Phoenix Energy One, LLC

Note 1 – Business

Phoenix Energy One, LLC (“Phoenix Energy”), formerly known as Phoenix Capital Group Holdings, LLC (“Phoenix Capital”), is a Delaware limited liability company focused on oil and gas operations primarily in the Williston Basin, North Dakota/Montana, the Uinta Basin, Utah, the Permian Basin, Texas, the Denver-Julesburg Basin, Colorado/Wyoming and the Powder River Basin, Wyoming. The Company was formed in April 2019 and changed its name to Phoenix Energy in January 2025. As used in these condensed consolidated financial statements, unless the context otherwise requires, references to the “Company,” “we,” “us,” and “our” refer to Phoenix Energy and its consolidated subsidiaries.

Interim financial presentation

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments considered necessary for fair presentation, have been included. Interim results are not necessarily indicative of results for a full year. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2024 (the “2024 annual financial statements”).

Note 2 – Significant Accounting Policies

Basis of preparation and principles of consolidation

The condensed consolidated financial statements include the accounts of Phoenix Energy and its wholly-owned subsidiaries. All intercompany accounts and transactions with and between Phoenix Energy and its wholly-owned subsidiaries have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to current period presentation.

Liquidity risk and management’s plans

Liquidity risk is the risk that the Company’s cash flows from operations will not be sufficient for the Company to continue operating and discharge its liabilities in the normal course of operations. The Company is exposed to liquidity risk as its continued operation is dependent upon its ability to continue to obtain financing, either in the form of debt or equity, or by achieving profitable operations in order to satisfy its liabilities as they come due.

As of March 31, 2025, the Company had negative working capital of approximately $157.3 million and a member’s deficit of approximately $28.5 million. The Company expects to repay its financial liabilities in the normal course of operations and to fund future operational and capital requirements through operating cash flows and through issuances of additional debt. Since the balance sheet date and through the date of the filing of these condensed consolidated financial statements, the Company had raised an additional $74.7 million of notes through its investor program (see Note 7 – Debt and Note 15 – Subsequent Events). Management believes its capital raises through its bond offerings will continue at or above this current pace.

Use of estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the applicable reporting period of such statements. Accordingly, actual results could differ materially from these estimates.

The accompanying condensed consolidated financial statements are based on a number of significant estimates including quantities of oil, natural gas and natural gas liquids (“NGL”) reserves that are the basis for the calculations of depreciation, depletion, amortization, and determinations of impairment of oil and natural gas properties. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas and there are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment along with estimated selling prices. As a result, reserve estimates may materially differ from the quantities of oil and natural gas that are ultimately recovered.

Recent accounting standards not yet adopted

In November 2024, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2024-03, Income Statement—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses (“ASU 2024-03”). ASU 2024-03 requires companies to provide more detailed disclosures about the disaggregation of income statement expenses. The ASU aims to enhance the transparency and usefulness of financial statements by providing better insight into the components of expense line items, and becomes effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. The Company is currently evaluating the impact of the standard on its financial statements and disclosures.

Accounting pronouncements not listed above were assessed and determined to not have a material impact to the Company’s condensed consolidated financial statements.

Note 3 – Restatement of Comparative Financial Statements

The Company restated its condensed consolidated financial statements for the three months ended March 31, 2024 (the “first quarter 2024 financial statements”) to correct the accounting treatment for debt issuance costs incurred in connection with the Company’s unregistered bond offerings and capitalized interest. Debt issuance costs were previously expensed immediately and interest costs were not capitalized. The Company corrected these errors in the comparative periods of these condensed consolidated financial statements as of and for the three months ended March 31, 2025, such that debt issuance costs associated with the Company unregistered bond offerings are deferred and amortized over the weighted average debt term using the effective interest method. Further, interest incurred on expenditures made in connection with the Company’s exploration and development projects not currently subject to depletion are capitalized and subsequently depleted in the same manner as the underlying assets.

The effects of the changes on the first quarter 2024 financial statements are summarized below.

Description of Misstatements

The Company identified the following misstatements in the first quarter 2024 financial statements:

Debt issuance costs. The Company had previously immediately expensed debt issuance costs related to its unregistered bond offerings rather than capitalizing and amortizing them over the weighted-average term of the bonds, which resulted in overstated advertising and marketing expense, selling, general, and administrative expense, and payroll and payroll-related expense, and understated interest expense and loss on debt extinguishment on the condensed consolidated statement of operations for the three months ended March 31, 2024.

Capitalized interest. The Company had previously expensed all interest costs, rather than capitalizing interest incurred on expenditures made in connection with the Company’s exploration and development projects as permitted under ASC 835-20, Capitalized Interest. This resulted in overstated interest expense on the condensed consolidated statement of operations for the three months ended March 31, 2024.

