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 JUNE 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		(I.R.S. Employer
incorporation or organization)		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		Smaller reporting company þ
				(Do not check if a smaller reporting company)

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 August 13, 2008, the number of outstanding shares of the issuer’s common stock was 198,194,958.

 

 

CRUSADER ENERGY GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 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			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4T. Controls and Procedures			35
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3. Defaults Upon Senior Securities			45
Item 4. Submission of Matters to a Vote of Security Holders			45
Item 5. Other Information			46
Item 6. Exhibits			46
SIGNATURES			49
INDEX TO EXHIBITS			50
Second Amended and Restated Bylaws
Certification by the Chief Executive Officer Pursuant to Section 302
Certification by the Chief Financial Officer Pursuant to Section 302
Certification by the Chief Executive Officer Pursuant to Section 906
Certification by the Chief Financial Officer Pursuant to Section 906

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)
		June 30,				December 31,
		2008				2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	10,936,633			$	7,941,663
Accounts receivable
Accrued oil and gas production revenue			17,940,658				7,581,187
Joint interest billings			16,008,130				14,045,470
Other			1,607				770,584
Prepaid and other assets			1,770,724				126,450
Total current assets			46,657,752				30,465,354
OIL AND GAS PROPERTIES — AT COST, net, based on full cost accounting ($136,438,772 and $12,558,796 excluded from amortization at 2008 and 2007, respectively)			574,225,420				243,560,456
Other assets			14,633,928				5,199,199
		$	635,517,100			$	279,225,009
LIABILITIES AND MEMBERS’/STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	18,744,460			$	11,856,699
Accrued liabilities			16,084,992				5,934,262
Derivative financial instruments			18,247,696				1,775,617
Total current liabilities			53,077,148				19,566,578
LONG-TERM LIABILITIES
Asset retirement obligations			1,100,038				718,316
Derivative financial instruments			4,532,710				403,883
Other			—				215,778
Deferred tax liabilities, net			39,271,859				—
Notes payable			130,000,000				67,000,000
Total long-term liabilities			174,904,607				68,337,977
COMMITMENTS AND CONTINGENCIES (Note 9)
MEMBERS’ EQUITY			—				191,320,454
STOCKHOLDERS’ EQUITY
Common stock, $.01 par value, 500,000,000 authorized; 198,194,958 shares issued and outstanding at June 30, 2008			1,981,950				—
Additional paid-in capital			523,019,071				—
Accumulated deficit			(117,465,676	)			—
Total Stockholders’ Equity			407,535,345				—
		$	635,517,100			$	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 June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
OPERATING REVENUES
Gas sales		$	12,567,181			$	5,434,107			$	20,829,699			$	9,552,790
Oil sales			13,184,508				3,894,122				21,655,551				6,619,372
Other			394,795				157,467				728,788				342,572
Total operating revenue			26,146,484				9,485,696				43,214,038				16,514,734
OPERATING COSTS AND EXPENSES
Lease operating			1,558,378				826,461				3,050,448				1,245,480
Production taxes			1,681,044				571,474				2,771,619				1,002,996
General and administrative			108,767,228				949,642				110,371,878				1,763,444
Depreciation, depletion and amortization			5,938,330				4,003,696				11,507,123				7,286,065
Accretion of asset retirement obligations			14,316				5,676				27,544				11,352
Total operating costs and expenses			117,959,296				6,356,949				127,728,612				11,309,337
Income (loss) from operations			(91,812,812	)			3,128,747				(84,514,574	)			5,205,397
OTHER (EXPENSE) INCOME
Interest expense			(1,590,061	)			(559,524	)			(3,100,490	)			(935,182	)
Interest income and other			34,806				27,236				123,457				43,320
Risk management			(15,012,339	)			1,626,816				(20,206,968	)			(717,130	)
Total other (expenses) income			(16,567,594	)			1,094,528				(23,184,001	)			(1,608,992	)
Income (loss) before income taxes			(108,380,406	)			4,223,275				(107,698,575	)			3,596,405
Income tax expense			11,826,824				—				11,826,824				—
NET INCOME (LOSS)		$	(120,207,230	)		$	4,223,275			$	(119,525,399	)		$	3,596,405
EARNINGS (LOSS) PER SHARE
Basic and Diluted		$	(1.15	)						$	(1.17	)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and Diluted			104,411,866								102,255,933
PRO FORMA INFORMATION (NOTE 2)
Historical income (loss) from operations before income taxes						$	4,223,275							$	3,596,405
Pro forma provision (benefit) for income taxes							(1,642,854	)							(1,399,002	)
Pro forma net income (loss)						$	2,580,421							$	2,197,403
PRO FORMA EARNINGS PER SHARE
Basic and Diluted						$	0.03							$	0.02
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			—								—				110,814,286								110,814,286
Net loss, June 26, 2008 through June 30, 2008			—								—								(117,465,676	)			(117,465,676	)
Balance as of June 30, 2008		$	—				198,194,958			$	1,981,950			$	523,019,071			$	(117,465,676	)		$	407,535,345

