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.

The Company’s strategy involves the acquisition of royalty assets, non-operating working interests, and operated leases for the purpose of exploration, development, and production of crude oil, natural gas, and natural gas liquids conducted through its wholly-owned subsidiaries, Phoenix Operating LLC (“PhoenixOp”), Firebird Services, LLC (“Firebird Services”) and Firebird Marketing, LLC (“Firebird Marketing”). PhoenixOp is a Delaware limited liability company formed in January 2022 to drill, complete and operate wells in the United States. Firebird Services is a Delaware limited liability company formed in October 2023 to perform saltwater disposal services on wells operated by PhoenixOp. Firebird Marketing is a Delaware limited liability company formed in March 2025 to market and sell the Company’s operated production.

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 June 30, 2025, the Company had negative working capital of approximately $205.6 million and a member’s deficit of approximately $9.8 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 $101.7 million

of notes through its investor program (see

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.

Revenue from contracts with customers

The Company recognizes its revenues following Accounting Standards Codification Topic 606,

Revenue from Contracts with Customers

. The Company’s revenues are predominantly derived from contracts for the sale of crude oil, natural gas and NGLs. For crude oil, natural gas and NGLs produced by PhoenixOp, each delivery order is treated as a separate performance obligation that is satisfied at the point in time control of the product transfers to the customer. Revenue is measured as the amount the Company expects to receive in exchange for transferring commodities to the customer. The Company’s commodity sales are typically based on prevailing market-based prices. When deliveries contain multiple products, an observable standalone selling price is generally used to measure revenue for each product. Revenues from product sales are presented separately from post-production expenses, including transportation costs, as the Company controls the operated production prior to its transfer to customers.

In circumstances where the Company is the

non-operator

or mineral rights owner, the Company derives revenue from its interests in the sale of oil and natural gas production and does not consider itself to have control of the product, resulting in the recognition of revenues net of post-production expenses. Oil, natural gas, and NGL sales revenues are generally recognized when control of the product is transferred to the customer, the performance obligations under the terms of the contracts with customers are satisfied and collectability is reasonably assured. Given the inherent time lag between when oil, natural gas, NGL production and sales occur, and when operators or purchasers often make disbursements to royalty interest owners and due to the large potential fluctuations of both production and sale price, a significant portion of the Company’s revenue may represent accrued revenue based on estimated net sales volumes and estimated selling prices of the commodities.

Effective April 2025, the Company began conducting marketing activities through its newly established subsidiary, Firebird Marketing. These activities include the purchase of crude oil from working interest owners and royalty interest holders in properties operated by PhoenixOp, and the subsequent sale of the crude oil to customers. The revenues and expenses from these sales and purchases are recognized on a gross basis as the Company acts as a principal in these transactions by assuming control of the purchased crude oil before it is transferred to the customer.

The Company, through Firebird Services, provides water disposal services to PhoenixOp and third parties with respect to oil and gas production from wells in which it is the operator. Pricing for such services represents a fixed rate fee based on the quantity of water volume processed. Intercompany charges associated with PhoenixOp’s net interests are eliminated upon consolidation. The proportionate share of fees allocable to third-party working interest owners are recognized as revenues over the course of time, as services are performed. Revenues from water services are recognized only when it is probable the Company will collect the consideration it is entitled to in exchange for the services transferred to the customer.

Recent accounting standards not yet adopted

In November 2024, the Financial Accounting Standards Board 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 – 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 a

basis over total proved reserves, while costs of wells and related equipment and facilities are depleted on a

basis over proved developed reserves. Depletion on oil and gas properties was $36.6 million and $24.3 million for the three months ended June 30, 2025 and 2024, respectively, and $67.8 million and $37.5 million for the six months ended June 30, 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 June 30, 2025 and 2024 and less than $0.1 million for both the six months ended June 30, 2025 and 2024.

Note 4 – Revenue

The following tables present the Company’s revenues disaggregated by product type and by segment for the periods presented:

Note 5 – Other Current Assets

The following table summarizes the Company’s other current assets 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

. 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 June 30, 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 the

mark-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 June 30, 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 these

non-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 tables provide (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 June 30, 2025 and December 31, 2024. The net amounts are classified as current or noncurrent based on their anticipated settlement dates.

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

Fortress Credit Agreement

In April 2025, the Company amended the secured credit agreement with Fortress Credit Corp. (the “Fortress Credit Agreement”) and established a new tranche of term loans in an aggregate principal amount of $50.0 million (the “Fortress Amendment”). The Fortress Amendment was accounted for as a debt modification, with $25.0 million borrowed upon closing in April 2025 and $25.0 million borrowed in May 2025. The Fortress 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 in December 2027. The new tranche of the Fortress Term Loans will bear interest at a rate per annum equal to Term Secured Overnight Financing Rate (“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.

The Company had an aggregate principal amount outstanding of $300.0 million and $250.0 million under the Fortress Term Loans as of June 30, 2025 and December 31, 2024, respectively. The

all-in

interest rate for the Fortress Term Loans was 11.4% at June 30, 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 75.0% 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 June 30, 2025.

Registered Notes

In October 2024, the Company filed a registration statement on Form

(the “Registration Statement”) with the SEC

,

which was declared effective in May 2025

,

with respect to the continuous offering of up to $750.0

million aggregate principal amount of the Company’s senior subordinated notes (the “Registered Notes”) with maturity dates ranging from three to 11 years from the issue date and interest rates ranging from

9.0% to 12.0%

per annum.

