SAXON CAPITAL GROUP INC 10-Q

Item 2. Management’s Discussion Analysis of Financial Condition and Results of Operations The following discussion will assist you in understanding our financial position, liquidity, and results of operations. The information below should be read in conjunction with the consolidated financial statements, and the related notes to consolidated financial statements. Our discussion contains both historical and forward-looking information. We assess the risks and uncertainties about our business, long-term strategy, and financial condition before we make any forward-looking statements, but we cannot guarantee that our assessment is accurate or that our goals and projections can or will be met. Statements concerning results of future exploration, exploitation, development, and acquisition expenditures as well as expense and reserve levels are forward-looking statements. We make assumptions about commodity prices, drilling results, production costs, administrative expenses, and interest costs that we believe are reasonable based on currently available information. Business Strategy USA Superior Energy Holdings, Inc. (the “Company”) is focused on acquiring, owning, operating and applying enhanced oil recovery (“EOR”) techniques to existing shallow fields of oil and gas. The Company performs complete workover and stimulation services in these existing fields to restart or substantially increase production. It utilizes state-of-the-art workover and shallow-well drilling techniques in these fields including new and innovative technologies under development by the Company. These new technologies include specialized shallow-well cased hole horizontal drilling (“CHHD”) and nitrogen (“N2”) injection which will be utilized to increase production volumes and reserve recoverability from the Company’s projects. Currently, the Company is involved in developing, owning and operating energy projects and prospects in East, Central and South Texas and currently has active projects and prospects in Bastrop, Caldwell, Navarro and Zavalla counties. These fields are known as the Bateman Project in Bastrop and Caldwell Counties (comprised of the Bateman Field and part of the adjacent Dale McBride Field), the Benton Field in Navarro County and the Del Monte Prospect in Zavalla County. Going Concern We incurred a net loss of $824,403 for the six months ended June 30, 2008 and have a working capital deficit of $1,239,411 at June 30, 2008, excluding prepaid expenses relating primarily to services paid for with common stock. We require significant additional funding to sustain our operations and satisfy our contractual obligations for our planned oil and gas exploration and development operations. Our ability to establish the Company as a going concern is dependent upon our ability to obtain additional financing, in order to fund our planned operations and ultimately, to achieve profitable operations. Liquidity and Capital Resources Our main sources of liquidity and capital resources for the six months ended June 30, 2008 were shareholder loans and draw down of our cash balances. During the period, we entered into a financing arrangement with our oil purchasing customers which allows for immediate payment on barrels delivered. While this may reduce the price we might otherwise receive for our production, we have been able to accelerate cash flow from revenues to enhance our liquidity by receiving cash upon the delivery of our barrels. During the six months ended June 30, 2008, net cash flow used by operating activities was $131,064. Excluding the effects of significant unforeseen expenses or other income, our cash flow from operations fluctuates primarily because of variations in oil and gas production rates and in commodity prices. In addition, our oil and gas production from either of our properties may be curtailed due to maintenance and weather-related factors beyond our control. Our realized oil and gas prices vary significantly due to world political events, supply and demand for products, product storage levels, and weather patterns, among other factors. We sell 100% of our production at spot market prices. Accordingly, product price volatility will affect our cash flow from operations. We anticipate making capital expenditures of approximately $4,000,000 over the next several years to drill additional wells on our existing properties. The remainder of our 2008 capital budget will be funded from a combination of our cash flow from operations, our cash and cash equivalents and the proceeds from offerings of debt and/or equity securities. On June 30, 2008, our current liabilities exceeded our current assets by $1,239,411, excluding prepaid expenses relating primarily to services paid for with common stock. In order to achieve positive cash flow from operations during 2008, we will require additional funding in order to complete our plans to maintain, workover and begin EOR operations on existing wells and to develop additional wells on existing properties. Results of Operations Comparison of the three and six months ended June 30, 2008, to the results of the corresponding prior periods: Revenue Revenue for the three months ended June 30, 2008, was $124,522, a decrease of $16,395 (11.65%) compared to revenue of $140,917 for the same period last year. The decline in revenue was primarily due to mechanical problems related to field operations. For the six months ended June 30, 2008, revenue was $240,085, an increase of $45,750 (23.5%) compared to revenue of $194,335 for the comparative six month period of the prior year. The Bateman Project was acquired on March 20, 2007, and thus the prior period does not represent a full period of production. The Company’s ability to maintain and increase sales from recent levels is dependent on its ability to raise funds to correct its working capital deficit and for the investment of additional funds into the extensive maintenance, workover and planned enhancement operations to accelerate the realization of production volumes. Lease operating expense and production taxes Lease operating expenses totaled $15,358 for the second quarter, and $119,612 for six months ended June 30, 2008. This compares to lease operating expenses of $93,434 and $126,423 for the comparative periods of the prior year. The current year decreases are the result of reduced field operations, primarily in the second quarter, due to mechanical problems encountered with the Bateman Project. General and administrative expense (G&A expense) General and administrative expense for the six months ended June 30, 2008 were $784,584 compared to $3,772,662 from the comparable 2007 period. The largest portion of the reduction came from a decrease in stock based compensation of $2,812,564 from the same period in 2007 which related to the reverse merger and compensation of key employees and consultants. Net loss For the quarter ended June 30, 2008, our net loss was $307,663, compared to our same quarter 2007 net loss of $395,808. For the six months ended June 30, 2008, our net loss was $824,403 compared to a net loss of $3,701,234 for the first half of 2007. The major components of the loss were general and administrative expenses of $320,833 and $446,807 for the three month periods ended June 30, 2008 and 2007, respectively, and general and administrative expenses of $784,585 and $3,772,662 for the six month periods ended June 30, 2008 and 2007, respectively. Included in the six month general and administrative expenses were stock based compensation of $207,436 in 2008 and $3,020,000 in 2007.