The accompanying notes are an integral part of these statements.

Crusader Energy Group Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (see Note 1)

		(Unaudited)
		Six Months Ended
		June 30,
		2008				2007
Cash flows from operating activities
Net income (loss)		$	(119,525,399	)		$	3,596,405
Adjustments to reconcile net income (loss) to net cash provided by operating activities, net of effect of business combination:
Depreciation, depletion and amortization			11,507,123				7,286,065
Accretion of asset retirement obligations			27,544				11,352
Amortization of loan costs			164,458				26,960
Deferred income taxes			11,826,824				—
Stock compensation			106,677,219				—
Change in assets and liabilities
(Increase) decrease in
Accounts receivable			(3,027,941	)			(4,155,811	)
Derivative financial instruments			16,999,318				2,064,604
Prepaid assets and other			1,346,677				115,081
Increase (decrease) in
Accounts payable, accrued liabilities and other			(16,856,426	)			3,511,080
Net cash provided by operating activities			9,139,397				12,455,736
Cash flows used in investing activities
Acquisitions of businesses, net of cash acquired			3,505,625				—
Oil and gas property costs			(44,713,870	)			(36,662,840	)
Net cash used in investing activities			(41,208,245	)			(36,662,840	)
Cash flows from financing activities
Payment of loan costs			(976,629	)			(50,000	)
Payments on debt borrowings			(26,959,553	)			—
Proceeds from debt borrowings			63,000,000				27,800,000
Net cash provided by financing activities			35,063,818				27,750,000
NET INCREASE IN CASH AND CASH EQUIVALENTS			2,994,970				3,542,896
Cash and cash equivalents at beginning of period			7,941,663				5,122,383
Cash and cash equivalents at end of period		$	10,936,633			$	8,665,279
Cash paid during period for interest		$	1,658,413			$	595,417

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 $354,178 and $29,111 associated with the asset retirement obligations on oil and gas properties (see Note 6). The amounts recorded in 2008 included $270,980 assumed in the business acquisitions (see Note 1).

At June 30, 2008 and 2007, accounts payable and accrued liabilities consisted of $16,729,209 and $18,144,799 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, net of cash acquired		$	32,862,173
Oil and gas properties			290,147,850
Deferred tax asset			20,416,136
Other long-term assets			2,343,940
Total fair value of assets			345,770,099
Liabilities:
Current liabilities			34,318,350
Note payable			34,650,225
Deferred tax liabilities			47,649,125
Other long-term liabilities			312,826
Net value of assets acquired		$	228,839,573

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 acquisition, exploration, 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 $228,840,000, 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 acquisition, exploration, 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 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 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.

