KRU Proshares Ultra S&P Regional Banking (delisted)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008.

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934 FOR THE TRANSITION PERIOD FROM                      TO                      .

COMMISSION FILE NO. 1-32533

CRUSADER ENERGY GROUP INC.

(Exact name of registrant as specified in its charter)

Nevada		88-0349241
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4747 Gaillardia Parkway
Oklahoma City, Oklahoma 73142
(Address of principal executive offices, including zip code)

(405) 285-7555
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes þ       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o       No þ

At November 6, 2008, the number of outstanding shares of the issuer’s common stock was 198,564,958.

 

 

CRUSADER ENERGY GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			37
Item 4T. Controls and Procedures			37
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			38
Item 1A. Risk Factors			38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 3. Defaults Upon Senior Securities			38
Item 4. Submission of Matters to a Vote of Security Holders			38
Item 5. Other Information			38
Item 6. Exhibits			39
SIGNATURES			40
INDEX TO EXHIBITS			41
EX-31.1
EX-31.2
EX-32.1
EX-32.2

AVAILABLE INFORMATION

     Crusader makes available free of charge on or through its Internet Web site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material has been electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The company’s Internet address is http://www.crusaderenergy .com and such filings are also available at the SEC’s Web site, http://www.sec.gov . Crusader also posts on its Internet Web site under the heading, “Investor Information”, other materials of general interest to investors including any current investor meeting information or Crusader conference or analyst presentations.

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

     This report contains “forward-looking statements” within the meaning of the Federal securities laws and regulations. Forward-looking statements are estimates and predictions by management about the future outcome of events and conditions that could affect Crusader’s business, financial condition and results of operations. We use words such as, “will,” “should,” “could,” “plans,” “expects,” “likely,” “anticipates,” “intends,” “believes,” “estimates,” “may,” and other words of similar expression to indicate forward-looking statements.

     There is no assurance that the estimates and predictions contained in our forward-looking statements will occur or be achieved as predicted. Any number of factors could cause actual results to differ materially from those referred to in a forward-looking statement, including drilling risks, operating hazards and other uncertainties inherent in the exploration for, and development and production of, oil and natural gas; volatility in oil and natural gas prices, including the adverse impact of lower prices on the amount of our cash flow available to meet capital expenditures, our ability to borrow and raise capital and on the values attributed to our proven reserves; drilling and operating risks in the unconventional shales and other reservoirs in which we operate, including uncertainties in interpreting engineering, reservoir and reserve data; the availability of technical personnel and drilling equipment; the timing and installation of processing and treatment facilities, third-party pipelines and other transportation facilities and equipment; changes in interest rates; and increasing production costs and other expenses.

     Further information on risks and uncertainties affecting our business is described under Risk Factors in this report and are also available in our reports filed with the Securities and Exchange Commission (“SEC”) which are incorporated by this reference as though fully set forth herein. We undertake no obligation to publicly update or revise any forward-looking statement.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Crusader Energy Group Inc.

CONSOLIDATED BALANCE SHEETS (see Note 1)

		(Unaudited)
		September 30,				December 31,
		2008				2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	27,637,842			$	7,941,663
Accounts receivable:
Accrued oil and gas production revenue			18,095,835				7,581,187
Joint interest billings			23,545,280				14,045,470
Other			456,132				770,584
Prepaid expenses and other assets			4,816,657				126,450
Total current assets			74,551,746				30,465,354
OIL AND GAS PROPERTIES — AT COST, net, based on full cost accounting ($181,309,360 and $12,558,796 excluded from amortization at 2008 and 2007, respectively)			652,790,008				243,560,456
Derivative financial instruments			2,337,651				—
Other assets			20,298,926				5,199,199
		$	749,978,331			$	279,225,009
LIABILITIES AND MEMBERS’/STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	14,692,198			$	11,856,699
Accrued liabilities			22,987,939				5,934,262
Derivative financial instruments			13,989				1,775,617
Total current liabilities			37,694,126				19,566,578
LONG-TERM LIABILITIES
Asset retirement obligations			1,151,419				718,316
Derivative financial instruments			—				403,883
Other			—				215,778
Deferred income taxes			49,223,602				—
Notes payable			237,770,833				67,000,000
Total long-term liabilities			288,145,854				68,337,977
COMMITMENTS AND CONTINGENCIES (Note 9)
MEMBERS’ EQUITY			—				191,320,454
STOCKHOLDERS’ EQUITY
Common stock, $.01 par value, 500,000,000 authorized; 198,564,958 shares issued and outstanding at September 30, 2008			1,985,650				—
Additional paid-in capital			523,198,521				—
Accumulated deficit			(101,045,820	)			—
Total Stockholders’ Equity			424,138,351				—
		$	749,978,331			$	279,225,009

The accompanying notes are an integral part of these statements.

Crusader Energy Group Inc.

CONSOLIDATED STATEMENT OF OPERATIONS (see Note 1)

		(Unaudited)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
OPERATING REVENUES
Gas sales		$	19,461,726			$	5,236,783			$	40,291,425			$	14,789,573
Oil sales			13,682,006				5,508,222				35,337,557				12,127,594
Other			368,873				271,747				1,097,661				614,319
Total operating revenue			33,512,605				11,016,752				76,726,643				27,531,486
OPERATING COSTS AND EXPENSES
Lease operating			3,176,995				1,102,303				6,227,443				2,347,783
Production taxes			2,531,769				763,536				5,303,388				1,766,532
General and administrative			3,227,305				952,426				113,599,183				2,715,870
Depreciation, depletion and amortization			10,885,522				4,523,575				22,392,645				11,809,640
Accretion of asset retirement obligations			20,637				21,471				48,181				32,823
Total operating costs and expenses			19,842,228				7,363,311				147,570,840				18,672,648
Income (loss) from operations			13,670,377				3,653,441				(70,844,197	)			8,858,838
OTHER (EXPENSE) INCOME
Interest expense			(8,283,932	)			(862,468	)			(11,384,422	)			(1,797,650	)
Interest income and other			480,469				24,862				603,926				68,182
Risk management			19,008,980				832,160				(1,197,988	)			115,030
Total other (expenses) income			11,205,517				(5,446	)			(11,978,484	)			(1,614,438	)
Income (loss) before income taxes			24,875,894				3,647,995				(82,822,681	)			7,244,400
Income tax expense			8,456,038				—				20,282,862				—
NET INCOME (LOSS)		$	16,419,856			$	3,647,995			$	(103,105,543	)		$	7,244,400
EARNINGS (LOSS) PER SHARE
Basic and Diluted		$	0.08							$	(0.77	)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic			198,194,958								134,469,036
Diluted			209,973,306								134,469,036
PRO FORMA INFORMATION (NOTE 2)
Historical income (loss) from operations before income taxes						$	3,647,995							$	7,244,400
Pro forma provision (benefit) for income taxes							1,419,070								2,818,072
Pro forma net income (loss)						$	2,228,925							$	4,426,328
PRO FORMA EARNINGS PER SHARE
Basic and Diluted						$	0.02							$	0.04
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and Diluted							100,100,000								100,100,000

The accompanying notes are an integral part of these statements.