The following tables present a reconciliation from the figures as previously reported to the restated amounts for the Company’s condensed consolidated statement of operations, statement of cash flows, and statement of changes in deficit for the three months ended March 31, 2024.

Corrected Condensed Consolidated Statement of Operations

Corrected Condensed Consolidated Statement of Changes in Deficit

Corrected Condensed Consolidated Statement of Cash Flows

Note 4 – Oil and Gas Properties

Oil and gas properties, net consist of the following:

The Company uses the successful efforts method of accounting for its oil and gas properties. Property acquisition costs are depleted on aunits-of-production basis over total proved reserves, while costs of wells and related equipment and facilities are depleted on aunits-of-production basis over proved developed reserves.

Depletion on oil and gas properties was $31.3 million and $13.3 million for the three months ended March 31, 2025 and 2024, respectively.

Depreciation expense on the Company’s equipment and other property was less than $0.1 million for both the three months ended March 31, 2025 and 2024.

Note 5 – Revenue

The following tables present the Company’s revenue from contracts with customers and other revenue for the three months ended March 31, 2025, and 2024 by segment:

The following tables present the Company’s revenue from contracts with customers disaggregated by product type for the periods presented:

Note 6 – Derivatives

The Company periodically enters into commodity derivative contracts to manage its exposure to crude oil price risk. Additionally, the Company is required to hedge a portion of anticipated crude oil production for future periods pursuant to its debt covenants under the Fortress Credit Agreement, as further described in Note 7 – Debt. The Company does not enter into derivative contracts for speculative trading purposes.

When the Company utilizes crude oil commodity derivative contracts, it expects to enter into put/call collars, fixed swaps or put options to hedge a portion of its anticipated future production. A collar contract establishes a floor and ceiling price on contracted volumes and provides payment to the Company if the index price falls below the floor or requires payment by the Company if the index price rises above the ceiling. A fixed swap contract sets a fixed price and provides payment to the Company if the index price is below the fixed price or requires payment by the Company if the index price is above the fixed price. A put arrangement gives the Company the right to sell the underlying crude oil commodity at a strike price and provides payment to the Company if the index price falls below the strike price. No payment or receipt occurs if the index price is higher than the strike price. As of March 31, 2025, the Company’s derivatives were comprised of crude oil commodity derivative contacts indexed to the U.S. New York Mercantile Exchange West Texas Intermediate (“WTI”). The Company has not designated its derivative contracts for hedge accounting and, as a result, records the net change in themark-to-market valuation of the derivative contracts and all payments and receipts on settled derivative contracts in its condensed consolidated statements of operations. All derivative contracts are recorded at fair market value and included in the condensed consolidated balance sheets as assets or liabilities. Derivative assets and liabilities are presented net on the condensed consolidated balance sheets when a legally enforceable master netting arrangement exists with the counterparty.

As of March 31, 2025, the Company’s open crude oil derivative contracts consisted of the following:

The following table summarizes the gains and losses on derivative instruments included on the condensed consolidated statements of operations and the net cash payments related thereto for the periods presented. Cash flows associated with thesenon-hedge designated derivatives are reported within operating activities on the condensed consolidated statements of cash flows.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.

Certain assets and liabilities are reported at fair value on a recurring basis, including the Company’s derivative instruments. The fair values of the Company’s derivative contracts are measured internally using established commodity futures price strips for the underlying commodity provided by a reputable third party, the contracted notional volumes, and time to maturity. These valuations are Level 2 inputs.

The following table provides (i) fair value measurement information for financial assets and liabilities measured at fair value on a recurring basis, (ii) the gross amounts of recognized derivative assets and liabilities, (iii) the amounts offset under master netting arrangements with counterparties, and (iv) the resulting net amounts presented in the Company’s condensed consolidated balance sheets as of March 31, 2025 and December 31, 2024. The net amounts are classified as current or noncurrent based on their anticipated settlement dates.

Note 7 – Debt

Long-Term Debt

The following table summarizes the Company’s long-term debt for the periods presented:

Fortress Credit Agreement

As of March 31, 2025 and December 31, 2024, the Company had $250.0 million of aggregate principal outstanding (the “Fortress Term Loans”) under the secured credit agreement with Fortress Credit Corp. (the “Fortress Credit Agreement”). Theall-in interest rate for the Fortress Term Loans was 11.4% at March 31, 2025. The Fortress Credit Agreement contains various customary covenants, including financial covenants that require the Company to maintain ratios around its maximum total secured leverage, minimum asset coverage, and working capital as of the last day of each calendar month or fiscal quarter, as the case may be. The Company has also entered into hedges covering at least 75% of the initially anticipated monthly production of crude oil from the Company’s proved developed reserves for a 36-month period, pursuant to the terms of the Fortress Credit Agreement. See Note 6 – Derivatives. The Company was in compliance with all debt covenants as of March 31, 2025.

