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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
Amendment No. 1
to the
FORM 10-Q
 
(Mark One)
 
þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011
 
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 number: 000-52618
 
SOUTHERN TRUST SECURITIES HOLDING CORP.
(Exact name of registrant as specified in its charter)
 
Florida   651001593
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
145 Almeria Ave., Coral Gables, Florida   33134
(Address of principal executive offices)   (Zip Code)
 
(305) 446-4800
(Registrant’s telephone area, 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 Òlarge accelerated filer,Ó Òaccelerated filerÓ and Òsmaller reporting companyÓ 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

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

The registrant had 19,177,826 shares of common stock issued and outstanding on November 11, 2011.

Introductory Note:  The Registrant qualifies as a “smaller reporting company” and has elected to comply with the requirements applicable to smaller reporting companies set forth in Regulation S-K and Form 10-Q.



 
 

 
EXPLANATORY NOTE
 
Southern Trust Securities Holding Corp., Inc. (the “Company,” “we,” “us,” or “our”) is filing this Amendment No. 1 (the “Amended Report”) to its Quarterly Report on Form 10-Q for its fiscal quarterly period ended September  30. 2011, originally filed with US Securities and Exchange Commission (“SEC”) on December 6, 2011 (the “Original Filing”), to correct and expand the disclosure for Note 18, Investment in AR Growth Finance Corp. and Nexo Empredimientos S.A. and Management Discussion and Analysis (MD&A”), as follows:
 
1.  
Note 18.  Pursuant to Regulation S-X 8-03 (b) (3), we have expanded the footnote disclosure to include a statements of income summary for Nexo Empredimientos S.A., a significant equity investee, for the three and nine month periods ended September 30, 2011 and for the years ended December 31, 2010 and 2009.

2.  
MD&A, Revenues.  The last paragraph of the revenue discussion for the nine months ended September 30, 2011 was rewritten to correct a typographical error and to better explain the increase in other miscellaneous revenue for the nine month period ended September 30, 2011.
 
3.  
MD&A, Liquidity and Capital Resources.  We expanded our explanation for  net cash provided by operating activities by quantifying  specific reasons operations provided approximately $298,000 net cash for the nine months ended September 30, 2011.
 
Except as discussed above, we have not modified or updated disclosures presented in the Original Filing. Accordingly, this Amended Report does not reflect events occurring after our Original Filing or modify or update those disclosures affected by subsequent events, except as specifically referenced herein.
 
This Quarterly Report on Form 10-Q/A should be read in conjunction with our filings on Form 10-Q/A for the quarterly period ended June 30, 2010 and our Form 10-K/A (Amendment No.2), which we are filling concurrently with this Amended Report, as well as our current reports on Form 8-K filed subsequent to the date of the Original Filing.
 
 
 
 

 
 
 
INDEX
 
      PAGE  
  PART I      
         
Item 1. Consolidated Interim Financial Statements     3  
           
  Consolidated Statements of Financial Condition as of September 30, 2011 and December 31, 2010     3  
           
  Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010     4  
           
  Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss)     5  
           
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010     6  
           
  Notes to Consolidated Interim Financial Statements     7  
           
Item 2.   Management’s Discussion and Analysis     30  
           
Item 3.  Quantitative and Qualitative Disclosures About Market Risk     37  
           
Item 4.   Controls and Procedures     37  
           
  PART II        
           
Item 1.  Legal Proceedings     38  
           
Item 1A.   Risk Factors     40  
           
Item 2.   Unregistered Sale of Equity Securities and Use of Proceeds     40  
           
Item 3.  Default Upon Senior Securities     40  
           
Item 4.   [Removed and Reserved]     40  
           
Item 5.   Other Information     40  
           
Item 6.   Exhibits     40  
           
  Signature Page     41  

 
2

 

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
             
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
ASSETS
             
Cash and cash equivalents
  $ 516,850     $ 281,878  
                 
Securities owned at fair value
    941,673       968,161  
                 
Due from clearing broker
    3,602,256       529,773  
                 
Commissions receivable
    68,182       90,348  
                 
Investment in AR Growth
    22,370       22,370  
                 
Investment in Nexo Emprendimientos, S.A. (see Note 18)
    1,098,667       1,010,271  
                 
Other assets
    22,054       20,931  
                 
Property and equipment, net
    1,567,503       1,612,986  
                 
Goodwill
    1,132,885       166,594  
                 
  Total assets   $ 8,972,440     $ 4,703,312  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                 
Liabilities
               
Accounts payable and accrued expenses
  $ 224,114     $ 244,475  
Payable to customers
    4,178,219       782,640  
Obligations under capital lease
    3,736       6,509  
Notes payable
    715,268       757,188  
                 
