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SOUTHERN USA RESOURCES INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

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Overview


The Company was incorporated in the state of Delaware on October 31, 2006 under
the name "Lodestar Mining, Incorporated." From its inception until January 28,
2010, the Company was an exploration stage company with plans to search for
mineral deposits or reserves.

On February 3, 2010, the Company acquired all of the issued and outstanding
shares of common stock of Atlantic Green Power Corporation ("Atlantic") pursuant
to the Share Exchange, and Atlantic became a wholly-owned subsidiary of the
Company. The Company issued an aggregate of 38,099,250 shares of common stock to
the former shareholders of Atlantic, and the Company changed its corporate name
to "Atlantic Green Power Holding Company." As a result of the Share Exchange,
the Company ceased its prior operations and commenced the operation of Atlantic
as its sole line of business. Atlantic is a renewable energy company primarily
focused on the location and development of utility-scale solar energy generation
projects in the Mid-Atlantic United States, with a particular focus on the
development of solar projects in southern New Jersey.

On February 27, 2012, the Company entered into (i) an Assignment of Mineral
Lease with Gerald Short, Carolyn Short and Charles H. Merchant, Sr., (ii) a
Southern Real Estate Sales Contract with John Hancock Life Insurance Company
(U.S.A.) and (iii) a Real Estate Sales Contract with David E. Riley (each a
"Real Estate Contract" and collectively, the "Real Estate Contracts"), whereby
the Company agreed to acquire certain real property located in the state of
Alabama (the "Land Purchase"). The Land Purchased was closed on April 27, 2012.
Following the foregoing transactions, the Company changed the direction of its
business. Since February 3, 2010, the Company has engaged in the development of
utility-scale solar energy generation projects in the Mid-Atlantic region of the
United States through its wholly-owned subsidiary, Atlantic. Following the
closing of the Land Purchase, the Company changed its business strategy to the
exploitation of mineral mining rights with respect to the acquired real estate
properties. The Company is currently in the process of distributing all of the
issued and outstanding shares of Atlantic's common stock to the holders of the
Company's common stock.

Effective April 23, 2012, the Company effectuated a 1,000-to-1 reverse stock
split with respect to its outstanding shares of common stock, par value $.000001
per share (the "Reverse Stock Split"), and amended and restated its certificate
of incorporation to (i) change its corporate name to "Southern USA Resources
Inc.," (ii) change the number of authorized shares of capital stock to
270,000,000, consisting of 250,000,000 shares of common stock and 20,000,000
shares of preferred stock, and (iii) provide that the par value per share, the
amount of stated capital of the Company and the amount of paid-in surplus of the
Company will not be increased or decreased due to the Reverse Stock Split.

On April 27, 2012, the Company consummated a private placement to accredited
investors of Secured Convertible Promissory Notes due April 27, 2014 in the
aggregate principal amount of $1,920,000 that were issued at an original issue
discount of 20% and bear no additional interest.

Concurrently with the closing of the debt financing, the Company entered into
and consummated transactions pursuant to the Equipment Contribution Agreement
with Charles H. Merchant, Sr. whereby Mr. Merchant contributed certain mining
equipment to the Company in consideration of the issuance of 29,000,000 shares
of Common Stock.

On October 24, 2012, the Company consummated a private placement to accredited
investors of Secured Convertible Promissory Notes due October 24, 2014 in the
aggregate principal amount of $160,000 that were issued at an original issue
discount of 20% and bear no additional interest.


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On November 2012, the Company consummated a private placement to accredited investors of Secured Convertible Promissory Notes due November 2014 in the aggregate principal amount of $160,000 that were issued at an original issue discount of 20% and bear no additional interest.