Interest Expense on Debt

The following table summarizes the total interest costs incurred on the Company’s debt:

Note 8 – Accrued and Other Liabilities

The following table summarizes the Company’s accrued and other liabilities for the periods presented:

Accrued capital expenditures and lease operating expenses are primarily associated with drilling, completion and operating activities on wells operated by the Company’s wholly-owned subsidiary, Phoenix Operating, LLC (“PhoenixOp”). As of March 31, 2025, PhoenixOp had placed 37 wells into production and had an additional 41 wells in various stages of development.

In circumstances where the Company serves as the operator, the Company receives production proceeds from the purchaser and distributes the amounts to other royalty owners and joint interest partners based on their respective ownership interests. Production proceeds that the Company has not yet distributed are reflected as revenue payables and classified as a component of accrued and other liabilities in the condensed consolidated balance sheets. Additionally, joint interest partners who participate in our wells may elect to prepay a portion of the estimated drilling and completion costs. For such advances, a liability is recorded and subsequently reduced as the associated work is performed and billed to the joint interest partners.

Note 9 – Equity-Based Compensation

The Company’s parent, Phoenix Equity Holdings, LLC (“Phoenix Equity”), has granted equity awards to employees of the Company under the 2024 Long-Term Incentive Plan (the “2024 Incentive Plan”). The 2024 Incentive Plan provides for the issuance of 900,000 Class A Units, 2,813,900 Class B Units and 1,000,000 Phantom Units. As of March 31, 2025, Phoenix Equity had issued all authorized Class A Units and Class B Units and 30,000 Phantom Units under the 2024 Incentive Plan.

A summary of the activity under the 2024 Incentive Plan for the three months ended March 31, 2025 is presented below.

During the three months ended March 31, 2025, Phoenix Equity granted 30,000 Phantom Unit awards contingent on the achievement of a performance condition, all of which will vest only upon the Company undergoing a liquidity event (e.g., change in control). No compensation cost will be recognized for the Phantom Unit awards until a liquidity event occurs. The Company has elected to account for forfeitures as they occur.

As of March 31, 2025, there was $178.7 million of total unrecognized compensation cost related to nonvested equity awards granted under the 2024 Incentive Plan, measured based on the fair value of the awards; that cost is expected to be recognized at the time a liquidity event occurs.

The fair value of each unit granted under the 2024 Incentive Plan was valued on the date of grant under an independent third-party valuation, which included a combination of an income approach, based on the present value of estimated future cash flows, and a market approach based on market data of comparable businesses. The weighted-average assumptions used in the valuation of performance unit awards granted for the three months ended March 31, 2025, are presented in the table below:

Note 10 – Related Parties

Debt Offerings

Certain of the Company’s officers and their family members participate in the Company’s unregistered debt offerings. During the three months ended March 31, 2025 and 2024, these officers and their family members purchased, in aggregate, 1,104 and 1,562 of the combined Regulation A+ and Regulation D bonds for a total purchase price of $1.1 million and $1.5 million, respectively. As of March 31, 2025 and December 31, 2024, there were 3,960 and 2,860 of bonds outstanding with carrying values of $4.0 million and $2.9 million, respectively. Interest expense attributable to these securities was less than $0.1 million for both the three months ended March 31, 2025 and 2024, respectively.

Lion of Judah

The Company paid interest expense of less than $0.1 million to a financial institution on behalf of Lion of Judah related to a certain financing agreement between Lion of Judah and the financial institution for both the three months ended March 31, 2025 and 2024. Interest payments made by the Company on behalf of Lion of Judah are discretionary in nature.

Note 11 – Leases

The Company leases its office facilities under noncancelable multi-year operating lease agreements.

The following table shows the line item classification of the Company’sright-of-use assets and lease liabilities on the Company’s condensed consolidated balance sheets:

Operating lease cost of $0.6 million and $0.3 million for the three months ended March 31, 2025 and 2024, respectively, was classified as a component of selling, general, and administrative expense on the condensed consolidated statements of operations.

Note 12 – Commitments and Contingencies

For a summary of the Company’s lease obligations, see Note 11 – Leases.

Litigation

From time to time, the Company may become involved in other legal proceedings or be subject to claims arising in the ordinary course of business. Although the results of ordinary course litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business, financial condition, results of operations or cash flows. Regardless of the outcome, litigation can have an adverse impact because of defense and settlement costs, diversion of management resources and other factors.

