results of operations and related cash flows as discontinued operations. Any remaining assets and liabilities of the discontinued operations have been presented separately, and are reflected within assets and liabilities from discontinued operations in the accompanying consolidated balance sheets as of December 31, 2022. Since the Company lost control of the management of Orbit in favor of the Administrators, the accounts of Orbit were deconsolidated effective December 1, 2021.

On November 28, 2023,
the administration of Orbit ceased and the control of Orbit reverted back to
the Company from the Administrators. The accounts of Orbit
were consolidated with those of the Company effective November 28,
2023.

Genie Retail Energy

GRE operates REPs that resell electricity and/or natural gas to residential and small business customers in Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Texas, Rhode Island, and Washington, D.C. GRE’s revenues represented approximately 95.6% and 96.3% of our consolidated revenues in the years ended December 31, 2023 and 2022, respectively.

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GRE’s cost of revenues consists primarily of natural gas and electricity purchased for resale. Certain of GRE’s REPs are party to an Amended and Restated Preferred Supplier Agreement with BP Energy Company, or BP, which is in effect through November 30, 2023. Those REPs’ ability to purchase electricity and natural gas under this agreement is subject to satisfaction of certain conditions including the maintenance of certain covenants.

As an operator of REPs, GRE does not own electrical power generation, transmission, or distribution facilities, or natural gas production, pipeline or distribution facilities. Instead, GRE’s REPs contract with various pipeline and distribution companies for natural gas pipeline, storage and transportation services, and utilizes NYISO, PJM, ISO New England and MISO for electric transmission and distribution. GRE’s cost of revenues includes scheduling costs, ISO fees, pipeline costs and utility service charges for the purchase of these services.

For risk management purposes, GRE’s REPs utilize put and call options and swaps as hedges against unfavorable fluctuations in market prices of electricity and natural gas and to reduce exposure from price fluctuations. The put and call options and swaps are recorded at fair value as a current asset or liability and any changes in fair value are recorded in cost of revenues. The impact of these options and swaps on cost of revenues is relatively small in comparison to the purchases of gas and electricity for resale.

The electricity transmission and distribution operators perform real-time load balancing for each of the electrical power grids in which GRE’s REPs operate. Similarly, the utility or the local distribution company, or LDC, performs load balancing for each of the natural gas markets in which GRE’s REPs operate. Load balancing ensures that the amount of electricity and natural gas that GRE’s REPs purchase is equal to the amount necessary to service their customers’ demands at any specific point in time. GRE’s REPs manage the differences between the actual electricity and natural gas demands of its customers and its bulk or block purchases by buying and selling in the spot market, and through monthly cash settlements and/or adjustments to futures deliveries in accordance with the load balancing performed by utilities, LDCs, and electricity transmission and distribution operators. Suppliers and the LDC’s charge or credit GRE for balancing the electricity and natural gas purchased and sold for its account.

Local utilities generally meter and deliver electricity and natural gas to GRE’s REPs' customers. The local utilities also provide billing and collection services on GRE’s REPs behalf for most of customers and certain local utilities offer purchase of receivables, or POR, programs. GRE’s REPs receive the proceeds less the utility’s fees for purchase of receivables billing and other ancillary services, where applicable.

Volatility in the electricity and natural gas markets affects the wholesale cost of the electricity and natural gas that GRE’s REPs sell to customers. GRE’s REPs may not always choose to pass along increases in costs to their customers for various reasons including competitive pressures and for overall customer satisfaction. In addition, GRE’s REPs offer fixed rate products or guaranteed pricing and may be unable to change their sell rates offered to fixed rate and guaranteed pricing customers in response to volatility in the prices of the underlying commodities. This can adversely affect GRE’s gross margins and results of operations. Alternatively, increases in GRE’s REPs rates charged to customers may lead to increased customer churn.

GRE’s REPs’ selling expense consists primarily of sales commissions paid to independent agents and marketing costs, which are the primary costs associated with the acquisition of customers. Selling, general and administrative expenses include compensation, benefits, utility fees for billing and collection, professional fees, rent and other administrative costs.

Seasonality and Weather; Climate Change

The weather and the seasons, among other things, affect GRE’s REPs’ revenues. Weather conditions have a significant impact on the demand for natural gas used for heating and electricity used for heating and cooling. Typically, colder winters increase demand for natural gas and electricity, and hotter summers increase demand for electricity. Milder winters and/or summers have the opposite effect. Unseasonable temperatures in other periods may also impact demand levels. Potential changes in global climate may produce, among other possible conditions, unusual variations in temperature and weather patterns, resulting in unusual weather conditions, more intense, frequent and extreme weather events and other natural disasters. Some climatologists believe that these extreme weather events will become more common and more extreme, which will have a greater impact on our operations. Natural gas revenues typically increase in the first quarter due to increased heating demands and electricity revenues typically increase in the third quarter due to increased air conditioning use. Approximately 48.1% and 39.7% of GRE’s natural gas revenues for the relevant years were generated in the first quarter of 2023 and 2022, respectively, when demand for heating was highest. Although the demand for electricity is not as seasonal as natural gas (due, in part, to usage of electricity for both heating and cooling), approximately 32.5% and 30.5% of GRE’s electricity revenues for 2023 and 2022, respectively, were generated in the third quarters of those years. GRE’s REPs’ revenues and operating income are subject to material seasonal variations, and the interim financial results are not necessarily indicative of the estimated financial results for the full year.