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Critical Accounting Estimates


This discussion and analysis of our consolidated financial condition presented
in this section is based upon our unaudited consolidated financial statements
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of our unaudited consolidated
financial statements and related disclosures requires us to make estimates,
assumptions and judgments that affect the reported amount of assets,
liabilities, revenue, costs and expenses, and related disclosures. We believe
that the estimates, assumptions and judgments involved in the accounting
policies described below have the greatest potential impact on our unaudited
consolidated financial statements and, therefore, consider these to be our
critical accounting policies. On an ongoing basis, we evaluate our estimates and
judgments, including those related to valuation of discounts on debt and other
related debt-related issuance costs and the valuation of beneficial conversion
features in convertible debt and valuation of derivative liabilities. We based
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

Deferred Issuance and Other Debt-Related Costs


Deferred issuance costs are amortized over the term of its associated debt
instrument. We evaluate the terms of the debt instruments to determine if any
embedded derivatives or beneficial conversion features exist. We allocate the
aggregate proceeds of the notes payable between the warrants and the notes based
on their relative fair values in accordance with ASC 470. The fair value of the
warrants issued to note holders or placement agents are calculated utilizing the
weighted average probability option-pricing model or probability weighted
outcomes using a binomial model, depending on the terms of the instruments. We
amortize the resultant discount or other features over the terms of the notes
through its earliest maturity date using the effective interest method. Under
this method, interest expense recognized each period will increase significantly
as the instrument approaches its maturity date. If the maturity of the debt is
accelerated because of defaults or conversions, then the amortization is
accelerated.

Fair Value of Liabilities for Warrant and Embedded Conversion Option Derivative Instruments


Under applicable accounting guidance, an evaluation of outstanding warrants is
made to determine whether warrants issued are required to be classified as
either equity or a liability. Because certain warrants we have issued in
connection with past financings contain certain provisions that may result in an
adjustment to their exercise price, we classify them as derivative liabilities,
and accordingly, we are then required to estimate the fair value of such
warrants, at the end of each quarter. We use the weighted average probabilities
of potential down-round scenarios and other assumptions utilizing an unmodified
binomial model to estimate such fair value, which requires the use of numerous
assumptions, including, among others, expected life, volatility of the
underlying equity security, fair value of the underlying common stock,
expectations of pricing of the future financing rounds, a risk-free interest
rate and expected dividends. The use of different values by management in
connection with these assumptions in the weighted average probabilities of
potential down-round scenarios and other assumptions utilizing an unmodified
binomial model could produce substantially different results. Because we record
changes in the fair value of warrants or other features classified as
liabilities as either a charge or credit in our consolidated statement of
operations, significant changes in the underlying assumptions could have a
material effect on our results of operations


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New Accounting Pronouncements

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See Note 2 to our consolidated financial statements included in this Report for discussion of recent accounting pronouncements.

Results of Operations


Three Months Ended September 30, 2012 Compared to the Three Months Ended
September 30, 2011

                                                                                  Period-over-         Period-over-
                                                                                     Period               Period
                                                     2012            2011           $ Change             % Change
Revenues                                          $         -     $         -     $           -                    - %
Exploration costs                                     268,049               -           268,049                100.0 %
Operating expenses                                    275,948               -           275,948                100.0 %
Other (income)
expense                                               122,666               -           122,666                100.0 %
Net loss from continuing operations                   666,663               -           666,663                100.0 %
Loss from discontinued operations                           -         256,924          (256,924 )             (100.0 )%
Net loss                                          $   666,663     $   256,924     $     409,739                159.5 %
Income (loss) per common share from continuing
operations- basic and diluted                     $     (0.02 )   $         -

Income (loss) per common share from discontinued operations- basic and diluted $ (0.02 ) $ (5.90 )




Revenue

In April 2012, we initiated a new business strategy of exploration of mineral mining rights. Accordingly, we had no revenues from our mining exploration activities for the three months ended September 30, 2012.

Exploration costs

Exploration costs of $268,049 include property maintenance, exploration, development including permitting and all other non-production related to our exploration mining activities in the three months ended September 30, 2012.

Operating Expenses


Operating expenses include compensation and related costs include salaries,
payroll related taxes, and related employee benefits of approximately eight part
time and full time employees hired during the three months ended June 30, 2012.
General and administrative consist of legal, accounting and other compliance
fees in connection with meeting our ongoing reporting obligations during the
period.


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Other (Income) Expense


Net other (income) expense for the three months ended September 30, 2012 were
$122,666, which consisted of $(2) in interest income, $15,014 in interest
expense, $ 62,523 in interest expense related to amortization of discount on
notes and $45,131 of expense related to the change in fair value of derivative
liabilities.

Net loss from continuing operations

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Loss from continuing operations for the three months ended September 30, 2012 was $666,663. The increase in loss from continuing operations was primarily attributable to the changes in exploration costs and operating expenses as detailed above.