Drilling Rig Contracts

The Company has entered into drilling rig contracts to procure drilling services for wells operated by PhoenixOp. The contracts are short-term and provide a daily operating rate as consideration for services performed by the third-party provider. As of March 31, 2025, the Company was subject to $12.7 million of commitments under these contracts.

Note 13 – Supplemental Cash Flow Information

The following table summarizes supplemental information to the condensed consolidated statements of cash flows for the periods presented:

Note 14 – Segments

Segment operating profit is used as a performance metric by the Chief Operating Decision Maker (“CODM”) in determining how to allocate resources and assess performance as this measure provides insight into the segments’ operations and overall success of a segment for a given period. Segment operating profit is calculated as total segment revenue less operating costs attributable to the segment, which includes allocated corporate costs that are overhead in nature and not directly associated with the segments, such as certain general and administrative expenses, executive or shared-function payroll costs and certain limited marketing activities. Corporate costs are allocated to the segments based on usage and headcount, as appropriate. Segment operating profit excludes other income and expense, such as interest expense, interest income, gain (loss) on derivatives, loss on debt extinguishment, even though these amounts are allocated to the segments and provided to the CODM. Transactions between segments are accounted for on an accrual basis and are eliminated upon consolidation. Interest expense is allocated to the segments based on the carrying value of the oil and gas properties owned by the respective segment at the balance sheet date, and interest income and gain (loss) on derivatives are allocated using the same basis as corporate costs.

The following table summarizes segment operating profit and reconciliation to net income (loss) for the periods presented:

The following tables present financial information by segment for the three months ended March 31, 2025 and 2024 and as of March 31, 2025 and December 31, 2024.

The following tables summarize the Company’s oil and natural properties by proved and unproved properties, location and by segment (before accumulated depletion):

Note 15 – Subsequent Events

In April 2025, the Company amended the Fortress Credit Agreement (the “Amendment”) and established a new tranche of term loans in an aggregate principal amount of $50.0 million, with $25.0 million borrowed upon closing and $25.0 million borrowed in May 2025. The Amendment also revised the mandatory repayment schedule such that $150.0 million of the outstanding principal amount of the Fortress Term Loans is due by December 2026, with the remainder due upon maturity. The new tranche of the Fortress Term Loans will bear interest at a rate per annum equal to Term SOFR plus a margin of 7.10%. Proceeds will be used to finance the development of the Company’s oil and gas properties in accordance with the approved plan of development provided in the Fortress Credit Agreement.

In May 2025, the Company entered into additional fixed swap contracts for a total volume of 1.8 million Bbls at a weighted average contract price of $58.93 with settlement dates through December 2027, pursuant to its debt covenants under the amended Fortress Credit Agreement.

In October 2024, the Company filed a Registration Statement on Form S-1 with the Securities Exchange Commission (the “SEC”) (File No. 333-282862), which relates to the issuance of up to an aggregate principal amount of $750.0 million of debt securities that the Company intends to offer on a continuous basis. The debt securities are comprised of notes with maturities of three, five, seven, and/or eleven years with interest rates ranging from 9%, to 12% per annum, and consist of either cash interest or compound interest on such notes. On May 14, 2025, the SEC declared the registration statement effective, and the Company filed a final prospectus describing the terms of the offering.

On May 14, 2025, the Company approved an increase to the maximum offering amount of the August 2023 506(c) Bonds from $750.0 million to $1,500.0 million. The August 2023 506(c) Bonds are unsecured bonds offered and sold pursuant to an offering rule under Rule 506(c) of Regulation D that commenced in August 2023 with maturity dates ranging from one to eleven years from the issue date and interest rates ranging from 9.0% to 14.0% per annum.

On May 15, 2025, the Company entered into an indenture pursuant to which it intends to issue from time to time to holders of its unsecured three-year 9.0% bonds offered and sold pursuant to an offering under Regulation A promulgated under the Securities Act that commenced in December 2021 and terminated in December 2024 (the “Reg A Bonds”) unsecured senior subordinated obligations in an offering exempt from registration under Section 3(a)(9) and/or 4(a)(2) of the Securities Act (the “Exchange Notes”). The Exchange Notes will have maturities of three, five, seven, and/or eleven years and interest rates ranging from 9.0% to 12.0% per annum.

The Company is continuing to raise debt capital under its exempt debt offerings. Since the balance sheet date and through the date of filing of these condensed consolidated financial statements, the Company issued approximately $54.4 million and $20.3 million of its Regulation D and Adamantium bonds, respectively, under the same terms and conditions as the existing securities.