																		Other
		Westside				Knight II				Hawk				RCH				Entities				Total
Preliminary calculation and allocation of purchase price:
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			920,894				1,851,568				511,390				128,717				—				3,412,569
Plus warrants assumed			2,250,449				—				—				—				—				2,250,449
Total purchase price			63,261,135				122,669,331				33,880,390				8,527,717				501,000				228,839,573
Plus fair value of liabilities assumed:
Current liabilities			5,886,977				19,638,912				8,792,461				—				—				34,318,350
Note payable			34,650,225				—				—				—				—				34,650,225
Deferred tax liabilities			31,377,741				—				11,863,524				4,407,860				—				47,649,125
Other long-term liabilities			146,660				42,985				94,181				29,000				—				312,826
Total purchase price plus liabilities assumed		$	135,322,738			$	142,351,228			$	54,630,556			$	12,964,577			$	501,000			$	345,770,099
Fair value of assets acquired:
Current assets		$	4,051,513			$	26,198,728			$	2,611,932			$	—			$	—			$	32,862,173
Oil and gas properties			114,803,907				110,435,298				51,944,068				12,964,577				—				290,147,850
Deferred tax asset			16,406,657				4,009,479				—				—				—				20,416,136
Other long-term assets			60,661				1,707,723				74,556				—				501,000				2,343,940
Total fair value of assets acquired		$	135,322,738			$	142,351,228			$	54,630,556			$	12,964,577			$	501,000			$	345,770,099

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 six months ended June 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 three and six months ended June 30, 2008, the Company recognized $106,677,219 of compensation expense related to a significant, non-recurring grant of stock options.

		Three Months Ended June 30,
		Actual								Pro Forma
		2008				2007				2008				2007
Revenues		$	26,146,484			$	9,485,696			$	32,930,826			$	12,606,283
Income (loss) from continuing operations			(91,812,812	)			3,128,747				(88,615,725	)			3,571,863
Net income (loss)			(120,207,230	)			2,580,421				(118,116,226	)			2,530,683
Earnings per share:
Basic and Diluted		$	(1.15	)		$	0.03			$	(1.13	)		$	0.03
Production volumes:
Gas (Mcf)			1,178,599				761,394				1,910,580				1,159,095
Oil (Bbls)			108,307				63,210				120,602				73,351
Mcfe			1,828,441				1,140,654				2,634,192				1,599,201
Mcfe/day			20,093				12,535				28,947				17,574

		Six Months Ended June 30,
		Actual								Pro Forma
		2008				2007				2008				2007
Revenues		$	43,214,038			$	16,514,734			$	56,782,721			$	22,291,351
Income (loss) from continuing operations			(84,514,574	)			5,205,397				(78,103,243	)			6,052,796
Net income (loss)			(119,525,399	)			2,197,403				(115,326,234	)			2,911,634
Earnings per share:
Basic and Diluted		$	(1.17	)		$	0.02			$	(1.13	)		$	0.03
Production volumes:
Gas (Mcf)			2,164,410				1,403,412				3,623,418				2,159,276
Oil (Bbls)			197,927				112,065				222,471				130,483
Mcfe			3,351,972				2,075,802				4,958,244				2,942,174
Mcfe/day			18,417				11,469				27,243				16,255

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 June 30, 2008 and for the three and six months ended June 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 six months ended June 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.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 2: Summary of Significant Accounting Policies — Continued

Income Taxes — Continued

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 $36,156,000 was made to record deferred taxes for the differences between the tax basis and financial reporting basis of our assets and liabilities.

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 and 501,392 relating to options and warrants, respectively, were excluded from the computations of diluted earnings (loss) per share because they are antidilutive for the three and six months ended June 30, 2008.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 2: Summary of Significant Accounting Policies — Continued

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 six months ended June 30, 2007 on the basis of 100,100,000 shares issued to Knight in the Westside Transaction on June 26, 2008.

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.

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 June 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 (5.50% and 7.07% at June 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.		$	100,000,000			$	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 (8.50% and 10.07% at June 30, 2008 and December 31, 2007), lump sum principal payment and any unpaid interest due August 31, 2012, collateralized by a second mortgage on the Company’s oil and gas properties.			30,000,000				30,000,000
		$	130,000,000			$	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. 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.

The agreements also 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 June 30, 2008 and December 31, 2007.