The Registered Notes are contractually senior to bonds sold pursuant to offerings under Rule 506(c) of Regulation D under the Securities Act (the “Reg D Bonds”) that commenced in December 2022 (the “December 2022 506(c) Bonds”) and August 2023 (the “August 2023 506(c) Bonds”), and subordinated to the Fortress Term Loans, the Adamantium Securities and Reg D Bonds whose offerings commenced in October 2020 and July 2022. The Registered Notes contain customary events of default and may be redeemed at the option of the Company at any time without premium or penalty. The holders of Registered Notes also have a right to request redemption of their notes in certain circumstances at a discount to par, subject to a limit of

10% of the then-outstanding principal amount of the applicable series in any given calendar year. As of June 30, 2025, the Company had $6.8 million of aggregate principal amount outstanding of the Registered Notes.

Unregistered Debt Offerings

Reg D Bonds

In May 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 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. As of June 30, 2025, the Company had $630.3 million of aggregate principal amount outstanding of the Reg D Bonds.

Reg A Bonds and Exchange Notes

In May 2025, the Company entered into an indenture to issue 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 have maturities of three, five, seven, and/or

years and interest rates ranging from 9.0% to 12.0% per annum. As of June 30, 2025, $10.7

million aggregate principal amount of

the Reg A Bonds were exchanged

to Exchange Notes and $82.0 million of the Reg A Bonds remained outstanding.

Adamantium Securities

In September 2023, the Company, through its wholly-owned subsidiary, Adamantium, commenced an offering of bonds exempt from registration pursuant to Rule 506(c) of Regulation D (the “Adamantium Bonds”). The Adamantium Bonds offer high net worth individuals a debt instrument that is unsecured but structurally senior to other bonds sold by the Company under Regulation A and Regulation D. The Adamantium Bonds have maturity terms that range from

five to

years and bear interest ranging from 13.0% to 16.0% per annum. In November 2024, Adamantium issued a $7.0 million seven-year promissory note to an investor bearing interest at 16.5%

per annum (the “Adamantium Secured Note” and, together with the Adamantium Bonds, “the Adamantium Securities”). The Adamantium Securities contain customary events of default and may be redeemed at the option of Adamantium at any time without premium or penalty. The holders of Adamantium Bonds also have a right to request redemption of their bonds in certain circumstances at a discount to par, subject to a limit of

10% of the then-outstanding principal amount of Adamantium Bonds in any given calendar year. The holder of the Adamantium Secured Note has the right to request redemption of its note at par, subject to a limit of $5.0 million in aggregate principal amount of the Adamantium Secured Note in any 12-month period. As of June 30, 2025, the Company had $190.8

million of aggregate principal amount outstanding of the Adamantium Securities.

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 PhoenixOp. As of June 30, 2025, PhoenixOp had 32 wells in various stages of development. Additionally, PhoenixOp placed 30 wells into production during the six months ended June 30, 2025, increasing the total number of wells placed into production to 62 as of June 30, 2025.

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 June 30, 2025, Phoenix Equity had issued all authorized Class A Units and Class B Units and 30,500 Phantom Units under the 2024 Incentive Plan.

A summary of the activity under the 2024 Incentive Plan for the six months ended June 30, 2025 is presented below.

During the six months ended June 30, 2025, Phoenix Equity granted 30,500 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 June 30, 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 six months ended June 30, 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 six months ended June 30, 2025 and 2024, these officers and their family members purchased, in aggregate,1,104 and 2,228 of the combined Reg A

Bonds

and Reg D

B

onds for a total purchase price of $1.1 million and $2.2 million, respectively. As of June 30, 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 $0.2 million for

both

the three months ended June 30, 2025 and 2024 and $0.3 million for both the six months ended June 30, 2025 and 2024.

Lion of Judah

The Company paid interest expense to a financial institution on behalf of Lion of Judah related to a certain financing agreement between Lion of Judah and the financial institution of less than $0.1 million for both the three months ended June 30, 2025 and 2024, and less than $0.1 million and $0.2 million for the six months ended June 30, 2025 and 2024, respectively. 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 primarily under noncancelable multi-year operating lease agreements.

The following table shows the line item classification of the Company’s

right-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 June 30, 2025 and 2024, respectively, and $1.2 million and $0.6 million for the six months ended June 30, 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 June 30, 2025, the Company was subject to $4.9 million of commitments under these contracts.

Natural Gas Processing Contracts

The Company has entered into contracts for mobile cryogenic gas processing units to process raw gas, produce and store NGLs, and compress residue natural gas at wells operated by PhoenixOp. The contracts range from

s

ix

months to 36 months and provide monthly facility and service fees as consideration for services performed by the third-party provider. As of June 30, 2025, the Company was subject to $8.0 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 and six months ended June 30, 2025 and 2024 and as of June 30, 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 July 2025, the Company entered into additional fixed swap contracts for a total volume of 2.7 million Bbls at a weighted average contract price of $62.87 with settlement dates through December 2027, pursuant to its debt covenants under the amended Fortress Credit Agreement.

In August 2025, the Company amended the Fortress Credit Agreement (the “Amendment”) and established a new tranche of term loans in an aggregate principal amount of $100.0 million that was borrowed in full upon closing and established a new $6.5 million tranche of loans

,

which represents a contingent principal obligation that is only due and payable (together with accrued interest) upon certain conditions occurring, including payment defaults under the Fortress Credit Agreement or a bankruptcy filing. The Amendment also revised the mandatory repayment schedule such that $200.0 million of the outstanding principal amount of the Fortress Term Loans is due

in

August 2027,

with the remainder due upon maturity in December 2027. 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.

The Company is continuing to raise debt capital under its exempt and registered debt offerings. Since the balance sheet date and through the date of filing of these condensed consolidated financial statements, the Company issued approximately

$101.7

million of debt securities under these offerings.