Crusader Energy Group Inc.

Consolidated Statement of Members’/Stockholders’ Equity (see Note 1)
(Unaudited)

						Common Stock								Additional								Total
		Members’				Number of				$.01 Par				Paid In				Accumulated				Stockholders’
		Equity				Shares				Value				Capital				Deficit				Equity
Balance as of January 1, 2008		$	191,320,454							$	—			$	—			$	—			$	191,320,454
Net loss through June 25, 2008			(2,059,723	)							—				—				—				(2,059,723	)
Effect of business combination with Westside Energy Corp.			(189,260,731	)			198,194,958				1,981,950				412,204,785				—				224,926,004
Stock compensation			—				370,000				3,700				110,993,736								110,997,436
Net loss, June 26, 2008 through September 30, 2008			—								—								(101,045,820	)			(101,045,820	)
Balance as of September 30, 2008		$	—				198,564,958			$	1,985,650			$	523,198,521			$	(101,045,820	)		$	424,138,351

The accompanying notes are an integral part of these statements.

Crusader Energy Group Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (see Note 1)

		(Unaudited)
		Nine Months Ended
		September 30,
		2008				2007
Cash flows from operating activities
Net income (loss)		$	(103,105,543	)		$	7,244,400
Adjustments to reconcile net income (loss) to net cash provided by operating activities, net of effect of business combinations:
Depreciation, depletion and amortization			22,392,645				11,809,640
Accretion of asset retirement obligations			48,181				32,823
Amortization of loan costs			1,337,556				11,796
Amortization of loan discount			520,833				—
Deferred income taxes			20,282,862				—
Stock compensation			106,860,370				—
Change in assets and liabilities (Increase) decrease in Accounts receivable			(5,643,913	)			(5,914,097	)
Derivative financial instruments			(3,153,638	)			2,535,426
Prepaid assets and other			(5,055,685	)			(254,919	)
Increase (decrease) in Accounts payable, accrued liabilities and other			(16,724,092	)			(124,344	)
Net cash provided by operating activities			17,759,576				15,340,725
Cash flows used in investing activities
Acquisitions of businesses, net of cash acquired			1,660,233				—
Proceeds from sale of oil and gas property			250,000				—
Oil and gas property costs			(137,629,827	)			(53,039,505	)
Net cash used in investing activities			(135,719,594	)			(53,039,505	)
Cash flows from financing activities
Payment of loan costs			(5,634,250	)			(291,957	)
Payments on debt borrowings			(157,209,553	)			—
Proceeds from debt borrowings			300,500,000				38,750,000
Net cash provided by financing activities			137,656,197				38,458,043
NET INCREASE IN CASH AND CASH EQUIVALENTS			19,696,179				759,263
Cash and cash equivalents at beginning of period			7,941,663				5,122,383
Cash and cash equivalents at end of period		$	27,637,842			$	5,881,646
Cash paid during period for interest		$	4,440,859			$	1,233,000

The accompanying notes are an integral part of these statements.

Crusader Energy Group Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS — CONTINUED
(Unaudited)

Noncash investing and financing activities :

During 2008 and 2007, the Company recorded a net asset and related liability of $384,922 and $252,732 associated with the asset retirement obligations on oil and gas properties (see Note 6). The amounts recorded in 2008 included $238,380 assumed in the business acquisitions (see Note 1).

At September 30, 2008 and 2007, accounts payable and accrued liabilities consisted of $28,624,829 and $14,802,511 related to oil and gas acquisition and development costs, respectively.

On June 26, 2008, in conjunction with the business acquisitions (see Note 1), the estimated fair market values of the assets acquired and liabilities assumed were as follows:

Estimated fair value of assets acquired:
Current assets		$	38,426,589
Oil and gas properties			297,651,522
Other long-term assets			3,434,576
Total fair value of assets			339,512,687
Liabilities:
Current liabilities			46,186,108
Note payable			34,650,225
Deferred income taxes, net			28,728,695
Other long-term liabilities			318,428
Net value of assets acquired		$	229,629,231

The accompanying notes are an integral part of these statements.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 1: Nature of Operations and Acquisition of Businesses

Knight Energy Group, LLC (“Knight”) was formed on August 29, 2006, and its major operations consist of the exploration for and acquisition, production, and sale of crude oil and natural gas with an area of concentration in Oklahoma and Texas. On December 31, 2007, Westside Energy Corporation (“Westside”), a public company traded on the American Stock Exchange, entered into a definitive agreement to combine with several affiliated privately-held entities, including Knight, Knight Energy Group II, LLC (“Knight II”), RCH Upland Acquisition, LLC (“RCH”), Hawk Energy Fund I, LLC (“Hawk”) and other entities acquired (consisting of Knight Energy Management, LLC, Crusader Energy Group, LLC and Crusader Management Corporation) (with Knight II, Hawk, RCH and the other entities acquired collectively referred to as the “Crusader Entities”). On June 26, 2008, the business combination contemplated by the contribution agreement (the “Westside Transaction”) was completed and Westside changed its name to Crusader Energy Group Inc. (“Crusader” or the “Company”). For accounting purposes, the Westside Transaction was treated as a reverse acquisition with Knight as the acquirer and Westside and the Crusader Entities as the acquired parties, as described more fully below. As such, the historical financial statements of Crusader are Knight’s historical financial statements. The acquisitions have been accounted for using the purchase method and the results of operations for Westside and Crusader Entities are included subsequent to June 26, 2008. The accompanying financial statements include the Company’s accounts and the accounts of its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The aggregate purchase price paid by Knight in the Westside Transaction was approximately $229,629,000, consisting of unregistered common stock (valued at the closing price ($2.27) of Westside common stock on January 2, 2008, the announcement date of the Westside Transaction), cash and warrants assumed (see table below). The operations of the acquired entities consist of the exploration for and acquisition, production and sale of crude oil and natural gas with an area of concentration in Oklahoma and Texas. Knight completed the business combinations for the following reasons:

	•		additional opportunities to exploit its horizontal drilling expertise;
	•		attractive acreage in areas such as the Barnett Shale in the Fort Worth Basin, Bakken Shale in the Williston Basin and various shale plays in the Permian Basin;
	•		expected synergies (elimination of Westside general and administrative expenses and Knight II management fee);
	•		appealing route to becoming a publicly traded company; and
	•		enhanced access to public markets to execute its business strategy.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 1: Nature of Operations and Acquisition of Businesses — Continued

The preliminary allocation of the purchase price and the estimated fair market values of the assets acquired and liabilities assumed are subject to modification and are shown below. The purchase price allocation is preliminary because certain items, such as the determination of the final tax bases and the fair value of certain assets and liabilities as of the acquisition date, have not been completed.