At June 30, 2008 and December 31, 2007, the Company’s notes payable are classified as long-term and $100,000,000 matures in the year ended December 31, 2010 and $30,000,000 in the year ended December 31, 2012.

On July 18, 2008, the Company entered into a five-year $250,000,000 second lien term facility with JPMorgan Chase Bank, N.A., as administrative agent. 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% and matures on July 18, 2013. At July 18, 2008, the effective rate was 11.25%. The second lien term facility is secured by substantially all of the proved oil and gas assets and all personal property of the Company and its subsidiaries and by guarantees of each of the Company’s subsidiaries.

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 Union Bank of California 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 will expense deferred financing costs related to its previous revolving and term credit facilities of approximately $1,000,000 as a loss on debt extinguished during the third quarter of 2008.

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 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.

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 designated as cash flow hedges. As of June 30, 2008 and 2007, the Company’s derivative instruments were comprised of collars, fixed price swaps 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.

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.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 4: Derivative Transactions — Continued

These instruments 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. The following table provides a summary of the components (cash and non-cash) of risk management income (expense):

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Gains (losses) from:
Settlements with counterparty		$	(2,322,562	)		$	433,724			$	(3,207,650	)		$	1,347,474
Changes in fair value			(12,689,777	)			1,193,092				(16,999,318	)			(2,064,604	)
		$	(15,012,339	)		$	1,626,816			$	(20,206,968	)		$	(717,130	)

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

	•		Collar covering 145,000 Mmbtu of natural gas per month from July 2008 through December 2008 with a floor of $8.00 and a cap of $10.50 per Mmbtu;
	•		Collar covering 60,000 Mmbtu of natural gas per month from July 2008 through December 2008 with a floor of $8.00 and a cap of $10.10 per Mmbtu;
	•		Fixed price swaps covering 10,000 Mmbtu of natural gas per month from July 2008 through December 2008 with a fixed price of $7.45 per Mmbtu;
	•		Collar ranging from 70,000 to 77,500 Mmbtu of natural gas per month from July 2008 through February 2009 with a floor of $8.00 and a cap of $10.35 per Mmbtu;
	•		Collar ranging from 28,000 to 31,000 Mmbtu of natural gas per month from July 2008 through February 2009 with a floor of $9.00 and a cap of $12.50 per Mmbtu;
	•		Collar covering 11,200 barrels of oil per month from July 2008 through December 2008 with a floor of $67.00 and a cap of $71.60 per Bbl;
	•		Collar covering 6,000 barrels of oil per month from July 2008 through December 2008 with a floor of $92.00 and a cap of $99.90 per Bbl;
	•		Collar covering 130,000 Mmbtu of natural gas per month from January 2009 through December 2009 with a floor of $8.00 and a cap of $9.50 per Mmbtu;
	•		Collar covering 17,000 Mmbtu of natural gas per month from January 2009 through December 2009 with a floor of $8.00 and a cap of $10.05 per Mmbtu;
	•		Collar covering 6,000 barrels of oil per month from January 2009 through December 2009 with a floor of $67.00 and a cap of $79.00 per Bbl;
	•		Collar covering 4,000 barrels of oil per month from January 2009 through December 2009 with a floor of $80.00 and a cap of $102.65 per Bbl;
	•		Basis protection swaps covering 145,000 Mmbtu of natural gas per month from July 2008 through December 2008 with an average location differential of $1.11; and
	•		Basis protection swaps covering 130,000 Mmbtu of natural gas per month from January 2009 through December 2009 with an average location differential of $.76.

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 June 30, 2008 and December 31, 2007 are summarized below. The increase in the net derivative liability from December 31, 2007 to June 30, 2008 is primarily attributable to the effect of higher 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
		June 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		$	1,117,749			$	—			$	1,475,042			$	—
Derivative Liabilities:							—								—
Natural gas derivative instruments			(11,380,797	)			—				(41,470	)			—
Oil derivative instruments			(12,517,358	)			—				(3,613,072	)			—
Net derivative liability		$	(22,780,406	)		$	—			$	(2,179,500	)		$	—
Asset retirement obligation		$	—			$	1,100,038			$	—			$	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 the six-month anniversary of the consummation of the business combination.