In addition to the direct physical impact that climate change may have on our business, financial condition and results of operations because of the effect on pricing, demand for our offerings and/or the energy supple markets, we may also be adversely impacted by other environmental factors, including: (i) technological advances designed to promote energy efficiency and limit environmental impact; (ii) increased competition from alternative energy sources; (iii) regulatory responses aimed at decreasing greenhouse gas emissions; and (iv) litigation or regulatory actions that address the environmental impact of our energy products and services.

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Purchase of Receivable

Utility companies offer purchase of receivable, or POR, programs in most of the service territories in which we operate. GRE’s REPs reduce their customer credit risk by participating in POR programs for a majority of their receivables. In addition to providing billing and collection services, utility companies purchase those REPs’ receivables and assume all credit risk without recourse to those REPs. GRE’s REPs’ primary credit risk is therefore nonpayment by the utility companies. In the year ended December 31, 2023, the associated cost was approximately 0.9% of GRE's revenue. At December 31, 2023, 84.4% of GRE’s net accounts receivable were under a POR program.

Concentration of Customers and Associated Credit Risk

GRE’s REPs reduce their customer credit risk by participating in purchase of receivable programs for a majority of their receivables. In addition to providing billing and collection services, some utility companies purchase those REPs’ receivables and assume all credit risk without recourse to those REPs for those purchased receivables. GRE’s REPs primary credit risk with respect to those purchased receivables is therefore nonpayment by the utility companies. Certain of the utility companies represent significant portions of our consolidated revenues and consolidated gross trade accounts receivable balance during certain periods, and such concentrations increase our risk associated with nonpayment by those utility companies.

The following table summarizes the percentage of consolidated trade receivable by customers that equal or exceed 10.0% of consolidated net trade receivables at December 31, 2023 and 2022 (no other single customer accounted for 10.0% or greater of our consolidated net trade receivable as of December 31, 2023 and 2022).

na—less than 10.0% of consolidated net trade receivables

The following table summarizes the percentage of consolidated revenues from customers that equal or exceed 10% or greater of the Company’s consolidated revenues in the period (no other single customer accounted for more than 10% of consolidated revenues in these periods):

na—less than 10.0% of consolidated revenues in the period

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Legal Proceedings

Although GRE endeavors to maintain best sales and marketing practices, such practices have been the subject of certain class action lawsuits in the past.

See Notes 15, Legal and Regulatory Proceedings, in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, which is incorporated by reference.

Agency and Regulatory Proceedings

From time to time, the Company responds to inquiries or requests for information or materials from public utility commissions or other governmental regulatory or law enforcement agencies related to investigations under statutory or regulatory schemes. The Company cannot predict whether any of those matters will lead to claims or enforcement actions or whether the Company and the regulatory parties will enter into settlements before a formal claim is made. See Note 15, Legal and Regulatory Proceedings, in the  Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, which is incorporated by reference, for further detail on agency and regulatory proceedings.

CRITICAL ACCOUNTING POLICIES

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to the allowance for doubtful accounts, goodwill and income taxes. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. See Note 1 to the Consolidated Financial Statements in this Annual Report for a complete discussion of our significant accounting policies.

Revenue Recognition

Revenues from the Sale of Electricity and Natural Gas

Revenue from the single performance obligation to deliver a unit of electricity and/or natural gas is recognized as the customer simultaneously receives and consumes the benefit. Variable quantities in requirements contracts are considered to be options for additional goods and services because the customer has a current contractual right to choose the amount of additional distinct goods to purchase. GRE records unbilled revenues for the estimated amount customers will be billed for services rendered from the time meters were last read to the end of the respective accounting period. The unbilled revenue is estimated each month based on available per day usage data, the number of unbilled days in the period and historical trends.

Many utility companies in the U.S. offer purchase of receivable, or POR, programs in most of the service territories in which we operate, and GRE’s REPs participate in POR programs for a majority of their receivables. We estimate variable consideration related to our rebate programs using the expected value method and a portfolio approach. Our estimates related to rebate programs are based on the terms of the rebate program, the customer’s historical electricity and natural gas consumption, the customer’s rate plan, and a churn factor. Taxes that are imposed on our sales and collected from customers are excluded from the transaction price.