Preliminary calculation and allocation of																		Other
purchase price:		Westside				Knight II				Hawk				RCH				Entities				Total
Shares of common stock issued			26,471,274				53,223,684				14,700,000				3,700,000				—				98,094,958
Westside closing stock price		$	2.27			$	2.27			$	2.27			$	2.27			$	2.27			$	2.27
Fair value of common stock issued		$	60,089,792			$	120,817,763			$	33,369,000			$	8,399,000			$	—			$	222,675,555
Plus cash consideration			—				—				—				—				501,000				501,000
Plus merger cost			1,133,986				2,280,015				629,724				158,502				—				4,202,227
Plus warrants assumed			2,250,449				—				—				—				—				2,250,449
Total purchase price			63,474,227				123,097,778				33,998,724				8,557,502				501,000				229,629,231
Plus fair value of liabilities assumed:
Current liabilities			5,673,233				31,340,279				9,101,959				70,637				—				46,186,108
Note payable			34,650,225				—				—				—				—				34,650,225
Deferred income taxes			13,686,849				326,551				11,083,779				3,631,516				—				28,728,695
Other long-term liabilities			146,660				44,823				97,945				29,000				—				318,428
Total purchase price plus liabilities assumed		$	117,631,194			$	154,809,431			$	54,282,407			$	12,288,655			$	501,000			$	339,512,687
Fair value of assets acquired:
Current assets		$	3,968,529			$	29,129,104			$	4,290,981			$	1,037,975			$	—			$	38,426,589
Oil and gas properties			113,647,665				122,836,424				49,916,753				11,250,680				—				297,651,522
Other long-term assets			15,000				2,843,903				74,673				—				501,000				3,434,576
Total fair value of assets acquired		$	117,631,194			$	154,809,431			$	54,282,407			$	12,288,655			$	501,000			$	339,512,687

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 1: Nature of Operations and Acquisition of Businesses — Continued

The following summary presents unaudited pro forma consolidated results of operations for the three and nine months ended September 30, 2008 and 2007, respectively, as if the acquisitions comprising the Westside Transaction had occurred as of January 1, 2007. The pro forma results are for illustrative purposes only and include adjustments in addition to the pre-acquisition historical results, such as increased depreciation, depletion and amortization expense resulting from the allocation of fair value to oil and gas properties acquired and change in tax status. The unaudited pro forma information is not necessarily indicative of the operating results that would have occurred if the acquisitions had been consummated at that date, nor is it necessarily indicative of future operating results. During the nine months ended September 30, 2008, the Company recognized $106,677,219 of compensation expense related to a significant, non-recurring grant of stock options.

		Three Months Ended September 30,
		Actual								Pro Forma
		2008				2007				2008				2007
Revenues		$	33,512,605			$	11,016,752			$	33,512,605			$	14,959,557
Income (loss) from continuing operations			13,670,377				3,653,441				13,670,377				6,251,676
Net income (loss)			16,419,856				2,228,925				16,419,856				2,419,002
Earnings per share:
Basic and Diluted		$	0.08			$	0.02			$	0.08			$	0.02
Production volumes:
Gas (Mcf)			2,208,667				809,653				2,208,667				1,272,140
Oil (Bbls)			120,766				79,489				120,766				98,717
Mcfe			2,933,263				1,286,587				2,933,263				1,864,442
Mcfe/day			31,883				13,985				31,883				20,266

		Nine Months Ended September 30,
		Actual								Pro Forma
		2008				2007				2008				2007
Revenues		$	76,726,643			$	27,531,486			$	90,295,326			$	37,250,908
Income (loss) from continuing operations			(70,844,197	)			8,858,838				(64,432,866	)			12,304,472
Net income (loss)			(103,105,543	)			4,426,328				(98,906,378	)			5,330,636
Earnings per share:
Basic and Diluted		$	(0.77	)		$	0.04			$	(0.74	)		$	0.05
Production volumes:
Gas (Mcf)			4,373,077				2,213,065				5,832,085				3,431,416
Oil (Bbls)			318,693				191,554				343,237				229,200
Mcfe			6,285,235				3,362,389				7,891,507				4,806,616
Mcfe/day			22,939				12,316				28,801				17,607

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 2: Summary of Significant Accounting Policies

Interim Financial Statements

The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q as prescribed by the SEC for smaller reporting companies and do not include all of the financial information and disclosures required by GAAP. The financial information as of September 30, 2008 and for the three and nine months ended September 30, 2008 and 2007 is unaudited. In the opinion of management, such information contains all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation of the results of the interim periods. The results of operations for the three and nine months ended September 30, 2008 are not necessarily indicative of the results of operations that will be realized for the year ended December 31, 2008. The interim financial statements should be read in conjunction with the financial statements as of December 31, 2007 and notes thereto, included in the proxy statement filed with the SEC on May 28, 2008.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates affecting these financial statements include estimates for quantities of proved oil and gas reserves, period end oil and gas sales and expenses, and asset retirement obligations, and are subject to change.

Income Taxes

Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” (“SFAS No. 109”) the Company follows the asset and liability method of accounting for income taxes, under which the Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities were measured using enacted tax rates expected to apply to taxable income in the years in which the Company expects to recover or settle those temporary differences.

As changes in tax laws or rates are enacted, deferred income tax assets and liabilities are adjusted through the provision for income taxes. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The classification of current and noncurrent deferred tax assets and liabilities is based primarily on the classification of the assets and liabilities generating the difference.

As a result of our conversion to a taxable corporation on June 26, 2008, as part of the Westside Transaction, a charge to income tax provision of approximately $35,156,000 was made to record deferred taxes for the differences between the tax basis and financial reporting basis of our assets and liabilities.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 2: Summary of Significant Accounting Policies — Continued

Pro Forma Income Taxes

Prior to consummating the Westside Transaction (see Note 1), the Company (i.e. Knight) was a limited liability company and classified as a partnership for income tax purposes. Accordingly, income taxes on net earnings were payable by the members and are not reflected in historical financial statements. Pro forma adjustments are reflected to provide for income taxes in accordance with SFAS No. 109. For unaudited pro forma income tax calculations, deferred tax assets and liabilities were recognized for the future tax consequences attributable to differences between the assets and liabilities and were measured using enacted tax rates expected to apply to taxable income in the years in which the Company expects to recover or settle those temporary differences. The pro forma tax effects assume the Company had been a taxable entity in the periods presented. Management believes that these assumptions provide a reasonable basis for presenting the pro forma tax effects.