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

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 5: Stockholders’ Equity — Continued

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. 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. 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.

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 5: Stockholders’ Equity — Continued

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				4.5			$	92,400,000
Outstanding at June 30, 2008			35,000,000			$	3.00				4.5			$	122,500,000
Exercisable at June 30, 2008			35,000,000			$	3.00				4.5			$	122,500,000

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 $4,137,000, during the three and six months ended June 30, 2008, respectively. Amounts not capitalized are recognized as general and administrative expenses and totaled approximately $106,677,000 during the three and six months ended June 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:

		Six Months
		Ended June
		30, 2008
Balance as of December 31, 2007		$	718,316
Liabilities incurred in current period			83,198
Liabilities assumed in business combination			270,980
Accretion expense			27,544
Balance as of June 30, 2008		$	1,100,038

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 June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Current taxes		$	—			$	—			$	—			$	—
Deferred taxes			11,826,824				—				11,826,824				—
Income tax expense (benefit)		$	11,826,824			$	—			$	11,826,824			$	—

Deferred income tax assets and liabilities are as follows:
 

		June 30,				December 31,
		2008				2007
Deferred tax assets:
Net operating loss carryforwards		$	15,551,856			$	—
Stock option expense			25,938,106				—
Derivatives			8,381,942				—
Other			48,466				—
Total deferred tax assets		$	49,920,370			$	—
Deferred tax liabilities:
Property and equipment, principally due to differences in depreciation			(89,192,229	)			—
Net deferred tax liabilities		$	(39,271,859	)		$	—

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 June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Expected tax expense (benefit)		$	(37,933,142	)		$	—			$	(37,694,501	)		$	—
State income taxes			(4,226,836	)			—				(4,200,244	)			—
Conversion to corporation			36,155,611				—				36,155,611				—
Loss attributable to nontaxable entity			1,066,465				—				801,232				—
Non-deductible stock compensation expenses			17,168,652				—				17,168,652				—
Other			(403,926	)			—				(403,926	)			—
		$	11,826,824			$	—			$	11,826,824			$	—

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 three and six months ended June 30, 2008 and 2007, the Company incurred approximately $2,097,000 and $4,035,000 and $1,151,000 and $2,089,000, respectively, for its share of expenses related to a personnel services agreement executed with CMC. 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 $49,700, and $26,100 and $93,000 and $49,600 for the three and six months ended June 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 June 30, 2008:

Year ending December 31
2008		$	312,000
2009			624,000
2010			624,000
2011			624,000
2012			624,000
Thereafter			156,000
		$	2,964,000

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 June 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 June 30, 2008, the outstanding balance of $8,859,000 was included in other assets in the consolidated balance sheets. The interest rate at June 30, 2008 was 6.46%.  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: $1,200,000 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 $1,690,000 as of June 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

On July 30, 2008, the Company entered into the following derivative instruments:

	•		Collar covering 1,560 barrels of oil per month from September 2008 through December 2008 with a floor of $100.00 and a cap of $160.00 per Bbl;
	•		Premium put covering 15,150 MMBTUs of gas per month from September 2008 through December 2008 with a floor of $8.00;
	•		Collar covering 3,600 barrels of oil per month from January 2009 through December 2009 with a floor of $100.00 and a cap of $164.00 per Bbl;
	•		Premium put covering 86,377 MMBTUs of gas per month from January 2009 through December 2009 with a floor of $8.00;
	•		Collar covering 9,600 barrels of oil per month from January 2010 through December 2010 with a floor of $100.00 and a cap of $161.75 per Bbl; and
	•		Premium put covering 178,749 MMBTUs of gas per month from January 2010 through December 2010 with a floor of $8.00.

The total premium paid related to the gas put instruments was approximately $2,200,000 and the other instruments were costless at inception.