We recognize the incremental costs of obtaining a contract with a customer as an asset if it expects the benefit of those costs to be longer than one year. We determined that certain sales commissions to acquire customers meet the requirements to be capitalized. For GRE, we apply a practical expedient to expense costs as incurred for sales commissions to acquire customers as the period would have been one year or less.

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Revenues from Solar Panels

Our revenues from sales of solar panels are recognized at a point in time following the transfer of control of the solar panels to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. For sales contracts that contain multiple performance obligations, such as the shipment or delivery of solar modules, we allocate the transaction price to each performance obligation identified in the contract based on relative standalone selling prices, or estimates of such prices, and recognize the related revenue as control of each individual product is transferred to the customer, in satisfaction of the corresponding performance obligations.

Revenues from Solar Projects

Genie Solar enters into a
contract to identify, develop, and in some cases operate solar generation sites
to provide solar electricity to its customers. Solar project contracts
consist of a series of tasks and components and accordingly are accounted
for as multiple performance obligations. Because our performance
creates and enhances assets that are controlled by and specific to customers,
we recognize construction services revenue over time. Revenue
for these performance obligations is recognized using the input method based on
the cost incurred as a percentage of total estimated contract costs. Due to the
significance of the costs associated with solar panels to the total project,
our judgment on when such costs should be included in the measure of progress
has a material impact on revenue recognition. Contract costs include all direct
material and labor costs related to contract performance.

Solar Energy Generation

Energy generation revenue is earned from both
the sale of electricity generated from solar projects and the sale of renewable
energy credits. Revenue from energy generation is recognized
when we satisfy the performance obligation, which occurs at the time
of the delivery of electricity at the contractual rates as stipulated in the power purchase entered into with the customers. We apply for and
receive Solar Renewable Energy Credit ("SREC") in certain
jurisdictions for power generated by solar energy systems it owns. There are no
direct costs allocated to SRECs upon generation. We typically
sell SRECs to different customers from those purchasing the energy. The sale
of each SREC is a distinct performance obligation satisfied at a point in time
and the performance obligation related to each SREC is satisfied when each
SREC is delivered to the customer.

Others

Revenues from commissions
from selling third-party products to customers, entry and other fees from the
energy brokerage are recognized at the time the performance obligations are met.
Our contracts with customers for commission revenue contain a single
performance obligation and are satisfied at a point in time.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses that result from the inability or unwillingness of our customers to make required payments. The allowance for doubtful accounts was $6.6 million at December 31, 2023 and $4.8 million at December 31, 2022. Our allowance is determined based on known troubled accounts, historical experience and other currently available evidence. Our estimates of recoverability of customer accounts may change due to new developments, changes in assumptions or changes in our strategy, which may impact our allowance for doubtful accounts balance. We continually assess the likelihood of potential amounts or ranges of recoverability and adjust our allowance accordingly, however, actual collections and write-offs of trade accounts receivable may materially differ from our estimates.

Goodwill

Our goodwill balances were $10.0 million at December 31, 2023 and 2022. Goodwill is not amortized since it is deemed to have an indefinite life. It is reviewed annually (or more frequently under various conditions) for impairment using a fair value approach.

Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. Goodwill and other indefinite lived intangible assets are not amortized. These assets are reviewed annually (or more frequently under various conditions) for impairment using a fair value approach.

The fair value of the reporting unit is estimated using discounted cash flow methodologies, as well as considering third party market value indicators. Calculating the fair value of the reporting units requires significant estimates and assumptions by management. Should the estimates and assumptions regarding the fair value of the reporting units prove to be incorrect, the Company may be required to record impairments to its goodwill in future periods and such impairments could be material.

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We perform our annual goodwill impairment test as of October 1. In reviewing goodwill for impairment, we have the option, for any or all of our reporting units that carry goodwill - to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (i.e. greater than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required to perform the quantitative impairment test, otherwise, no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether we choose to perform the qualitative assessment or proceed directly to the quantitative impairment test. In 2023 and 2022, we elected to perform a qualitative analysis for our GRE reporting unit as of October 1. The Company determined, after performing a qualitative analysis, that there was no evidence that it is more likely than not that the fair value of any identified reporting unit was less than the carrying amounts, therefore, it was not necessary to perform a quantitative impairment test. We determined, after performing qualitative analysis, that there was no evidence that it is more likely than not that the fair value of any identified reporting unit was less than the carrying amounts, therefore, it was not necessary to perform a quantitative impairment test.

The determination of the fair value of our reporting units is based on an income approach that utilizes discounted cash flows for each reporting unit and other Level 3 inputs as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosure. Under the income approach, we determine fair value based on the present value of the most recent cash flow projections for the reporting unit as of the date of the analysis and calculate a terminal value utilizing a terminal growth rate. The significant assumptions under this approach include, among others: income projections, which are dependent on future sales, new customers, customer behavior, competitor pricing, operating expenses, the discount rate, and the terminal growth rate. The cash flows used to determine fair value are dependent on a number of significant management assumptions such as the expectations of future performance and the expected future economic environment, which are partly based upon our historical experience. The estimates are subject to change given the inherent uncertainty in predicting future results. Additionally, the discount rate and the terminal growth rate are based on judgment of the rates that would be utilized by a hypothetical market participant.