  Total liabilities     5,121,337       1,790,812  
                 
Commitments and contingencies
               
                 
Stockholders' equity
               
Series C 8% convertible preferred stock, no par value, 2.5 million shares authorized,
               
520,000 issued and outstanding
    5,200,000       5,200,000  
Common stock, no par value, 100 million shares authorized; 19,177,826 and 14,333,378
               
shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
    10,474,760       9,002,986  
   Additional paid-in capital
    1,678,946       1,536,991  
Accumulated deficit
    (13,613,492 )     (12,927,671 )
Accumulated other comprehensive loss
    (8,223 )     (11,002 )
                 
  Total Southern Trust Securities Holding Corp. and Subsidiaries stockholders' equity     3,731,992       2,801,304  
Noncontrolling interest
    119,111       111,196  
  Total stockholders' equity     3,851,103       2,912,500  
                 
  Total Liabilities and Stockholders' Equity   $ 8,972,440     $ 4,703,312  

 
3

 
 
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
               
   
Three Months
   
Three Months
   
Nine Months
   
Nine Months
 
   
Ended
   
Ended
   
Ended
   
Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
                         
Revenues
                       
Trading income
  $ 427,710     $ 161,415     $ 1,324,720     $ 691,030  
Commissions
    281,577       628,310       839,766       1,351,722  
Investment banking fees
    -               3,704          
Managed account fees
    19,111       15,791       57,853       46,759  
Interest and dividend income
    12,069       20,674       34,361       66,151  
Other miscellaneous income
    22,889       798       97,889       34,707  
                                 
      763,355       826,988       2,358,292       2,190,369  
                                 
Expenses
                               
Commissions and clearing fees
    443,106       417,560       1,297,077       1,086,476  
Employee compensation and benefits
    178,331       171,722       551,903       514,665  
Occupancy
    14,683       17,114       47,992       46,246  
Communications and market data
    26,101       29,217       106,360       94,429  
Professional fees
    81,193       109,765       305,802       253,669  
Travel and entertainment
    26,737       20,738       58,276       24,111  
Depreciation
    15,826       16,037       47,453       53,533  
Interest expense
    13,524       15,236       41,449       48,822  
Other operational expenses
    52,424       43,930       153,657       105,529  
                                 
      851,924       841,319       2,609,967       2,227,480  
                                 
Loss before equity method income (loss)
    (88,569 )     (14,331 )     (251,675 )     (37,111 )
                                 
Equity method loss
    (240,918 )     (57,601 )     (374,288 )     (34,598 )
                                 
Net loss before noncontrolling interest
    (329,487 )     (71,932 )     (625,963 )     (71,709 )
                                 
Net loss attributable to noncontrolling interest
    7,000       3,165       7,915       10,167  
                                 
Net loss attributable to Southern Trust Securities Holding Corp.
                               
and Subsidiaries   $ (336,487 )   $ (75,097 )   $ (633,821 )   $ (81,876 )
                                 
Preferred stock dividends
    -       -       (52,000 )     -  
                                 
Net loss applicable to common stockholders
  $ (336,487 )   $ (75,097 )   $ (685,821 )   $ (81,876 )
                                 
Weighted average common shares outstanding
                               
Basic and diluted
    19,177,826       14,333,378       16,338,589       14,333,378  
                                 
Income (loss) per common share
                               
Basic and diluted
  $ (0.02 )   $ (0.01 )   $ (0.04 )   $ (0.01 )

 
4

 
 
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
                                                             
                                       
Accumulated
                   
                           
Additional
         
Other
   
Total
             
   
Preferred Stock
   
Common Stock
   
Paid-In
   
Accumulated
   
Comprehensive
   
Stockholders'
   
Noncontrolling
   
Total
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Income (loss)
   
Equity
   
Interest
   
Equity
 
                                                             
Balances December 31, 2009
                                                           
  (as previously reported)
    520,000     $ 5,200,000       14,333,378     $ 9,002,986     $ 1,357,612     $ (12,608,616 )   $ 2,918     $ 2,954,900     $ 104,320     $ 3,059,220  
                                                                                 
Retroactive adjustment for
                                                                               
  conversion from cost method of
                                                                               
  accounting for Nexo investment to
                                                                               
  the equity method of accounting
                                            19,363               19,363               19,363  
                                                                                 
Balances, January 1, 2010
    520,000       5,200,000       14,333,378       9,002,986       1,357,612       (12,589,253 )     2,918       2,974,263       104,320       3,078,583  
                                                                                 
Stock-based compensation
                                    179,379                       179,379               179,379  
                                                                                 
Comprehensive loss:
                                                                               
                                                                                 
         Net loss
                                            (338,418 )             (338,418 )     6,876       (331,542 )
             Foreign currency adjustment
                                                    (13,920 )     (13,920 )             (13,920 )
                                                                                 