On August 5, 2008, the Company also entered into an interest rate swap covering $125,000,000 of long-term debt from August 2008 through February 2011 at a fixed interest rate of 3.74%, with a floating rate based on 3-month LIBOR.

On August 12, 2008, the Company also entered into an interest rate swap covering $125,000,000 of long-term debt from August 2008 through February 2011 at a fixed interest rate of 3.68%, with a floating rate based on 3-month LIBOR.

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 $228.8 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 with an area of 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 six months ended June 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 June 30,
		Actual								Pro Forma
		2008				2007				2008				2007
Production volumes:
Gas (Mcf)			1,178,599				761,394				1,910,580				1,159,095
Oil (Bbls)			108,307				63,210				120,602				73,351
Mcfe			1,828,441				1,140,654				2,634,192				1,599,201

		Six Months Ended June 30,
		Actual								Pro Forma
		2008				2007				2008				2007
Production volumes:
Gas (Mcf)			2,164,410				1,403,412				3,623,418				2,159,276
Oil (Bbls)			197,927				112,065				222,471				130,483
Mcfe			3,351,972				2,075,802				4,958,244				2,942,174

Revenue and Expense Drivers

   Revenue Drivers

      Crude Oil and Natural Gas Sales. Crusader’s revenues are generated from production of crude oil and natural gas which are substantially dependent on prevailing prices. Crusader’s future production is impacted by its drilling success, acquisitions and decline curves on existing production. Prices for oil and gas are subject to large fluctuations in response to relatively minor changes in the supply of or demand for oil and gas, market uncertainty and a variety of additional factors beyond Crusader’s control. Crusader enters into derivative instruments for a portion of its oil and gas production to achieve a more predictable cash flow and to reduce its exposure to adverse fluctuations in the prices of oil and gas.

     Crusader generally sells its oil and gas at current market prices determined at the wellhead. Crusader is required to pay gathering and transportation costs with respect to substantially all of its products. Crusader markets its products in several different ways depending upon a number of factors, including the availability of purchasers for the product at the wellhead, the availability and cost of pipelines near the well, market prices, pipeline constraints and operational flexibility.

   Operating Expenses

     Crusader’s operating expenses primarily involve the expense of operating and maintaining its wells.

	•		Lease Operating. Crusader’s lease operating expenses include repair and maintenance costs, contract labor and supervision, workover costs, electrical power and fuel costs and other expenses necessary to maintain its operations. Crusader’s lease operating expenses are driven in part by the type of commodity produced, the level of maintenance activity and the geographical location of its properties. Ad valorem taxes represent property taxes.
	•		Production Taxes. Production taxes represent the taxes paid on produced oil and gas based on a percentage of market prices (price received from purchaser) or at fixed rates established by federal, state or local taxing authorities.
	•		General and Administrative Expenses. General and administrative expenses include employee compensation and benefits, professional fees for legal, accounting and other advisory services and corporate overhead.
	•		Depreciation, Depletion and Amortization. Depreciation, depletion and amortization represent the expensing of the capitalized costs of Crusader’s oil and gas properties, using a units of production method, and Crusader’s other property and equipment.

   Other Expenses and Income

     Other Expenses and Income consist of the following:

      Interest Income . Crusader generates interest income from its cash deposits.

      Interest Expense. Crusader’s interest expense reflects its borrowing costs under its revolving line of credit and its subordinated term facility.

      Risk Management. 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, Crusader has entered into certain derivative instruments which have not been designated as cash flow hedges for financial reporting purposes. Generally, Crusader’s derivative instruments are comprised of collars that guarantee a price based on a floor and ceiling as defined by the instrument. These instruments are recorded at fair value and changes in fair value, including settlements, have been reported as risk management in the statement of operations.

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Results of Operations

     The following schedule reflects the historical operations of Crusader for the three months ended June 30, 2008 and 2007, respectively. The operations of the acquired entities (Westside, Knight II, Hawk, RCH and the other entities acquired) are included in the historical operations from June 27, 2008 to June 30, 2008 and did not materially contribute to Crusader’s operating results.