Income Taxes

Our current and deferred income taxes and associated valuation allowance are impacted by events and transactions arising in the normal course of business as well as in connection with special and non-routine items. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets, the results of Internal Revenue Service audits of our federal income tax returns, and changes in tax laws or regulations.

The valuation allowance on our deferred income tax assets was $10.1 million and $10.2 million at December 31, 2023 and 2022, respectively. We employ a tax strategy that enables us to currently deduct losses from our foreign subsidiaries against our profitable U.S. operations and we assess the realizability of deferred taxes quarterly. Because of our current projections, we concluded that we meet the criteria of more likely than not in order to utilize our deferred federal income tax assets in the foreseeable future and have released the valuation on the assets that we will utilize.

We use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return. We determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the appropriate taxing authority that has full knowledge of all relevant information will examine the position. Tax positions that meet the more-likely-than-not recognition threshold are measured to determine the amount of tax benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one or more of the following: an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset, or an increase in a deferred tax liability. We review and adjust our liability for unrecognized tax benefits based on our best estimate and judgment given the facts, circumstances and information available at each reporting date. To the extent that the outcome of these tax positions is different from the amounts recorded, such differences may affect income tax expense and actual tax payments.

RECENTLY ISSUED ACCOUNTING STANDARDS

Information regarding new accounting pronouncements is included in Note 1 — Description of Business and Summary of Significant Accounting Policies, to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

RESULTS OF OPERATIONS

We evaluate the performance of our operating business segments based primarily on income (loss) from operations. Accordingly, the income and expense line items below income (loss) from operations are only included in our discussion of the consolidated results of operations.

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Year Ended December 31, 2023 compared to Year Ended December 31, 2022

Genie Retail Energy Segment

nm—not meaningful

Revenues. GRE’s electricity revenues increased in 2023 compared to 2022. The increase in electricity revenues in 2023 compared to 2022 was the result of an increase in electricity consumption partially offset by a decrease in the average price charged to customers. Electricity consumption by GRE's REPs' customers increased by 47.8% in 2023 compared to 2022. The increase in electricity consumption reflected an increase in the average number of meters served, which increased by 41.7% in 2023 compared to 2022 and a 4.3% increase in average electricity consumption per meter in 2023 compared to 2022. The increase in meters served was driven by strong customer acquisitions during 2023, while customer acquisition efforts had been reduced during 2022. Electricity consumption per meter increased in 2023 due to warmer weather conditions in our service areas compared to 2022. The average rate per kilowatt hour sold decreased by 1.9% in 2023 compared to 2022. The decrease in the average
rate per kilowatt hour sold is due to a decrease in the average wholesale price of
electricity in 2023 compared to 2022.

GRE’s natural gas revenues decreased in 2023 compared to 2022. The decrease in natural gas revenues in 2023 compared to 2022 was a result of decreases in natural gas consumption and the average revenue per therm sold. Natural gas consumption of GRE's REPs customers decreased by 0.4% in 2023 compared to 2022. Average consumption per meter decreased by 6.6% in 2023 compared to 2022 while the average meters served increased by 6.6% in 2023 compared to 2022. The average rate per therm sold decreased by 9.5% in 2023 compared to 2022. The decrease in the average revenue per therm sold is due to the decrease in the average wholesale price of natural gas in 2023 compared to 2022.

Other revenues in 2023 included revenues from the sale of petroleum products in Israel.

The customer base for GRE's REPs as measured by meters serviced consisted of the following:

Gross meter acquisitions in 2023 were 316,000 compared to 159,000 in 2022.  The number of meters served on December 31, 2023 increased by 86,000 meters or 31.3% from December 31, 2022. The increase in the gross meter acquisitions for the year ended December 31, 2023 compared to 2022 was due to a “strategic pause” on certain customer acquisition channels that started in the fourth quarter of 2021 and continued through 2022. In the first quarter of 2023, we resumed customer acquisition activities using a variety of new and existing channels.

In 2023, average monthly churn slightly increased to 4.9% compared to 4.8% in 2022.

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The average rates of annualized energy consumption, as measured by residential customer equivalents, or RCEs, are presented in the chart below. An RCE represents a natural gas customer with annual consumption of 100 mmbtu or an electricity customer with annual consumption of 10 MWh. Because different customers have different rates of energy consumption, RCEs are an industry standard metric for evaluating the consumption profile of a given retail customer base.

RCEs increased by 33.6% at December 31, 2023 compared to December 31, 2022. The increase is due to the resumption of customer acquisition activities in 2023 as discussed above.