Loss from discontinued operations


On February 27, 2012, we acquired certain real property located in the state of
Alabama (the "Land Purchase"). Upon closing of the Land Purchase on April 27,
2012, we changed the direction of our business. Since February 3, 2010, we have
been engaged in the development of utility-scale solar energy generation
projects in the Mid-Atlantic region of the United States through its
wholly-owned subsidiary, Atlantic. Following the closing of the Land Purchase,
we changed our business strategy to the exploitation of mineral mining rights
with respect to the acquired real estate properties and discontinued the
operations of its utility-scale solar energy generation projects. Therefore, as
of April 27, 2012, the results of the operations of the utility-scale solar
energy generation projects have been classified as discontinued operations for
all periods presented. Loss from discontinued operations for the three months
ended September 30, 2011 was $256,924.

Net Loss


Net loss for the three months ended September 30, 2012 was $666,663 as compared
to net loss for the three months ended September 30, 2011 of $256,924. The
change in net loss was primarily attributable to the exploration costs in the
amount of $268,049 and increased operating costs of $ 275,948 recorded during
the three months ended September 30, 2012.

Inflation did not have a material impact on the Company's operations for the
period. Other than the foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's results of operations.


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Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September
30, 2011

                                                                            Period-over-      Period-over-
                                                                               Period            Period
                                               2012            2011           $ Change          % Change
Revenues                                   $          -     $         -     $           -                 - %
Exploration costs                               377,126               -           377,126             100.0 %
Operating expenses                            7,319,125               -         7,319,125             100.0 %
Other (income) expense                       (1,504,349 )             -        (1,504,349 )           100.0 %
Net loss from continuing operations           6,191,902               -         6,191,902             100.0 %
Income (loss) from discontinued
operations                                      277,196       1,700,555        (1,423,359 )           (83.7 )%
Net loss                                   $  6,469,098     $ 1,700,555     $   4,768,543             280.4 %
Income (loss) per common share from
continuing operations- basic and diluted   $      (0.37 )   $         -
Income (loss) per common share from
discontinued operations- basic and
diluted                                    $      (0.02 )   $    (39.20 )



Revenue

In April 2012, we initiated a new business strategy of exploration of mineral mining rights. Accordingly, we had no revenues from our mining exploration activities for the nine months ended September 30, 2012.

Exploration costs

Exploration costs of $377,126 include property maintenance, exploration, development including permitting and all other non-production related to our exploration mining activities in the nine months ended September 30, 2012.

Operating Expenses


Operating expenses include compensation and related costs include salaries,
payroll related taxes, and related employee benefits of approximately eight part
time and full time employees hired during the three months ended June 30, 2012.
General and administrative consist of legal, accounting and other compliance
fees in connection with meeting our ongoing reporting obligations during the
period.

On April 27, 2012, we entered into an Equipment Contribution Agreement with
Charles H. Merchant, Sr. whereby Mr. Merchant contributed certain mining
equipment to us in consideration of the issuance of 29,000,000 shares of our
common stock. Upon issuance of the of the shares of common stock, we recorded
compensation expense in the amount of $6,894,738 in the consolidated statement
of operations for the nine months period ended September 30, 2012.

Other Income (Expense)


Net other (income) expense for the nine months ended September 30, 2012 were
$(1,504,349) which consisted of $(7) in interest income, $45,383 in interest
expense, $188,169 in interest expense related to amortization of discount on
notes and $(1,737,894) of income related to the change in fair value of
derivative liabilities.


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Net loss from continuing operations


Loss from continuing operations for the nine months ended September 30, 2012 was
$6,191,902. The increase in net loss from continuing operations was primarily
attributable to the changes in operating expenses as detailed above.

Loss from discontinued operations


On February 27, 2012, we acquired certain real property located in the state of
Alabama (the "Land Purchase"). Upon closing of the Land Purchase on April 27,
2012, we changed the direction of our business. Since February 3, 2010, we have
been engaged in the development of utility-scale solar energy generation
projects in the Mid-Atlantic region of the United States through its
wholly-owned subsidiary, Atlantic. Following the closing of the Land Purchase,
we changed our business strategy to the exploitation of mineral mining rights
with respect to the acquired real estate properties and discontinued the
operations of its utility-scale solar energy generation projects. Therefore, as
of April 27, 2012, the results of the operations of the utility-scale solar
energy generation projects have been classified as discontinued operations for
all periods presented. Loss from discontinued operations for the nine months
ended September 30, 2012 was $277,196 as compared to $1,700,555 for the
comparable period in the previous year.