Total comprehensive loss
                                                            (352,338 )     6,876       (345,462 )
                                                                                 
Balances, December 31, 2010
    520,000       5,200,000       14,333,378       9,002,986       1,536,991       (12,927,671 )     (11,002 )   $ 2,801,304     $ 111,196     $ 2,912,500  
                                                                                 
 
                                                                               
Issuance of common stock
                                                                               
  in private placement
                    2,979,591       1,042,857                               1,042,857               1,042,857  
                                                                                 
Issuance of common stock
                                                                               
  in connection with Nexo investment
                    1,864,857       428,917                               428,917               428,917  
                                                                                 
Stock-based compensation
                                    141,955                       141,955               141,955  
                                                                                 
Dividends to preferred stockholders
                                            (52,000 )             (52,000 )             (52,000 )
                                                                                 
Comprehensive loss:
                                                                               
                                                                                 
         Net loss
                                            (633,821 )             (633,821 )     7,915       (625,906 )
             Foreign currency adjustment
                                                    2,779       2,779               2,779  
                                                                                 
Total comprehensive loss
                                                            (631,042 )     7,915       (623,127 )
                                                                                 
Balance, September 30, 2011
    520,000     $ 5,200,000       19,177,826     $ 10,474,760     $ 1,678,946     $ (13,613,492 )   $ (8,223 )   $ 3,731,992     $ 119,111     $ 3,851,103  

 
5

 
 
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
   
   
Nine Months
   
Nine Months
 
   
Ended
   
Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
 
   
(unaudited)
   
(unaudited)
 
Cash flows from operating activities
           
             
Net loss before noncontrolling interest
  $ (625,963 )   $ (71,709 )
Adjustments to reconcile net loss before noncontrolling interest to net cash provided by operating activities:
               
Stock-based compensation
    141,955       145,827  
Depreciation and amortization
    47,453       53,533  
Loss in equity of affiliate
    374,288       34,598  
        Changes in operating assets and liabilities:
               
Securities owned
    26,488       1,066,925  
Due from clearing broker
    (3,072,483 )     (561,921 )
Commissions receivable
    22,166       10,615  
Other assets
    (1,124 )     13,210  
Accounts payable and accrued expenses
    (20,361 )     4,781  
Payable to customers
    3,395,579       580,228  
                 
Net cash provided by operating activities
    287,997       1,276,087  
                 
Cash flows from investing activities
               
                 
  Purchases of equity investment
    (1,000,000 )     -  
  Purchases of equipment
    (1,968 )     -  
                 
Net cash used for investing activities
    (1,001,968 )     -  
                 
Cash flows from financing activities
               
                 
   Proceeds from sale of common stock
    1,042,857       -  
   Dividends paid to preferred stockholders
    (52,000 )     -  
Principal payments on notes payable and capital lease obligations
    (44,693 )     (358,623 )
                 
Net cash flows provided by (used in) financing activities
    946,164       (358,623 )
                 
Effect of foreign exchange rate changes on cash and cash equivalents
    2,779       (2,382 )
                 
Net increase in cash and cash equivalents
    234,972       915,082  
                 
Cash and cash equivalents, beginning of period
    281,878       130,631  
                 
Cash and cash equivalents, end of period
  $ 516,850     $ 1,045,713  
                 
Supplementary disclosure of cash flow information:
               
Cash paid during the periods for interest
  $ 41,449     $ 48,822  
                 
Non-cash financing activities:
               
  Common stock issued in connection with equity investment   $ 428,917     $ -  

 
6

 
 
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  
Basis of Presentation

We are providing herein the consolidated interim statements of financial condition of Southern Trust Securities Holding Corp. and subsidiaries (collectively the "Company") as of September 30, 2011, and the related consolidated interim statements of operations for the three and nine months ended September 30, 2011 and 2010, and cash flows for the nine months ended September 30, 2011 and 2010 and the consolidated interim statements of changes in stockholders equity and comprehensive income (loss) for the three and nine months ended September 30, 2011 and the year ended December 31, 2010. The consolidated interim financial statements presented herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The consolidated interim financial statements should be read in conjunction with the Company's consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC on April 15, 2011.
 
The information furnished in this report reflects all adjustments consisting of only normal recurring adjustments, which are in the opinion of management necessary for a fair presentation of the results for the interim periods. The results of operations for the nine months ended September 30, 2011 are not necessarily indicative of results that may be expected for the fiscal year ending December 31, 2011.
 