Cost of Revenues and Gross Margin Percentage. GRE’s cost of revenues and gross margin percentage were as follows:

nm—not meaningful

Cost of revenues for electricity increased in 2023 compared to 2022 primarily because of increases in electricity consumption and the average unit cost of electricity. The average unit cost of electricity increased by 39.0% in 2023 compared to 2022 due to loss recognized from derivatives in 2023 from the fluctuation of the wholesale price of electricity, while we recognized a significant gain from derivatives in 2022. Electricity consumption by GRE's REPs' customers increased by 47.8% in 2023 compared to 2022. The gross margin on electricity decreased in 2023 compared to 2022, because the average cost of electricity increased while the rate charged to customers decreased. While the average unit cost of electricity decreased in 2023 compared to 2022, the cost of revenue in 2022 was reduced by the favorable results of hedges.

Cost of revenues for natural gas increased in 2023 compared to 2022 primarily because of an increase in the average unit cost of natural gas partially offset by a decrease in total natural gas consumption. The average unit cost of natural gas increased 1.3% in 2023 compared to 2022. Natural gas consumption by GRE’s REPs’ customers decreased by 0.4% in 2023 compared to 2022. Gross margin on natural gas sales decreased in 2023 compared to 2022 because the average unit cost of natural gas increased while the average rate charged to customers decreased.

The cost of other revenues in 2023 included the cost of petroleum products sold in Israel.

Selling, General and Administrative. The increase in selling, general and administrative expenses in 2023 compared to 2022 was primarily due to increases in marketing and customer acquisition costs and employee-related costs partially offset by a decrease in legal settlement costs. Marketing and customer acquisition expenses increased by $6.1 million in 2023 compared to 2022 as a result of an increase in the number of meters acquired. Employee-related expenses increased by $2.2 million in 2023 compared to 2022 primarily due to an increase in the number of employees, commissions earned by employees from commercial sales and share based compensation expenses. Processing and regulatory fees increased by $1.9 million in 2023 compared to 2022 as a result of a higher level of activities from an increase in the number of meters. We also paid $0.5 million in legal fees and settlements in Connecticut in 2023. No legal settlements were paid in 2022. As a percentage of GRE’s total revenues, selling, general and administrative expenses decreased to 17.4% in 2023 from 19.9% in 2022.

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Genie Renewables

The Genie Renewables (formerly GES) segment is composed of Genie Solar, CityCom Solar and Diversegy. Genie Solar is an integrated solar energy company that develops, constructs and operates solar energy projects for commercial and industrial customers as well as its own portfolio. CityCom Solar is a marketer of alternative products and services complementary to our energy offerings. Diversegy provides energy brokerage and advisory services to commercial and industrial customers.

On November 3, 2023, the Company acquired ten special-purpose entities that own and operate solar system facilities in Ohio and Michigan for an aggregate purchase price of $7.5 million. The acquisition is accounted for as an asset acquisition and recognized $7.7 million, including $0.2 million of direct transaction cost to solar arrays assets included in the property and equipment account in the consolidated balance sheet.

The Company recorded revenue from the solar array acquisitions of approximately $0.1 million in its consolidated statements of operations and comprehensive income for the year ended December 31, 2023.

Revenue. Genie Renewables' revenues increased in 2023 compared to 2022. The increases in revenues were the result of increases in revenues from commissions from selling third-party products to customers by CityCom Solar and revenues from Diversegy that includes commissions, entry fees and other fees from our energy brokerage and marketing services businesses.

Cost of Revenue. The variations in the cost of revenues in 2023 compared to 2022 are consistent with the variations in revenues of CityCom Solar and Diversegy. In 2023, we recorded a $1.1 million charge to the cost of revenues of Genie Solar to write down the carrying value of solar panel inventories to the estimated net realizable value.

Selling, General and Administrative. Selling, general and administrative expenses increased in 2023 compared to 2022 primarily due to increases in headcount in Genie Solar and Diversegy and consulting fees and warehousing costs at Genie Solar.

Corporate

As discussed above, the remaining accounts of GRE International were transferred to corporate starting in the third quarter of 2022. Entities under corporate do not generate any revenues, nor does it incur any cost of revenues. Corporate costs include unallocated compensation, consulting fees, legal fees, business development expense and other corporate-related general and administrative expenses.

The increase in Corporate general and administrative expenses in 2023 compared to 2022 was primarily due increases in employee related cost and stock-based compensation expenses. As a percentage of our consolidated revenues, corporate general and administrative expenses slightly decreased from 2.9% in 2022 to 2.6% in 2023.