Net Loss


   Net loss for the nine months ended September 30, 2012 was $6,469,098, as
compared to net loss for the nine months ended September 30, 2011 of $1,700,555.
The change in net loss was primarily attributable to the $6,894,738 compensation
expense recorded during the nine months ended September 30, 2012 partially
offset by the $1,423,359 decrease in loss from discontinued operations and the
decrease of $1,504,349 related to the change in fair value of derivative
liabilities.

    Inflation did not have a material impact on the Company's operations for the
period. Other than the foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's results of operations.

Liquidity and Capital Resources

The following table summarizes total current assets, liabilities and working capital at September 30, 2012 and December 31, 2011.

                                                     September 30,       December 31,
                                                          2012               2011
                          Current Assets            $        118,500     $      58,165
                          Current Liabilities       $      1,475,745     $   2,760,074
                          Working Capital Deficit   $     (1,357,245 )   $  (2,701,909 )



At September 30, 2012 we had a working capital deficit of $(1,357,245) as
compared to a working capital deficit of $(2,701,909), at December 31, 2011, an
increase of $ 1,344,664. The increase is primarily related to a decrease in the
fair market value of derivative liabilities.


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For the Nine Months Ended September 30, 2012 and September 30, 2011


Net cash used in operating activities for the nine months ended September 30,
2012 and nine months ended September 30, 2011 was $1,053,655 and $434,528,
respectively. The net loss for the nine months ended September 30, 2012 and nine
months ended September 30, 2011 was $6,469,098 and $1,700,555, respectively.
Cash used in operating activities for the nine months ended September 30, 2012
consisted of for Compensation and related costs, in legal and professional fees
and for exploration costs.

Net cash (used in) provided by all investing activities for the nine months
ended September 30, 2012 and nine months ended September 30, 2011, was $574,478
and $168,000, respectively. Cash used through investing activities for the nine
months ended September 30, 2012 consisted of purchase of property and equipment
of $708,122, partially offset by reduction in deposits of $133,644. Cash
provided by investing activities for the nine months ended September 30, 2011
consisted of Proceeds from sale of investment projects of $168,000.

Net cash obtained through all financing activities for the nine months ended
September 30, 2012 and nine months ended September 30, 2011, was $1,600,000 and
$248,790, respectively. Cash obtained through financing activities for the nine
months ended September 30, 2012 consisted of net proceeds from short-term and
long-term notes entered into during the period. Cash obtained through financing
activities for the nine months ended September 30, 2011 consisted of net
proceeds from short-term notes entered into during the period.

On the Company's Annual Report on Form 10-K, filed on March 30, 2012, our
auditors have expressed their substantial doubt about our ability to continue as
a going concern. Our ability to continue as a going concern is dependent upon
our ability to generate future profitable operations and/or to obtain the
necessary financing to meet our obligations and repay our liabilities arising
from normal business operations when they come due. Our management has no formal
plan in place to address this concern but considers that we will be able to
obtain additional funds by, our mining operations, equity or debt financing
and/or related party advances; however there is no assurance of additional
funding being available.


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Item 4. Controls and Procedures

Disclosure Controls and Procedures


As required by Rule 13a-15 under the Exchange Act, as of the end of the period
covered by this quarterly report on Form 10-Q, the Company carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. This evaluation was carried out under the
supervision and with the participation of the Company's management, including
the Company's President and Chief Executive Officer and the Company's Chief
Financial Officer, who concluded that the Company's disclosure controls and
procedures are effective to provide reasonable assurance that: (i) information
required to be disclosed by the Company in reports filed or submitted under the
Exchange Act is accumulated and communicated to management to allow timely
decisions regarding required disclosure by the Company; and (ii) information
required to be disclosed in reports that filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in SEC's rules and forms.

Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in the Company's
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the rules and
forms of the SEC. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in the Company's reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's President
and Chief Executive Officer and Chief Financial Officer and Director of Business
Development, to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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                           PART II. OTHER INFORMATION
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