Earnings (Loss) Per Common Share

Basic earnings (loss) per common share is computed by dividing the net earnings (loss) applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share are based on the assumption that stock options and warrants are converted into common shares using the treasury stock method. Conversion or exercise is not assumed if the results are antidilutive.

Potential common shares of 35,000,000, 501,392 and 370,000 relating to options, warrants and restricted stock, respectively, were excluded from the computations of diluted earnings (loss) per share because they are antidilutive for the nine months ended September 30, 2008.

Pro Forma Earnings (Loss) Per Share

Pro forma earnings (loss) per basic and diluted common share is computed based on the weighted average pro forma number of basic and diluted shares assumed to be outstanding during the periods. Pro forma basic and diluted earnings (loss) per share is presented for the historical three and nine months ended September 30, 2007 on the basis of 100,100,000 shares issued to Knight in the Westside Transaction on June 26, 2008.

		Three Months				Three Months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		September 30, 2008				September 30, 2007				September 30, 2008				September 30, 2007
Net income available to shareholders		$	16,419,856			$	2,228,925			$	(103,105,543	)		$	4,426,328
Weighted average shares outstanding — basic			198,194,958				100,100,000				134,469,036				100,100,000
Effect of dilutive securities — stock options			11,347,189				—				—				—
Effect of dilutive securities — warrants			365,513				—				—				—
Effect of dilutive securities — restricted stock			65,645				—				—				—
Weighted average shares outstanding — diluted			209,973,306				100,100,000				134,469,036				100,100,000
Basic net income per share		$	0.08			$	0.02			$	(0.77	)		$	0.04
Diluted net income per share		$	0.08			$	0.02			$	(0.77	)		$	0.04

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 2: Summary of Significant Accounting Policies — Continued

Stock-based Compensation

SFAS No. 123(R), “Share-Based Payment” requires the Company to measure the costs of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following assumptions used for grants in 2008: no expected dividends, volatility ranging from 54% to 50%, risk-free interest rates ranging from 2.36% to 3.34% and expected lives ranging from 1 year to 4 years. The volatility assumptions were developed using a peer group of similar energy companies and our stock price. The weighted average fair value of the options issued in 2008 was $3.17. Based upon the provisions of the grant, no future service was required and as such, the total fair value of the grant was recognized during the second quarter of 2008.

The fair value of restricted stock awards issued is determined based on the fair market value of the shares on the date of grant. The Company granted 370,000 shares of restricted stock during the third quarter, with a grant date fair value of $3.30 per share. The fair value of the award is amortized ratably over the vesting period. The shares will vest at the rate of 30%, 30%, and 40% on January 1, 2009, 2010, and 2011, respectively.

Oil and Natural Gas Properties

We perform a review of the carrying value of our oil and natural gas properties, referred to as a ceiling test, under the full-cost accounting rules of the SEC on a quarterly basis. Under the ceiling test, capitalized costs, less accumulated amortization and related deferred income taxes, may not exceed an amount equal to the sum of the present value of estimated future net revenues less estimated future expenditures to be incurred in developing and producing the proved reserves, less any related income tax effects. Future net revenues are calculated by using the current prices and costs as of the end of the appropriate quarterly period.

Recently Issued Accounting Standards

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 requires additional disclosures about derivative and hedging activities and is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is evaluating the impact the adoption of SFAS No. 161 will have on its financial statement disclosures. However, the Company’s adoption of SFAS No. 161 will not affect its current accounting for derivative and hedging activities.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations . This statement requires assets acquired and liabilities assumed to be measured at fair value as of the acquisition date, acquisition-related costs incurred prior to the acquisition to be expensed and contractual contingencies to be recognized at fair value as of the acquisition date. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact, if any, the adoption of this statement will have on our financial position, results of operations or cash flows.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 3: Notes Payable

Notes payable consisted of the following at September 30 and December 31:

		2008				2007
Revolving line of credit with Union Bank of California (“UBOC”), bearing interest at an adjusted rate as defined in the agreement (6.05% and 7.07% at September 30, 2008 and December 31, 2007) payable quarterly, principal and any unpaid interest due October 4, 2010, collateralized by the Company’s oil and gas properties.		$	—			$	37,000,000
Subordinated term facility with UnionBancal Equities, Inc. an affiliate of UBOC, quarterly interest due at an adjusted rate as defined in the agreement (10.07% at December 31, 2007), retired in July 2008.			—				30,000,000
2 nd lien term facility with JPMorgan Chase Bank, N.A., as administrative agent, bearing interest at an adjusted rate as defined in the agreement (11.25% at September 30, 2008) payable quarterly, principal and any unpaid interest due on July 18, 2013, collateralized by a second mortgage on the Company’s oil and gas properties			249,750,000				—
Discount on 2 nd lien facility (5% discount on total issuance)			(11,979,167	)			—
		$	237,770,833			$	67,000,000

During the second quarter of 2008, the Company’s loan agreement was amended to provide for a revolving line of credit equal to the lesser of $200,000,000 or the borrowing base, as defined, and a subordinated term facility equal to $30,000,000, which was retired in the third quarter. The borrowing base was re-determined and was increased to $100,000,000. Additionally, the variable borrowing rate, as defined, was adjusted and generally calls for the London Interbank Offered Rate (“LIBOR”) plus 2.00% on the revolving line of credit and LIBOR plus 5.00% on the subordinated term facility.

On July 18, 2008 (“Effective Date”), the Company entered into a five-year $250,000,000 second lien term facility with JPMorgan Chase Bank, N.A., as administrative agent. Under the terms of the second lien agreement, the Company received loan proceeds net of a discount in the amount of 5% of the total issuance. The second lien term facility replaced our existing $30,000,000 second lien term facility with UnionBanCal Equities, Inc.

The second lien term loan facility bears interest at the lesser of: (a) LIBOR (subject to a floor of 3.50%) plus 7.75% or (b) the reference rate, as defined, plus 6.75%. The second lien facility has the following prepayment premium on principal amounts prepaid equal to: (i) the Applicable Premium, as defined, if the prepayment is made from the Effective Date through the first anniversary thereof, (ii) 5% if the prepayment is made from the first anniversary of the Effective Date through the second anniversary thereof, (iii) 3% if the prepayment is made from the second anniversary of the Effective Date through the third anniversary thereof, (iv) 1% if the prepayment is made from the third anniversary of the Effective Date through the fourth anniversary thereof and (v) 0% thereafter.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 3: Notes Payable — Continued

The second lien term facility proceeds were used to refinance a portion of the outstanding debt under the revolving line of credit with UBOC and to retire the subordinated term facility and will be used to fund the Company’s drilling activity, acquisitions, and general corporate purposes. In connection with this transaction, the revolving line of credit was amended to equal the lesser of $140,000,000 or the borrowing base, as defined, and the borrowing base was reduced to $70,000,000. The reduction in the loan commitment and borrowing base was a result of one of our participating banks leaving the syndication. As a result, the Company expensed deferred financing costs related to its previous revolving and term credit facilities of approximately $1,100,000 as a loss on debt extinguished. This loss is included in interest expense during the third quarter of 2008.