In December 2023, we established a wholly-owned captive insurance subsidiary (the "Captive") with the primary purpose of enhancing our risk financing strategies. In December 2023, we paid $51.2 million premiums to Captive, which amount is included in restricted cash in our consolidated balance sheet as of December 31, 2023. The Captive must maintain a sufficient level of cash to fund future reserve payment and secure the insurer's liabilities, particularly those related to the insured risks. We also recognized a $45.1 million provision for captive insurance liability for the year ended December 31, 2023 related to Captive's exposure for the insured risks.

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In December 2022, the Company suspended the development of business operations of Petrocycle, Ltd. ("Petrocycle"), a pre-operating entity engaged in the development of a process to recycle used engine oil into usable gasoline,  after it was determined that the current operations will not meet the expected results. Petrocycle provided full impairment of its property and equipment and notes and other receivables from its minority interest partner for an aggregate amount of $2.1 million.

Consolidated

Selling, General and Administrative. Stock-based compensation expense included in consolidated selling, general and administrative expenses were $2.8 million and $3.0 million in 2023 and 2022, respectively. At December 31, 2023, aggregate unrecognized compensation cost related to non-vested stock-based compensation was $1.2 million. The unrecognized compensation cost expected to be recognized over the average service period of 0.9 years.

As a percentage of our consolidated revenues, selling, general and administrative expenses decreased from 23.8% in 2022 to 21.3% in 2023.

The following is a discussion of our consolidated income and expense line items below loss from operations.

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Interest income. Interest income increased in year ended December 31, 2023, compared to the same period in 2022 primarily due to increases in average cash, cash equivalents and restricted cash during the period and significant increases in average effective interest rates on those balances.

Gain (loss) on Marketable Equity Securities and Investments. The gain on marketable equity securities and investment for the year ended December 31, 2023 pertains to the change in fair value of the Company's investments various entities including investments in common stock of Rafael Holdings, Inc. ("Rafael") which the Company acquired in December 2020.

Other income (loss), net. Other income (loss), net in the year ended December 31, 2023 consisted primarily of on-time tax credit related to payroll taxes incurred in prior years. .

Provision for Income Taxes. The decrease in provision for income tax in 2023 compared to 2022 is primarily due to decreases in the amount of taxable income in the various taxing jurisdictions. Income before income taxes decreased to $18.1 million in 2023 compared to $77.5 million in 2022.

Net (Income) Loss Attributable to Noncontrolling Interests. Net income attributable to noncontrolling interests for the year ended December 31, 2023 is primarily consist of net income from Citizens Choice ("CCE") partially offset by losses incurred in various businesses in Renewables segments. Net loss attributable to noncontrolling interests for the year ended December 31, 2022 primarily consists of net losses from CCE and various businesses in Renewables segments.

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Income from discontinued operations, net of tax. Income from discontinued operations, net of tax in year ended December 31, 2023 is mainly from an increase in the estimated value of our investments in Orbit and foreign exchange differences in Lumo Sweden. Income from discontinued operations, net of tax in the year ended December 31, 2022 is mainly due to result of operations of Lumo Finland and Lumo Sweden.

LIQUIDITY AND CAPITAL RESOURCES

General

We currently expect that our cash flows from operations in the next twelve months and the $107.6 million balance of unrestricted cash and cash equivalents that we held at December 31, 2023 will be sufficient to meet our currently anticipated cash requirements for at least the period from January 1, 2023 to March 16, 2024.

At December 31, 2023, we had working capital (current assets less current liabilities) of $131.6 million.

Operating Activities

Cash, cash equivalents and restricted cash provided by continuing operating activities were $50.9 million and $66.0 million in the years ended December 31, 2023 and 2022, respectively. Net income from continuing operations after non-cash adjustments increased to $21.1 million in 2023 compared to $64.3 million in 2022. The increase is primarily the result of favorable results of continuing operations in 2022 compared 2021.

Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results and the timing of operating cash receipts and payments, specifically trade accounts receivable and trade accounts payable. Changes in working capital decreased cash flows by $28.1 million for 2023, compared to 2022. Changes in other assets decreased cash flows by $1.0 million for 2023, compared to 2022.

Certain of GRE's REPs are party to an Amended and Restated Preferred Supplier Agreement with BP, which is to be in effect through November 30, 2023. Under the agreement, the REPs purchase electricity and natural gas at market rate plus a fee. The obligations to BP are secured by a first security interest in deposits or receivables from utilities in connection with their purchase of the REP’s customer’s receivables, and in any cash deposits or letters of credit posted in connection with any collateral accounts with BP. The ability to purchase electricity and natural gas under this agreement is subject to satisfaction of certain conditions including the maintenance of certain covenants. At December 31, 2023, we were in compliance with such covenants. At December 31, 2023, restricted cash—short-term of $0.7 million and trade accounts receivable of $67.5 million were pledged to BP as collateral for the payment of trade accounts payable to BP of $21.0 million at December 31, 2023.

We had purchase commitments of $144.1 million at December 31, 2023, of which $128.3 million was for purchases of electricity.