2.  
Nature of operations

Southern Trust Securities Holding Corp. (the "Company”) owns Southern Trust Securities, Inc. ("STS"), Southern Trust Metals, Inc. (“STM”), Southern Trust Securities Asset Management, Inc. ("STSAM"), and Loreley Overseas Corporation (“LOR”). Additionally, on October 23, 2006, the Company formed Kiernan Investment Corp. (“KIC”) as an international business company in Belize.  KIC has had very limited operations since inception.

The Company contributed $105,653 in cash to form a new company, IPWM, España S.A. ("IPWM Spain") under a partnership agreement with a Swiss Financial Group, International Private Wealth Management, SA (“IPWM, SA”), in exchange for a 50.01% interest and control of the newly created company.  During July 2008, IPWM Spain commenced operations and opened offices in the cities of Barcelona, Spain, San Sebastian, Spain and Marbella, Spain.  IPWM Spain had limited operations for the years ended December 31, 2010 and 2009.

The Company is a Florida corporation and was organized on January 25, 2000.  STS, a Florida corporation, was organized on June 10, 1999 and is registered as an introducing broker/dealer with the Securities and Exchange Commission (“SEC”).  STS is a member of the Financial Industry Regulatory Authority (“FINRA”) and National Futures Association (“NFA”). STS operates as an introducing broker clearing customer trades on a fully disclosed basis through a clearing firm.  Under this basis, it forwards all customers transactions to another broker who carries all customers’ accounts and maintains and preserves books and records.  Pershing, LLC currently performs the transaction clearing functions and related services for STS.   STSAM, a Florida corporation formed on November 22, 2005, is a fee-based investment advisory company which offers its services to retail customers. STM, a Florida corporation formed on October 29, 2009, to capitalize on investor interest in the trading of precious metals such as gold, silver, platinum, and palladium.  LOR, a British Virgin Islands corporation, was formed on May 19, 2004, and acts as an international intermediary for STM’s international trading transactions; the corporation had been inactive until 2010.
 
As a result of the Company's late filing of this Form 10-Q for the period ended September 30, 2011, the Company has been late in three periodic filings within the past 24 months, and therefore under FINRA Rule 6530(e) its shares of common stock are ineligible for quotation on the OTCBB for a period of one year assuming timely filing during such year.  The Company had been late in three of its filings, including the current filing, primarily due to an inability to get timely information from foreign business partners. The Company is in the process of addressing this problem to enable it to timely file periodic reports in the future.  In the meantime, the Company's common stock will trade on the Pink Sheets. The stock symbol for the common stock will be SOHL.PK rather than SOHL.OB.  This quotation on the Pink Sheets rather than the OTCBB has no affect on the status of the Company's common stock shares as freely trading or restricted under federal securities laws.
 
 
7

 

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.  
Liquidity

The Company reported a net loss applicable to common shareholders of approximately $336,000 and $686,000 for the three and nine month periods ended September 30, 2011, respectively, and net loss applicable to common shareholders of approximately $75,000 and $82,000 for the same periods in 2010. For the nine month period ended September 30, 2011 cash flows provided by operations was approximately $288,000, compared to cash flows provided by operations of approximately $1,276,000 for the same period in 2010. The Company has not attained a level of revenues sufficient to support recurring expenses.

Should the Company revenues decline from their current levels the Company will need to seek alternative sources of funding to continue its operations.

4.  
Summary of significant accounting policies
 
Basis of Presentation and Principles of Consolidation
 
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, STS, STM, STSAM, LOR, and KIC.  IPWM Spain’s assets and liabilities are consolidated with those of the Company and the outside investor’s 49.99% interest in IPWM Spain is included in the accompanying consolidated financial statements as a noncontrolling interest.  All intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers short-term interest bearing investments with initial maturities of three months or less to be cash equivalents. Cash and cash equivalents consist of cash in banks, free credit on investment accounts and money market accounts.

Securities Owned

All securities owned are valued at market and unrealized gains and losses are reflected in revenues.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Repairs and maintenance are expensed as incurred while betterments and improvements are capitalized.

The Company provides for depreciation and amortization over the following estimated useful lives:
 
  Building and improvements 40 years
  Office equipment 5 years
  Furniture and fixtures 10 years
 
 
8

 
 
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.  
Summary of significant accounting policies (continued)
 
Long-Lived Assets

In accordance with Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360 “Property, Plant, and Equipment,” the Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts There were no impairment charges during the three and nine months ended September 30, 2011.

Revenue and Expense Recognition from Securities Transactions

The Company records all securities transactions, including commission revenue and related expenses, on a trade-date basis.

Investment Banking Fees

Investment banking fees include fees, net of syndication expenses, arising from securities offerings in which the Company acts as an underwriter or agent.  Investment banking revenues also include fees earned in providing financial advisory services.  These revenues are recorded in accordance with the terms of the investment banking agreements.

Managed Account Fees
 
Managed account fees are primarily earned based on a percentage of assets under management.  Fees are computed and due at specified intervals, generally quarterly and recorded when earned.
 