The Company’s debt agreements have certain financial covenants which provide for, among other things, maintaining a certain current ratio (excluding fair value of derivative financial instruments), minimum reserve coverage and leverage ratio, and certain reporting requirements, as defined. The Company was in compliance with the financial covenants as of September 30, 2008 and December 31, 2007.

Note 4: Derivative Transactions

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , as amended, requires that the Company recognize a derivative as either an asset or a liability measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative and the resulting designation. Derivatives that are not hedges or not elected to be considered as hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through income or recognized in other comprehensive income until the hedged item is recognized in income. The ineffective portion of a hedge’s change in fair value will be immediately recognized in income.

Natural Gas and Oil Derivatives

The results of operations and operating cash flows are impacted by changes in market prices for oil and gas. To mitigate a portion of this exposure, the Company has entered into certain derivative instruments, none of which were elected to be designated as cash flow hedges. As of September 30, 2008 and 2007, the Company’s derivative instruments are generally comprised of collars, fixed price swaps, premium puts and basis protection swaps.

Collars contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, the Company receives the fixed price and pays the market price. If the market price is between the call and the put strike price, no payments are due from either party.

Premium puts contain a fixed floor price (put). If the market price falls below the put strike price, the Company receives the fixed price and pays the market price.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 4: Derivative Transactions — Continued

In fixed-price swap instruments, the Company receives a fixed-price for the hedged commodity and pays a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.

Basis protection swaps are arrangements that guarantee a price differential for natural gas from a specified delivery point. For Mid-Continent basis protection swaps, which have negative differentials to NYMEX, the Company receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract.

Concentration of Credit Risk

The derivative transactions mentioned above expose the Company to credit risk from our counterparties. To mitigate this risk, we enter into these transactions only with investment-grade rated counterparties that management believes to be competent and competitive firms. Currently, concerns have arisen regarding the ability of certain investment banks to continue to meet their financial obligations. The Company does not believe that a failure by a counterparty would have a material negative impact on our liquidity. Also, the counterparties in our derivative contracts are parties to our credit facilities.

As of September 30, 2008, the Company has the following hedging transactions with two financial counterparties in the form of costless collars, fixed-price swaps, premium puts and basis protection swaps:

Natural Gas Production

						Collars												Swaps								Puts
Year		Month				MCF				Floor				Ceiling				MCF								MCF				Floor
2008		Oct - Dec					937,000			$	8.10			$	10.58				30,000			$	7.45				45,450			$	8.00
2009		Jan - Mar					678,500			$	8.13			$	10.12				—			$	—				259,131			$	8.00
2009		Apr - Jun					441,000			$	8.00			$	9.56				—			$	—				259,131			$	8.00
2009		Jul - Dec					882,000			$	8.00			$	9.56				—			$	—				518,262			$	8.00
2010		Jan - Dec					—			$	—			$	—				—			$	—				2,144,988			$	8.00

Oil Production

						Collars
Year		Month				Bbls				Floor				Ceiling
2008		Oct - Dec					56,280			$	77.74			$	88.00
2009		Jan - Dec					163,200			$	79.56			$	117.72
2010		Jan - Dec					115,200			$	100.00			$	161.75

Basis Differential Swap

Year		Month				MCF				ANR
2008		Oct - Dec					435,000			$	1.11
2009		Jan - Dec					1,560,000			$	0.76

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 4: Derivative Transactions — Continued

Interest Rate Derivatives

The Company uses interest rate derivatives to mitigate its exposure to the volatility in interest rates, none of which were elected to be designated as hedges. Changes in the fair value of non-designated derivatives that occur prior to their maturity (i.e., temporary fluctuations in value) are reported currently in the consolidated statements of operations as unrealized gains (losses) as risk management income (expense).

As of September 30, 2008, the following interest rate derivatives were outstanding:

Weighted

Average

Notional

Fixed

Floating

Amount

Rate

Rate

Floating to Fixed Swaps:

August 2008 — February 2011

$

250,000,000

3.71

%

3 month LIBOR

These instruments (natural gas, oil and interest rate derivatives) are recorded at fair value and changes in fair value, including settlements, have been reported as risk management income (expense) in the consolidated statement of operations. Settlements on these instruments occur every three months. The effective rate of long-term debt was 11.46% at September 30, 2008. The following table provides a summary of the components (cash and non-cash) of risk management income (expense):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
Gains (losses) from:
Settlements with counterparty		$	(2,924,126	)		$	1,406,438			$	(5,228,022	)		$	2,694,152
Changes in fair value — premiums paid			3,170,962				—				3,170,962				—
Changes in fair value — non-cash			20,485,840				(574,278	)			2,582,768				(2,579,122	)
Total oil and gas derivatives			20,732,676				832,160				525,708				115,030
Settlements with counterparty			—				—				—				—
Changes in fair value			(1,723,696	)			—				(1,723,696	)			—
Total interest rate derivatives			(1,723,696	)			—				(1,723,696	)			—
Total risk management income (expense)		$	19,008,980			$	832,160			$	(1,197,988	)		$	115,030

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 4: Derivative Transactions — Continued

Fair Value Measurements

     SFAS No. 157, Fair Value Measurements (as amended) (“SFAS No. 157”), defines fair value, establishes a framework for measuring fair value, outlines a fair value hierarchy based on inputs used to measure fair value and enhances disclosure requirements for fair value measurements. The Company has not applied the provisions of SFAS No. 157 to nonrecurring, nonfinancial assets and liabilities as allowed under FASB Staff Position No. 157-2.

Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, use of unobservable prices or inputs are used to estimate the current fair value, often using an internal valuation model. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the item being valued.

Beginning January 1, 2008, assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels—defined by SFAS No. 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities—are as follows:

Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The fair value of our derivative contracts are measured using Level II inputs, and are determined by either market prices on an active market for similar assets or by prices quoted by a broker or other market-corroborated prices, including analysis of formal pricing curves on national exchanges.

Our asset retirement obligation is measured using primarily Level III inputs. The significant unobservable inputs to this fair value measurement include estimates of plugging and abandonment costs, inflation rate and well life. The inputs are calculated based on historical data as well as current estimated costs. See Note 6 for a rollforward of the asset retirement obligation.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 4: Derivative Transactions — Continued

The estimated fair values of derivatives included in the consolidated balance sheets at September 30, 2008 and December 31, 2007 are summarized below. The decrease in the net derivative liability from December 31, 2007 to September 30, 2008 is primarily attributable to the effect of lower natural gas and oil prices, partially offset by cash settlements of derivatives during the period and new derivatives entered during the period.