		Three Months Ended June 30,
		2008				2007
OPERATING REVENUES
Gas sales		$	12,567,181			$	5,434,107
Oil sales			13,184,508				3,894,122
Other			394,795				157,467
Total operating revenue			26,146,484				9,485,696
OPERATING COSTS AND EXPENSES
Lease operating			1,558,378				826,461
Production taxes			1,681,044				571,474
General and administrative			108,767,228				949,642
Depreciation, depletion and amortization			5,938,330				4,003,696
Accretion of asset retirement obligations			14,316				5,676
Total operating costs and expenses			117,959,296				6,356,949
Income (loss) from operations			(91,812,812	)			3,128,747
OTHER (EXPENSE) INCOME
Interest expense			(1,590,061	)			(559,524	)
Interest income and other			34,806				27,236
Risk management			(15,012,339	)			1,626,816
Total other (expenses) income			(16,567,594	)			1,094,528
Income (loss) before income taxes			(108,380,406	)			4,223,275
Income tax expense			11,826,824				—
NET INCOME (LOSS)		$	(120,207,230	)		$	4,223,275

      Revenues . Revenues for the three months ended June 30, 2008 increased $16.7 million, to $26.1 million as compared to $9.5 million for the three months ended June 30, 2007. Revenue growth was due primarily to continued drilling success and increase of realized prices received. Production of oil and gas increased by 45,097 bbls of oil and 417,205 Mcf of gas, respectively, (71% and 55%) during the same three month period in 2008 to 108,307 Bbls of oil and 1,178,599 Mcf of gas, respectively.

     The following table highlights production growth by certain projects.

										Three Months ended June 30,
										2008								2007
Project		Operations				Basin				Mcf				Bbls				Mcf				Bbls
Cleveland Sand		Operated				Anadarko					422,910				48,736				170,048				23,314
N. Barnett		Operated				Ft. Worth					112,030				12,963				27,462				4,700
Eureka		Non-Operated				Anadarko					152,435				1,640				32,405				20
											687,375				63,339				229,915				28,034
Production from remaining projects											491,224				44,968				531,479				35,176
Total production for the period											1,178,599				108,307				761,394				63,210

     Prices received for oil and gas increased by 98% and 49%, respectively. The average sales price for oil and gas for the three months ended June 30, 2008 were $121.73 per Bbl and $10.66 per Mcf, respectively, as compared to average sales price for oil and gas for the three months ended June 30, 2007 of $61.61 per Bbl and $7.14 per Mcf, respectively.

      Lease Operating E xpenses . Lease operating expenses for the three months ended June 30, 2008 increased $.7 million, or 89%, to $1.6 million as compared to $.8 million for the three months ended June 30, 2007 and increased 18% per Mcfe during the three months ended June 30, 2008 to $.85 per Mcfe as compared to $.72 per Mcfe during the three months ended June 30, 2007. The increase in lease operating expenses on a gross dollar basis is primarily a result of increased well count, while the increase on an Mcfe basis was primarily due to increases in produced water volumes and associated hauling and disposal costs and to a lesser extent third-party vendor costs rising due to demand for services and general increase in cost of fuel, raw materials, and labor during the first three months of 2008 compared to the same period in 2007.

      Production Taxes. Production taxes for the three months ended June 30, 2008 increased $1.1 million, or 194%, to $1.7 million as compared to $.6 million for the three months ended June 30, 2007 due to increased oil and gas sales during 2008. Production taxes as a percentage of revenues were 6.4% and 6.0% for the three months ended June 30, 2008 and 2007, respectively.

      General and Administrative Expenses . G&A for the three months ended June 30, 2008 increased $107.8 million, or 11,354%, to $108.8 million as compared to $1.0 million for the three months ended June 30, 2007. The increase in G&A was driven primarily by a non-cash stock compensation expense of approximately $106.7 million, employee count and employee-related costs as a result of hiring additional professional staff (petroleum engineers, geologists, landmen and other professionals) which resulted in an increase of approximately 20 employees, awarding of annual compensation increases and increase in benefit costs (primarily health insurance premiums) during the last half of 2007 and continuing into 2008 which totaled approximately $.7 million, an increase in professional fees of approximately $.2 million and an increase in rent expense of $.1 million.