 
9

 
 
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.  
Summary of significant accounting policies (continued)
 
Income Taxes
 
The Company files a consolidated income tax return with its subsidiaries.  The Company accounts for income taxes in accordance with FASB ASC Topic 740 “Income Taxes”, which requires accounting for deferred income taxes under the asset and liability method.  Deferred income tax asset and liabilities are computed for difference between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on the enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.  Valuation allowances are established, when necessary, to reduce the deferred income tax assets to the amount expected to be realized.

The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws.  Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions.  The benefits of uncertain tax positions are recorded in the Company’s financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from tax authorities.  When facts and circumstances change, the Company reassesses these probabilities and records any changes in the financial statements as appropriate.
 
In accordance with GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.  De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce stockholders equity.  This policy also provides guidance on thresholds, measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial statement comparability among different entities.  Management’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. Generally, the tax filings are no longer subject to income tax examinations by major taxing authorities for years before 2008. Any potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with U.S. federal, state and local tax laws.  The Company's management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.

Interest and Penalty Recognition on Unrecognized Tax Benefits

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No interest expense or penalties have been recognized as of and for the period ended September 30, 2011.
 
 
10

 

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.  
Summary of significant accounting policies (continued)

Foreign Currency Adjustments

The financial position and results of operations of the Company’s foreign subsidiary is measured using the foreign subsidiary’s local currency as the functional currency in accordance with FASB ASC Topic 830, “Foreign Currency Matters.” Revenues and expenses of such subsidiary have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange as of the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders’ equity.

Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Comprehensive Income (Loss)

The Company complies with FASB ASC Topic 220, “Comprehensive Income,” which establishes rules for the reporting and display of comprehensive income (loss) and its components.  FASB ASC Topic 220 requires the Company’s change in foreign currency translation adjustments to be included in other comprehensive loss, and is reflected as a separate component of stockholders’ equity.
 
Fair Value of Financial Instruments
 
The fair values of the Company’s assets and liabilities that qualify as financial instruments under FASB ASC Topic 825, “Financial Instruments,” approximate their carrying amounts presented in the accompanying consolidated statements of financial condition at September 30, 2011 and December 31, 2010.
 
Loss Per Common Share

The Company complies with the accounting and disclosure requirements of FASB ASC 260, “Earnings Per Share.” Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted loss per common share incorporates the dilutive effect of common stock equivalents on an average basis during the period.  The calculation of diluted net loss per share excludes 4,500 and 26,000 warrants and 2,080,000 shares of common stock issuable upon the conversion of the Series C 8% convertible preferred stock as of September 30, 2010, since their effect is anti-dilutive. As of September 30, 2011, 2,080,000 shares of common stock issuable upon the conversion have been excluded since their effect is anti-dilutive.

Investment

The Company classifies its common stock investment in AR Growth Finance Corp. (“AR Growth”) as available-for-sale in accordance with FASB ASC Topic 320, “Investments-Debt and Equity securities.” Available-for-sale investments are carried on the consolidated statements of financial condition at their fair value with the current period adjustments to the carrying value recorded in accumulated other comprehensive income (loss).
 
 
11

 

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.  
Summary of significant accounting policies (continued)

Stock-Based Compensation

The Company complies with FASB ASC Topic 718 “Compensation – Stock Compensation,” which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services.  It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. FASB ASC Topic 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions.  FASB ASC Topic 718 requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions).  That cost will be recognized over the period during which an employee is required to provide service in exchange for the award the requisite service period (usually the vesting period).  No compensation costs are recognized for equity instruments for which employees do not render the requisite service.  The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available).  If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.  Based on stock options and stock awards that vested during the nine month periods ended September 30, 2011 and 2010, the Company recorded approximately $142,000 and $146,000, respectively, as compensation expense under FASB ASC 718.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities at the date of the financial statements, as well as their related disclosures.  Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Valuation of Investments in Securities at Fair Value—Definition and Hierarchy

FASB ASC Topic 820 “Fair Value Measurements and Disclosures” provides a framework for measuring fair value under generally accepted accounting principles in the United States and requires expanded disclosures regarding fair value measurements.  ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. 

In determining fair value, the Company uses various valuation approaches.  In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company.  Unobservable inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  FASB ASC Topic 820 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations, as follows:
 
 
12

 
 
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.  
Summary of significant accounting policies (continued)

Valuation of Investments in Securities at Fair Value – Definition and Hierarchy (continued)

Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.  Valuation adjustments and block discounts are not applied to Level 1 securities.  Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
 
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
 
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
 
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined.
 
Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.
 
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure.  Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date.  The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation.  In periods of market dislocation, the observability of prices and inputs may be reduced for many securities.  This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.