		Fair Value Measurements
		September 30, 2008								December 31, 2007
		Significant								Significant
		Other				Significant				Other				Significant
		Observable				Unobservable				Observable				Unobservable
		Inputs				Inputs				Inputs				Inputs
		(Level 2)				(Level 3)				(Level 2)				(Level 3)
Derivative assets:
Gas basis protection swaps		$	843,300			$	—			$	1,475,042			$	—
Natural gas derivative instruments			4,031,573
Oil derivative instruments			1,498,867
Derivative liabilities:							—								—
Natural gas derivative instruments			—				—				(41,470	)			—
Oil derivative instruments			(2,326,382	)			—				(3,613,072	)			—
Interest rate instruments			(1,723,696	)			—				—				—
Net derivative asset (liability)		$	2,323,662			$	—			$	(2,179,500	)		$	—
Asset retirement obligation		$	—			$	1,151,419			$	—			$	718,316

Note 5: Stockholders’ Equity

In connection with the acquisition as described in Note 1, Crusader issued 171,723,684 million shares of unregistered common stock to the following entities: Knight Energy Group I Holding Co., LLC received 100,100,000 shares, Knight Energy Group II Holding Company, LLC received 53,223,684 shares, Hawk Energy Fund I Holding Company, LLC received 14,700,000 shares and RCH Energy Opportunity Fund I, L.P. received 3,700,000 shares. None of the shares may be sold or otherwise transferred until December 26, 2008.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 5: Stockholders’ Equity — Continued

Additionally, Crusader assumed 501,392 warrants in the acquisition of Westside and their fair value were estimated using the Black-Scholes options-pricing model. A summary of the outstanding warrants and the assumptions used to estimate their fair value are as follows:

																								Black
	Number of			Exercise				Remaining				Risk Free								Expected				Scholes				Estimated
	Warrants			Price				Term				Rate				Volatility				Dividend				Value				Fair Value
	166,392			$	0.50				2/28/2009				2.36	%			58.50	%		None				$	5.15			$	856,573
	100,000			$	0.50				5/7/2009				2.36	%			55.27	%		None				$	5.15				515,008
	235,000			$	2.00				10/29/2009				2.63	%			52.53	%		None				$	3.74				878,868
	501,392																											$	2,250,449

The Company has the following stock-based compensation plans:

2004 Consultant Plan

The Consultant Plan provides for the granting of shares of common stock to certain outside consultants who assisted in the development and success of Westside’s business. There are 3,000,000 shares of common stock authorized to be awarded pursuant to the plan, of which 500,000 were registered with the SEC. The plan expires on April 15, 2014, or when no further shares are available for issuance, whichever comes first. As a result of the business combination as described in Note 1, any then outstanding awards under the plan either became fully vested or were forfeited due to the change in control. Any vested shares were included in the common stock issued to Westside and treated as business combination consideration, as no future service was required. No grants have been made since June 26, 2008.

2005 Director Stock Plan

The Director Stock Plan provides for the granting of shares of common stock to non-employee members of the Board of Directors to provide them with incentives for their service to the Company. There are 500,000 shares of common stock authorized to be awarded pursuant to this plan. Awards may be made under the plan until there are no further shares available for issuance or until March 30, 2015, whichever occurs first. Under the plan, each non-employee director receives a certain number of shares upon becoming a director, and annual awards thereafter, provided that the individual is still a director of the Company. Certain of the awards are also subject to time vesting, also provided that the individual is still a director of the Company. Effective January 1, 2008, the Board determined to cease making grants under this plan and now may make grants to non-employee directors at such times and in such amounts as the Board determines appropriate. As a result of the business combination as described in Note 1, any then outstanding awards under the plan either became fully vested or were forfeited due to the change in control. Any vested shares were included in the common stock issued to Westside and treated as business combination consideration, as no future service was required. No grants have been made since June 26, 2008.

2007 Equity Incentive Plan

The Equity Incentive Plan provides for the granting of incentive stock options, non-qualified options, stock grants and stock-based awards to attract and retain the services of employees, consultants, and directors of the Company and its subsidiaries. There are 2,000,000 shares authorized to be awarded under the plan. The plan has a termination date of July 9, 2017. As a result of the business combination as described in Note 1, any then outstanding awards under the plan either became fully vested or were forfeited due to the change in control.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 5: Stockholders’ Equity — Continued

Any vested shares were included in the common stock issued to Westside and treated as business combination consideration, as no future service was required. No grants have been made since June 26, 2008.

2008 Long Term Incentive Plan

The Long Term Incentive Plan provides for the granting of incentive stock options, non-qualified options, restricted stock awards, restricted stock units, and stock appreciation rights to attract and retain employees, directors, and consultants of the Company. The plan was approved by the shareholders of Westside on June 26, 2008. There are 37,310,000 shares authorized to be awarded under the plan.

Stock Options

Pursuant to this plan and in connection with the acquisitions described in Note 1, Crusader issued options to purchase 35,000,000 shares of common stock, exercisable at $3.00 per share, to certain employees. The exercise price was determined at December 31, 2007, concurrent with the execution of the contribution agreement setting forth the terms of the business combination. The outstanding options vested immediately upon issuance and expire 4.5 years from the date of grant. Pursuant to the terms of the grant, the options are subject to a mandatory exercise program of 25% each year beginning in 2009.

The following table provides information related to stock option activity during the current quarter:

						Weighted
		Number of				Average				Weighted
		Shares				Exercise				Average				Aggregate
		Underlying				Price				Contract				Intrinsic
		Options				Per Share				Life in Years				Value(a)
Outstanding at January 1, 2008			—				—				—				—
Issued			35,000,000			$	3.00				4.50			$	92,400,000
Outstanding at September 30, 2008			35,000,000			$	3.00				4.25			$	3,500,000
Exercisable at September 30, 2008			35,000,000			$	3.00				4.25			$	3,500,000

(a)  The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying
      stock option exceeds the exercise price of the option.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 5: Stockholders’ Equity — Continued

Restricted Shares

Pursuant to this plan, Crusader granted 370,000 shares of restricted stock to certain employees on September 18, 2008. Restricted share activity as of September 30, 2008 was as follows:

						Weighted
						Average
		Shares				Fair Value
Outstanding at December 31, 2007			—			$	—
Granted			370,000				3.30
Vested			—				—
Forfeited			—				—
Outstanding at September 30, 2008			370,000			$	3.30

As of September 30, 2008, total unrecognized stock-based compensation expense related to non-vested restricted shares was approximately $1,038,000, which is expected to be recognized over a weighted average period of approximately 2.25 years.