      Depreciation, Depletion and Amortization . DD&A for the three months ended June 30, 2008 increased $1.9 million, or 48%, to $5.9 million as compared to $4.0 million for the three months ended June 30, 2007. DD&A on a per Mcfe basis for the three months ended June 30, 2008 decreased 8% to $3.25 per Mcfe, as compared to $3.51 per Mcfe for the three months ended June 30, 2007. The increase in DD&A expense for the three months ended June 30, 2008 was due to an increase in volumes partially offset by a reduced depletion rate.

      Income (loss) from Operations. Due to the factors described above, loss from operations increased $94.9 million, or 3,034%, to $(91.8) million for the three months ended June 30, 2008 compared to income from operations of $3.1 million for the three months ended June 30, 2007.

     Excluding the effect of stock compensation expense, income from operations increased $11.7 million, or 375%, to $14.9 million for the three months ended June 30, 2008 compared to the three months ended June 30, 2007.  

Other (Expense) Income .

     The increase in interest expense of approximately $1.0 million for the three months ended June 30, 2008 compared to the same period in 2007 was a result of Knight’s outstanding debt balance, for the respective periods, increased from $43.8 million to $130.0 million.

     The increase in risk management expense for the three months ended June 30, 2008 compared to the same period in 2007 was a result of the change in fair value of Knight’s open derivative contracts during the respective periods, as a result of increasing commodity prices and expectations of commodity prices in excess of the prices in our derivative agreements.

      Income (loss) before income taxes. Due to the factors described above, loss before income taxes increased $112.6 million, or 2,666%, to $(108.4) million for the three months ended June 30, 2008 compared to income before income taxes of $4.2 million for the three months ended June 30, 2007.

      Income Tax Expense. Increase in income tax expense was a result of a one-time charge of approximately $36.2 million due to a change in tax status from a partnership to a corporation. This was partially offset by the deferred tax benefit of approximately $(25.9) million related to stock option expense.

      Net Income (Loss) . Due to the factors described above, net loss of $(120.2) million was recognized for the three months ended June 30, 2008 compared to net income of $4.2 million for the three months ended June 30, 2007.

     Excluding the effect of stock compensation expense and the change in tax status, net loss of $(1.7) million would have been recognized for the three months ended June 30, 2008, primarily due to the significant non-cash unrealized losses associated with the oil and gas derivative contracts.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Results of Operations

     The following schedule reflects the historical operations of Crusader for the six months ended June 30, 2008 and 2007, respectively. The operations of the acquired entities (Westside, Knight II, Hawk, RCH and other entities acquired) are included in the historical operations from June 27, 2008 to June 30, 2008.

		Six Months Ended June 30,
		2008				2007
OPERATING REVENUES
Gas sales		$	20,829,699			$	9,552,790
Oil sales			21,655,551				6,619,372
Other			728,788				342,572
Total operating revenue			43,214,038				16,514,734
OPERATING COSTS AND EXPENSES
Lease operating			3,050,448				1,245,480
Production taxes			2,771,619				1,002,996
General and administrative			110,371,878				1,763,444
Depreciation, depletion and amortization			11,507,123				7,286,065
Accretion of asset retirement obligations			27,544				11,352
Total operating costs and expenses			127,728,612				11,309,337
Income (loss) from operations			(84,514,574	)			5,205,397
OTHER (EXPENSE) INCOME
Interest expense			(3,100,490	)			(935,182	)
Interest income and other			123,457				43,320
Risk management			(20,206,968	)			(717,130	)
Total other (expenses) income			(23,184,001	)			(1,608,992	)
Income (loss) before income taxes			(107,698,575	)			3,596,405
Income tax expense			11,826,824				—
NET INCOME (LOSS)		$	(119,525,399	)		$	3,596,405