Valuation Techniques

The Company values investments in securities that are freely tradable and are listed on a national securities exchange or reported on the NASDAQ national market at their last sales price as of the last business day of the year.  At September 30, 2011, all of the Company’s investments classified as securities owned on the consolidated statements of financial condition are classified as Level 1 investments on the fair value hierarchy table in Note 5.
 
 
13

 

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.  
Summary of significant accounting policies (continued)

Government Bonds

The fair value of sovereign government bonds is generally based on quoted prices in active markets. At September 30, 2011 and 2010 all government bonds are categorized as level 1.

Certificate of Deposits

The fair values of the bank certificate of deposits are based on the face value of the certificate of deposits.

Derivative Contracts

The Company records its derivative activities at fair value. Gains and losses from derivative contracts are included in trading income in the consolidated statement of operations.  Derivative contracts include future and option contracts related to foreign currencies, government bonds and other securities.

The fair value of the derivate contacts traded by the Company is generally based on quoted prices in active markets on national exchanges. The derivative contracts, such as options and futures, which are listed on a national securities exchange or reported on the NASDAQ national market, are generally categorized in Level 1 of the fair value hierarchy.

Investments-Equity Method

Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an Investee depends on an evaluation of several factors including, among others, representation on the Investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the Investee company. Under the equity method of accounting, an Investee company’s accounts are not reflected within the Company’s Consolidated Balance Sheets and Statements of Operations; however, the Company’s share of the earnings or losses of the Investee company is reflected in the caption ‘‘Equity method income (loss)” in the Consolidated Statements of Operations. The Company’s carrying value in an equity method Investee company is reflected in the caption ‘‘Investment in Nexo Emprendimientos, S.A.” in the Company’s Consolidated Balance Sheets.

As a result of an additional 12.2% interest in Nexo, thereby increasing its level of ownership to 29.5%, the Company changed its method of accounting for this investment from the cost method to the equity method. According to ASC 323-10-35-32, the investment, results of operations (current and prior periods presented), and retained earnings of the investor shall be adjusted retroactively as if the equity method had been in effect during all previous periods in which the investment was held.  The carrying amount of an investment in common stock of an investee that qualifies for the equity method of accounting may differ from the underlying equity in net assets of the investee. The difference shall affect the determination of the amount of the investor's share of earnings or losses of an investee as if the investee were a consolidated subsidiary. However, if the investor is unable to relate the difference to specific accounts of the investee, the difference shall be recognized as goodwill and not be amortized in accordance with Intangibles-Goodwill. However, an equity investor shall recognize its share of any impairment charge recorded by an investee in accordance with the guidance in Investments- Equity method and consider the effect, if any, of the impairment on the investor’s basis difference in the assets giving rise to the investee’s impairment charge.
 
 
14

 

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.  
Summary of significant accounting policies (continued)

Investments-Equity Method (continued)

As a result of the method change noted in the prior paragraph, Goodwill was adjusted to $1,132,885 and $166,594 as of September 30, 2011 and December 31, 2010, respectively. These adjustments were taken from the investment in Nexo, which were retroactively to  $1,010,271 as of December 31, 2010. See Note 18 for further discussion of retroactive adjustments.

Goodwill allocated during 2010 and 2011 relating to the conversion of the equity method of accounting for Nexo was done so on a preliminary basis. Purchase accounting adjustments will be made upon finalizing the valuation of certain underlying assets of Nexo, which will ultimately affect the amount allocated to goodwill.

Offsetting of Amounts Related to Certain Contracts

The Company has elected to offset fair value amounts recognized for cash collateral receivables and payables against fair value amounts recognized for net derivative positions executed with the same counterparty under the same master netting arrangement. At September 30, 2011 and December 31, 2010, the Company offset cash collateral receivables of $9,213 and $44,223, respectively against its net derivative positions.

Recently Adopted Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update 2010-06, “Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements” (ASU 2010-06), to require new disclosures related to transfers into and out of Levels 1 and 2 of the fair value hierarchy and additional disclosure requirements related to Level 3 measurements.  The guidance also clarifies existing fair value measurement disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value.  The additional disclosure requirements are effective for the first reporting period beginning after December 15, 2009, except for the additional disclosure requirements related to Level 3 measurements, which are effective for fiscal years beginning after December 15, 2010.  The adoption of the additional requirements did not have any financial impact on the Company’s consolidated financial statements.
 
In April 2010, the FASB issued ASU No. 2010-13, “Compensation - Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades,” which addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. ASU No. 2010-13 is effective for interim and annual periods beginning on or after December 15, 2010 and is not expected to have a material impact on the Company’s consolidated financial position or results of operations. The Company adopted the pronouncement on January 1, 2011 resulting in no impact to the Company’s consolidated financial statements.
 