To the extent compensation cost relates to employees directly involved in natural gas and oil exploration and development activities, such amounts are capitalized to natural gas and oil properties which totaled approximately $27,000 and $4,164,000, during the three and nine months ended September 30, 2008, respectively. Amounts not capitalized are recognized as general and administrative expenses and totaled approximately $156,000 and $106,833,000 during the three and nine months ended September 30, 2008, respectively.

Note 6: Asset Retirement Obligation

The Company’s asset retirement obligations relate to estimated future plugging and abandonment expenses or disposal of its oil and gas properties and related facilities. These obligations to abandon and restore properties are based upon estimated future costs which may change based upon future inflation rates and changes in statutory remediation rules. The following table provides a summary of the Company’s asset retirement obligations:

		Nine Months
		Ended September
		30, 2008
Balance as of December 31, 2007		$	718,316
Liabilities incurred in current period			146,542
Liabilities assumed in business combination			238,380
Accretion expense			48,181
Balance as of September 30, 2008		$	1,151,419

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 7: Income Taxes

Income tax expense consists of the following:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
Current taxes		$	—			$	—			$	—			$	—
Deferred taxes			8,456,038				—				20,282,862				—
Income tax expense		$	8,456,038			$	—			$	20,282,862			$	—

Deferred income tax assets and liabilities are as follows:

		September 30,				December 31,
		2008				2007
Deferred tax assets:
Net operating loss carryforwards		$	26,360,649			$	—
Stock option expense			25,289,212				—
Derivatives			318,001				—
Other			2,784,346				—
Total deferred tax assets		$	54,752,208			$	—
Deferred tax liabilities:
Property and equipment, principally due to differences in depreciation			(103,975,810	)			—
Net deferred tax liabilities		$	(49,223,602	)		$	—

Upon the conversion from a limited liability company to a corporation in conjunction with becoming a public company, the Company incurred a one-time charge to operations in the second quarter of 2008 of approximately $36,156,000 to record deferred taxes upon change in tax status.

In assessing its ability to realize deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. The Company believes it is more likely than not that it will realize the benefits of these deductible differences.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 7: Income Taxes — Continued

The provision for income taxes on continuing operations differs from the amounts computed by applying the federal income tax rate of 35% to net income (loss). The differences are summarized as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
Expected tax expense (benefit)		$	8,706,563			$	—			$	(28,987,938	)		$	—
State income taxes			694,037				—				(2,368,729	)			—
Conversion to corporation			—				—				35,156,421				—
Non-deductible stock compensation expenses			(195,130	)			—				16,368,867				—
Other			(749,432	)			—				114,241				—
		$	8,456,038			$	—			$	20,282,862			$	—

Note 8: Related Party Transactions

Prior to the Westside Transaction on June 26, 2008, general and administrative expenses and a fee for usage of property and equipment (including furniture and fixtures, office furniture and fixtures and vehicles) were charged to the Company monthly from a related entity, Crusader Management Corporation (“CMC”). During the nine months ended September 30, 2008, the Company incurred approximately $4,035,000 for its share of expenses related to the personnel services agreement executed with CMC. During the three and nine months ended September 30, 2007, the Company incurred approximately $1,151,000 and $2,089,000, respectively. Upon closing the acquisition as described in Note 1, CMC became a wholly-owned subsidiary of the Company.

Included in joint interest billings at December 31, 2007 was approximately $6,261,000, owed by affiliates. Upon closing the acquisition as described in Note 1, the affiliates became wholly-owned subsidiaries of the Company.

Note 9: Commitments and Contingencies

Prior to the Westside Transaction on June 26, 2008, the Company executed a personnel services agreement with CMC to provide all management, employee and other administrative services as necessary from time to time to operate the business of the Company. Upon closing the acquisition as described in Note 1, CMC became a wholly-owned subsidiary of the Company, and the existing personnel services agreement was terminated and a new personnel services agreement was entered into between the Company and CMC.

CMC has a retirement plan covering substantially all qualified employees under section 401(k) of the Internal Revenue Code with a matching policy to contribute for each participant a required matching contribution equal to 100% of the participant’s contribution up to 4% of each employee’s annual compensation and 50% of the participant’s contribution on the next 2% of each employee’s annual compensation. CMC’s contributions vest immediately. Knight and Crusader’s expenses under the plan were approximately $58,200, and $25,000 and $151,200 and $74,600 for the three and nine months ended September 30, 2008 and 2007, respectively, which were a component of the cost allocated through the CMC personnel services agreement (see Note 8).

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 9: Commitments and Contingencies — Continued

On December 28, 2007, CMC entered into an agreement with Le Norman Properties, LLC, to lease approximately 24,000 net square feet of office space located in Oklahoma City, Oklahoma for an initial term of five years. Le Norman Properties is wholly-owned by David D. Le Norman, who is a director, president and chief executive officer of the Company. The Company assumed the obligations under this lease. The lease calls for annual base rent of $624,000 plus expenses related to maintenance, taxes, insurance and utilities. The Company has an option to renew the lease for two additional five year terms for a base rent in an amount equal to the fair market rent for comparable buildings in the area.

The following table summarizes the Company’s future minimum payments under non-cancellable operating lease agreements at September 30, 2008:

Year ending December 31
2008		$	156,000
2009			624,000
2010			624,000
2011			624,000
2012			624,000
Thereafter			156,000
		$	2,808,000

The Company acquired an unsecured Revolving Note and an exploration agreement with Alpine Energy, LP (“Alpine”) as a result of acquiring Knight II. The unsecured Revolving Note has a maturity date of September 30, 2010. Under the terms of the note and subject to approval by the Company, Alpine may borrow up to $10,000,000 at a floating interest rate equal to the ninety day LIBOR plus 4.00% per annum. At September 30, 2008, the outstanding balance of $10,000,000 was included in other assets in the consolidated balance sheets. The interest rate at September 30, 2008 was 7.93%. Interest is due and payable monthly, in arrears, on the first day of each month. As a condition to the agreement, Alpine must use all advances from the note for expenditures related to certain prospects, as defined in the agreement. If Alpine fails to repay the note, the Company’s only source of repayment is limited to the oil and gas sales from certain oil and gas properties, as defined in the agreement.

The Alpine exploration agreement, covering certain prospects, calls for monthly payments of $200,000 through June 2009. Future commitments related to this agreement are as follows: $600,000 for the remainder of the year 2008 and $1,200,000 for the year ended December 31, 2009.

Unsecured Standby Letters of Credit (“Letters”) are used in lieu of surety bonds with various city, state and federal agencies for liabilities of the operation of oil and gas properties and to our derivative counter party. The Company had various Letters outstanding totaling $1,270,000 as of September 30, 2008, which were issued by a bank where our cash and cash equivalents reside.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 9: Commitments and Contingencies — Continued

The Company is involved in certain litigation arising in the normal course of business. Management does not believe that the outcome of these matters will have a material impact on the financial position or results of operations of the Company.