As discussed above, in December 2023, we established a Captive insurance company. At December 31, 2023, the balance of short-term and long-term restricted of Captive are $6.5 million and $44.9 million, respectively. We also recognized $45.1 million provision for captive insurance liability for the year ended December 31, 2023, related to Captive's exposure for the insured risks. At December 31, 2023, the current captive insurance liability of $0.1 million is included in other current liabilities in the consolidated balance sheet. The amount of the expected loss liability for each risk is based on an analysis performed by a third-party actuary which assumed historical patterns. The key assumptions used in developing these estimates are subject to variability.

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We are a lessee under operating lease
agreements primarily for office space in locations where
we operate and for our solar development projects with lease periods
expiring between 2024 and 2052. Our future lease payments under the operating leases as of December 31, 2023 were 4.0 million.

GRE has performance bonds issued through a third party for the benefit of certain utility companies and for various states in order to comply with the states’ financial requirements for retail energy providers. At December 31, 2023, we had outstanding aggregate performance bonds of $19.4 million and a minimal amount of unused letters of credit.

From time to time, we receive inquiries or requests for information or materials from public utility commissions or other governmental regulatory or law enforcement agencies related to investigations under statutory or regulatory schemes, and we respond to those inquiries or requests. We cannot predict whether any of those matters will lead to claims or enforcement actions.

Investing Activities

Our capital expenditures were $1.4 million and $1.0 million in 2023 and 2022, respectively. The increase in capital expenditures in 2023 compared to 2022 is due to construction in progress in Genie Solar. In the year ended December 31, 2023, we transferred solar panels with carrying value of $5.4 million that are indented to be used in Genie Solar projects from inventories to construction in progress. We currently anticipate that our total capital expenditures in the year ending December 31, 2024 will be between $10.0 million and $20.0 million mostly related to the solar projects of Genie Renewables.

In 2020 and 2021, we invested an aggregate of $6.0 million for 261,984 shares of Class B common stock of Rafael. Rafael, a publicly-traded company and a related party. In the year ended December 31, 2023, we sold 195,501 shares of Class B common stock of Rafael for $0.3 million. In the year ended December 31, 2023, we acquired 150,001 shares of Class B common stock of Rafael for $0.3 million. We do not exercise significant influence over the operating or financial policies of Rafael. At December 31, 2023, the carrying value of the remaining investments in the Class B common stock of Rafael was $0.4 million.

In the year ended December 31, 2023, we invested $4.6 million to purchase the common stock of a publicly-traded company which we sold for $3.9 million during the same period.

In the year ended December 31, 2023, we invested $4.4 million to purchase investments in total return swap which we sold for $5.5 million during the same period.

In March 2023, we received $0.1 million from Atid 613 Drilling Ltd. ("Atid 613") for the full settlement of its investment in Atid 613 and recognized a minimal gain from settlement of investment included in other income (loss), net in its consolidated statements of operations for the year ended December 31, 2023.

On November 3, 2023, we acquired ten special-purpose entities that own and operate solar system facilities in Ohio and Michigan for an aggregate purchase price of $7.5 million. The acquisition is accounted for as an asset acquisition with a total purchase price of $7.7 million, including $0.2 million of direct transaction cost to solar arrays assets included in the property and equipment account in our consolidated balance sheet.

In 2023 and 2022, we acquired minimal interests in various ventures for an aggregate amount of investments of $1.2 million and $2.7 million, respectively.

On November 29, 2021, Orbit,
which operated in the United Kingdon, was declared insolvent and its customers were
transferred to the “supplier of last resort.” Effective December 1, 2021, the
administration of Orbit was transferred to third-party Administrators. The
accounts of Orbit were deconsolidated from those of the Company
effective December 1, 2021. In 2022, we transferred $28.3 million to the Administrator as part of the administration process. On November 28, 2023,
the administration of Orbit ceased and the control of Orbit reverted back to
the Company from the Administrators. The accounts of Orbit
were consolidated with those of the Company effective November 28, 2023. In 2023 and 2022, the Administrator paid us a return of its interest in Orbit of £18.8 million (equivalent to $23.7 million on the dates of transfer) and £4.6 million (equivalent to $5.4 million on the dates of transfer), respectively.

On February 21, 2022, we entered into a Loan and Security Agreement to extend up to 5.5 million New Israel Shekel, or NIS (equivalent to $1.5 million as at December 31, 2022) with Natan Ohayon (the "Ohayon Loan"). Natan Ohayon holds a minority interest in (Petrocycle Ltd ("Petrocycle"), a subsidiary of the Company. Petrocycle is a pre-operating entity engaged in the development of a process to recycle used engine oil into usable gasoline. The Ohayon Loan, which is secured by all assets that Mr. Ohayon acquired using the proceeds of the loan bears a minimum interest as set by the Income Tax Regulations of Israel (3.23% in 2022) and is due, together with the principal amount on or before December 31, 2023. In December 2022, the Company suspended the development of business operations of Petrocycle after it was determined that the current operations will not meet the expected results. Petrocycle fully impaired its property and equipment and notes and other receivables from its minority interest partner for an aggregate amount of $2.1 million.