 
15

 
 
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.  
Summary of significant accounting policies (continued)

Recently Adopted Accounting Pronouncements (continued)
 
In December 2010, FASB issued ASC ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic 350) — Intangibles — Goodwill and Other.” ASU 2010-28 amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2, if qualitative factors indicate that it is more likely than not that goodwill impairment exists. The amendments to this update are effective for us in the first quarter of 2011. Any impairment to be recorded upon adoption will be recognized as an adjustment to our beginning retained earnings. The Company adopted the pronouncement on January 1, 2011 resulting in no impact to the Company’s consolidated financial statements.
 
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement” (“ASU 2011-04”). ASU 2011-04 is intended to create consistency between GAAP and International Financial Reporting Standards (“IFRS”) on the definition of fair value and on the guidance on how to measure fair value and on what to disclose about fair value measurements. ASU 2011-04 will be effective for financial statements issued for fiscal periods beginning after December 15, 2011, with early adoption prohibited for public entities. We are currently evaluating the impact ASU 2011-04 may have on our consolidated financial statements.
 
On June 16, 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income (Topic 220),” which requires companies to report total net income, each component of comprehensive income, and total comprehensive income on the face of the income statement, or as two consecutive statements. The components of comprehensive income will not be changed, nor does the ASU affect how earnings per share is calculated or reported. These amendments will be reported retrospectively upon adoption. The adoption of the ASU will be required for the Company’s March 31, 2012 Form 10-Q filing, and is not expected to have a material impact on the Company.
 
 
16

 
 
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.  
Fair value measurements
 
The Company's assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with GAAP guidance for fair value measurement.  See Note 3 for a discussion of the Company's policies regarding this hierarchy.  The Company’s financial assets and liabilities measured at fair value on a recurring basis include those securities classified as securities owned on the consolidated statements of financial condition.

The following table presents information about the Company’s assets and liabilities measured at fair value as of September 30, 2011 and December 31, 2010
 
   
Quoted
                         
   
Prices
                         
   
In Active
   
Significant
   
Significant
             
   
Markets
   
Other
   
Other
         
Balance
 
   
for identical
   
Observable
   
Unobservable
   
Collteral
   
as of
 
   
Assets
   
Inputs
   
Inputs
   
Held
   
September 30,
 
Assets
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
at Broker
   
2011
 
Securities owned, at fair value:
                             
                               
Money market
  $ 284,774     $ -     $ -     $ -     $ 284,774  
Corporate bonds
    450,560                               450,560  
Options and futures
                            9,213       9,213  
Equity securities
    197,126                               197,126  
    $ 932,460     $ -     $ -     $ 9,213     $ 941,673  
                                         
                                         
                                         
Investment in A/R Growth common stock
  $ -     $ -     $ 22,370     $ -     $ 22,370  
 
 
17

 

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.  
Fair value measurements (continued)
 
   
Markets
   
Other
   
Significant
         
Balance
 
   
for Identical
   
observable
   
Unobservable
   
Collateral
   
as of
 
   
Assets
   
Inputs
   
Inputs
   
Held
   
December 31,
 
Assets
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
at Broker
   
2010
 
Securities owned, at fair value:
                             
Money market
  $ 706,156                       $ 706,156  
Corporate bonds
    180,803                         180,803  
Options and futures
    3,139                 $ 44,223       47,362  
Equity securities
    33,840                           33,840  
                                     
    $ 923,938     $ -     $ -     $ -     $ 968,161  
                                         
Investment in AR Growth common stock
  $ -     $ -     $ 22,370     $ -     $ 22,370  
 
During the year ended December 31, 2010, the Company recognized an impairment loss on its investment in AR Growth based on the excess of the carrying value over the fair value of the investment.  The Company estimated the fair value of the investment to be approximately $ 22,000 based on an analysis of its ownership of outstanding shares, trading volume, and trading prices of A/R Growth.  The fair value measurement of the investment in A/R Growth is categorized as a Level 3 in the fair value hierarchy.

6.  
Derivative contracts

In the normal course of business, the Company utilizes derivative contracts in connection with its proprietary trading activities.  Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment.  The Company’s derivative activities and exposure to derivative contracts are classified by the following primary underlying risks: interest rate, credit, foreign currency exchange rate, commodity price, and equity price risks.  In addition to its primary underlying risks, the Company is also subject to additional counterparty risk due to the potential inability of  its counterparties to meet the terms of their contracts.

Options

The Company is subject to equity price risk in the normal course of pursuing its investment objectives.  Option contracts give the Company the right, but not the obligation, to buy or sell within a limited time, a financial instrument, commodity or currency at a contracted price that may also be settled in cash, based on differentials between specified indices or prices.