Note 10: Subsequent Events

In October 2008, the Company entered into the following derivative instruments to raise or eliminate the ceiling on the following collars (instruments not indicating a premium were cashless transactions):

	•		11,200 barrels of oil per month from October 2008 through December 2008 with a original ceiling of $67.00 and was increased to $71.60 per Bbl;
	•		6,000 barrels of oil per month from October 2008 through December 2008 with a original ceiling of $92.00 and was increased to $99.90 per Bbl;
	•		60,000 MCF of gas per month from October 2008 through December 2008 with a original ceiling of $8.00 and was increased to $10.10 per MCF;
	•		Removed the ceiling on 1,000 MCF of gas per day from January 2009 through March 2009 with a original ceiling of $12.50 per MCF with a total premium of $11,250;
	•		Removed the ceiling on 2,500 MCF of gas per day from January 2009 through February 2009 with a original ceiling of $10.35 per MCF with a total premium of $33,925;
	•		4,000 barrels of oil per month from January 2009 through December 2009 with a original ceiling of $80.00 and was increased to $102.65 per Bbl;
	•		6,000 barrels of oil per month from January 2009 through December 2009 with a original ceiling of $67.00 and was increased to $79.00 per Bbl;
	•		17,000 MCF of gas per month from January 2009 through December 2009 with a original ceiling of $8.00 and was increased to $10.05 per MCF;
	•		130,000 MCF of gas per month from January 2009 through December 2009 with a original ceiling of $9.50 and was increased to $10.00 per MCF with a total premium of $195,000; and
	•		Removed the ceiling on 17,000 MCF of gas per day from January 2009 through December 2009 with a original ceiling of $10.05 per MCF with a total premium of $96,900.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     You should read the following information together with the information presented elsewhere in this Quarterly Report on Form 10-Q and with the audited financial statements as of December 31, 2007 and notes thereto, included in the proxy statement filed with the Securities and Exchange Commission (“SEC”) on May 28, 2008.

Overview

     Crusader is an oil and gas company with assets focused in various producing domestic basins. The Company has a primary focus on the development of unconventional resource plays which includes the application of horizontal drilling and cutting edge completion technology aimed at developing shale and tight sand reservoirs. The Crusader assets are located in various domestic basins, the majority of which are in the Anadarko Basin and Central Uplift, Ft. Worth Basin Barnett Shale, Delaware Basin, Val Verde Basin, and the Bakken Shale of the Williston Basin.

     Segment reporting is not applicable to Crusader as it has a single company-wide management team that administers all properties as a whole rather than by discrete operating segments. Crusader tracks only basic operational data by area. Crusader does not maintain complete separate financial statement information by area. Crusader measures financial performance as a single enterprise and not on an area-by-area basis. Crusader seeks to increase reserves and production through internally generated drilling projects, coupled with complementary acquisitions. Crusader uses the full cost method of accounting for its oil and gas activities.

     On December 31, 2007, Westside Energy Corporation (“Westside”), a public company traded on the American Stock Exchange, entered into a definitive agreement to combine with several affiliated privately-held entities, including Knight, Knight Energy Group II, LLC (“Knight II”), RCH Upland Acquisition, LLC (“RCH”), Hawk Energy Fund I, LLC (“Hawk”) and other entities acquired (consisting of Knight Energy Management, LLC, Crusader Energy Group, LLC and Crusader Management Corporation) (with Knight II, Hawk, RCH and the other entities acquired collectively referred to as the “Crusader Entities”). On June 26, 2008, the business combination contemplated by the contribution agreement (the “Westside Transaction”) was completed and Westside changed its name to Crusader Energy Group Inc. (“Crusader” or the “Company”). For accounting purposes, the Westside Transaction was treated as a reverse acquisition with Knight as the acquirer and Westside and the Crusader Entities as the acquired parties. As such, the historical financial statements of Crusader are Knight’s historical financial statements which were included in the proxy statement filed with the Securities and Exchange Commission on May 28, 2008. The acquisitions have been accounted for using the purchase method and the results of operations for Westside and Crusader Entities are included subsequent to June 26, 2008.

     The aggregate purchase price paid by Knight in the Westside Transaction was approximately $229.6 million, consisting of unregistered common stock (valued at the closing price ($2.27) of Westside common stock on January 2, 2008, the announcement date of the Westside Transaction), cash and warrants assumed. The contribution agreement also called for certain Crusader employees to receive stock options totaling 35 million shares with an exercise price of $3.00 which were granted on June 26, 2008 and resulted in a non-cash stock compensation expense of approximately $106.7 million. When the contribution agreement was executed in December 2007 and the grant of 35 million options to management at an exercise price of $3.00 was agreed to, Westside stock closed at $1.92 per share; 36% below the $3.00 strike price. In addition, because the market price of the Westside stock was above $3.00 per share at closing, rather than being exercisable immediately, the options are exercisable over 4 years beginning in 2009. We believe that the structuring of management’s consideration and incentive in the form of stock options benefits the combined Company by resulting in the contribution of $105.0 million in capital to the Company in the event all of the options are exercised and aligning the interests of our employees, management team and stockholders.

The operations of Westside and the Crusader Entities consist of the acquisition, exploration, production and sale of crude oil and natural gas currently with an area of production concentration in Oklahoma and Texas. Knight completed the business combinations for the following reasons:

	•		additional opportunities to transfer its horizontal drilling expertise;
	•		attractive acreage in areas such as the Barnett Shale in the Fort Worth Basin, Bakken Shale in the Williston Basin and various shale plays in the Permian Basin;
	•		expected synergies (elimination of Westside G&A and Knight II management fee);
	•		appealing route to becoming a publicly-traded company; and
	•		enhanced access to public markets to execute its business strategy.

The following summary presents unaudited pro forma consolidated production volumes for the three and nine months ended September 30, 2008 and 2007, respectively, as if the acquisitions comprising the Westside Transaction had occurred as of January 1, 2007. The pro forma results are for illustrative purposes only. The unaudited pro forma information is not necessarily indicative of the operating results that would have occurred if the acquisitions had been consummated at that date, nor is it necessarily indicative of future operating results.

		Three Months Ended September 30,
		Actual								Pro Forma
		2008				2007				2008				2007
Production volumes
Gas (Mcf)			2,208,667				809,653				2,208,667				1,272,140
Oil (Bbl)			120,766				79,489				120,766				98,717
Total (Mcfe*)			2,933,263				1,286,587				2,933,263				1,864,442

		Nine Months Ended September 30,
		Actual								Pro Forma
		2008				2007				2008				2007
Production volumes
Gas (Mcf)			4,373,077				2,213,065				5,832,085				3,431,416
Oil (Bbl)			318,693				191,554				343,237				229,200
Total (Mcfe*)			6,285,235				3,362,389				7,891,507				4,806,616