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Financing Activities

In the year ended December 31, 2023, we paid Base Dividends of $0.1594 per share on our Series 2012-A Preferred Stock or Preferred Stock. In the year ended December 31, 2022 we accrued Additional Dividends on our Preferred Stock of $0.5301 per share in respect of GRE's results of operations through December 31, 2022, which Additional Dividends we paid on May 15, 2023 to stockholders of record as of May 5, 2023. In the year ended December 31, 2023, we paid Base Dividends of $0.3188 per share of our 2012-A Preferred Stock or Preferred Stock. We paid $1.4 million and $0.9 million in dividends on our Preferred Stock in the years ended December 31, 2023 and 2022, respectively.

In each of the years ended December 31, 2023 and 2022, we paid dividends of $0.30 per share to holders of our Class A common stock and Class B common stock. We paid common stock dividends in an aggregate amount of $8.0 million and $7.7 million in the years ended December 31, 2023 and 2022, respectively.

On February 28, 2024, we paid a dividend of $0.075 per share to holders of our Class A common Stock and Class B common stock to stockholders of record as of the close of business on February 20, 2024.

On March 11, 2013, our Board of Directors approved a program for the repurchase of up to an aggregate of 7.0 million shares of our Class B common stock. In the year ended December 31, 2023, we acquired 3,778 shares of Class B common stock under the stock purchase program for an aggregate amount of $0.1 million. In the year ended December 31, 2022, we acquired 639,393 Class B common stock under the repurchase program for an aggregate amount of $4.4 million. At December 31, 2023, 4.7 million shares remained available for repurchase under the stock repurchase program.

On February 7, 2022, the Board of Directors of the Company authorized a program to redeem, beginning, in the second quarter of 2022, up to $1.0 million per quarter of our Preferred Stock at the liquidation preference of $8.50 per share.  In 2022 and 2023, we redeemed 983,385 and 1,339,341 shares of Preferred Stock at the liquidation preference of $8.50 for an aggregate amount of  $11.4 million and $ 8.4 million, respectively. Following the redemption, there are no shares of Preferred Stock outstanding, all rights of Preferred Stockholders have terminated, and the Preferred Stock’s ticker symbol, "GNEPRA", has been retired.

In June 2023, several holders of warrants exercised warrants to purchase 1,048,218 shares of Class B common stock warrants for $5.0 million.

On December 13, 2018, we entered into a Credit Agreement with JPMorgan Chase Bank (“Credit Agreement”). On February 14, 2024, the Company entered into the third amendment of its existing Credit Agreement to extend the maturity date of December 31, 2024. The aggregate principal amount was retained at $3.0 million credit line facility (“Credit Line”). The Company pays a commitment fee of 0.1% per annum on the unused portion of the Credit Line as specified in the Credit Agreement. The borrowed amounts will be in the form of letters of credit which will bear interest of 1.0% per annum. The Company will also pay a fee for each letter of credit that is issued equal to the greater of $500 or 1.0% of the original maximum available amount of the letter of credit. We agreed to deposit cash in a money market account at JPMorgan Chase Bank as collateral for the line of credit equal to $3.1 million. As of December 31, 2023, there is no issued letter of credit from the Credit Line. At December 31, 2023, the cash collateral of $3.2 million was included in restricted cash—short-term in the consolidated balance sheet.

In the year ended December 31, 2023, we paid $2.9 million to shares of our Class B common stock, and, in the year ended December 31, 2023, we paid $0.6 million to repurchase shares of our Class B common stock tendered by our employees to satisfy tax withholding obligations in connection with the lapsing of restrictions on awards of restricted stock. Such shares were repurchased by us based on their fair market value on the trading day immediately prior to the vesting date.

Cash flows from discontinued operations

Cash provided by operating activities of discontinued operations was $11.5 million in 2023 compared to $14.7 million in 2022. The cash provided by operating activities of discontinued operations in the years ended December 31, 2023 and 2022 includes proceeds from the settlement of hedges of Lumo Sweden and favorable results of operations of Lumo Finland and Lumo Sweden in 2022. Net provided by investing activities of discontinued operations was $23.6 million in the year ended December 31, 2023 from the return of cash transferred to the Administrator or Orbit in prior year. The investing activities of discontinued operations in year ended December 31, 2023 is due to the transfer of cash proceeds from unwinding of the contract of Orbit with Shell  to the Administrators of Orbit in the first quarter of 2022 to settle its liabilities, net of cash received from the Administrators during the second half of 2022.

ENVIRONMENTAL MATTERS

For information concerning climate change, see "Climate Change" in Item I.

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