The Company is exposed to counterparty risk from the potential that a seller of an option contract does not sell or purchase the underlying asset as agreed under the terms of the option contract.  The maximum risk of loss from counterparty risk to the Company is the fair value of the contracts and the premiums paid to purchase its open option contracts.  The Company considers the credit risk of the intermediary counterparty to its option transactions in evaluating potential credit risk.
 
 
18

 
 
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.  
Derivative contracts (continued)

Futures Contracts

The Company is subject to equity price risk in the normal course of pursuing its investment objectives. The Company may use futures contracts to gain exposure to, or hedge against, changes in the value of equities. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.   At September 30, 2011, the Company held no futures contracts.

7.  
Property and equipment

Property and equipment consisted of the following at September 30, 2011:

Building and improvements
  $ 1,075,942  
         
Land
    725,000  
         
Office equipment
    136,687  
         
Capitalized leases
    17,543  
         
      1,955,172  
         
Less:  accumulated depreciation and amortization
    (387,669 )
         
    $ 1,567,503  
 
Depreciation expense was approximately $47,000 and $54,000 for the nine month periods ended September 30, 2011 and 2010,  respectively.
 
 
19

 

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.  
Notes payable

Notes payable consisted of the following:

 
Mortgage payable to bank, secured by the building, monthly payment of $92,027 including interest at 7.28% per annum, due July 20, 2020.
  $ 715,268  
         
    $ 715,268  
         
         
Maturities of notes payable are appximately as follows at September 30:
       
         
2011
  $ 15,000  
2012
    61,000  
2013
    65,000  
2014
    70,000  
2015
    76,000  
Thereafter
    428,000  
         
    $ 715,000  
 
9.  
Income taxes

At September 30, 2011, the Company had approximately $7.5 million of net operating losses (“NOL”) carry-forwards for federal and state income purposes.  These losses are available for future years and expire through 2031.  Utilization of these losses may be severely or completely limited if the Company undergoes an ownership change pursuant to Internal Revenue Code Section 382.

The deferred tax asset is summarized as follows:

   
September 30,
   
December 31,
 
   
2011
   
2010
 
             
Deferred tax asset:
           
             
Net operating loss carryforwards
  $ 2,818,000     $ 2,777,000  
                 
Other temporary differences
    953,000       958,000  
                 
Deferred tax asset
    3,771,000       3,735,000  
                 
Less: Valuation allowance
    (3,771,000 )     (3,735,000 )
                 
                 
Net deferred tax asset
  $ -     $ -  
 
 
20

 
 
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.  
Income taxes (continued)

A reconciliation of income tax expense computed at the U.S. federal, state, and local statutory rates and the Company’s effective tax rate is as follows:
 
    September 30,    
December 31,
 
   
2011
   
2010
 
             
Statutory federal income tax expense
    (34 ) %     (34 ) %
                 
State and local income tax
    (4 )     (4 )
                 
(net of federal benfits)
               
                 
Other temporary differences
    8       8  
                 
Valuation allowance
    30       30  
                 
      - %     - %
 
The Company has taken a 100% valuation allowance against the other timing differences and the deferred asset attributable to the NOL carry-forwards of $3.771 million and $3.735 million at September 30, 2011 and December 31, 2010, respectively,  due to the uncertainty of realizing the future tax benefits.  The increase in valuation allowance of $36,000 is primarily attributable to the Company’s net operating loss during the nine month period ended September 30, 2011.

The Company files a consolidated income tax return with its subsidiaries.  Income taxes are charged by the Company based on the amount of income taxes the subsidiaries would have paid had they filed their own income tax returns.  In accordance with FASB ASC Topic 740, “Accounting for Income Taxes,” allocation of the consolidated income tax expense is necessary when separate financial statements are prepared for the affiliates.  As a result, the Company uses a method that allocates current and deferred taxes to members of the consolidated group by applying the liability method to each member as if it were a separate taxpayer.

10.  
Common stock

The Company is authorized to issue 100 million shares of common stock, no par value and 10 million shares of preferred stock of which 2.5 million shares have been designated as Series C 8% convertible preferred stock, no par value.

In June 2011, the Company issued 2,979,591 shares of its no par value common stock for $1,042,857 cash.  These shares were deemed to have been issued pursuant to an exemption provided by Section 4(2) of the Act, which exempts from registration “transactions by an issuer not involving any public offering.”

In June 2011, the Company issued 1,864,857 shares of its no par value common stock at an agreed value of $0.23 per share, in connection with its purchase of an additional 12.2% equity investment in Nexo Emprendimientos S.A. (“Nexo”), a credit card and consumer loan financing company based in Sunchales, Argentina.  These shares were deemed to have been issued pursuant to an exemption provided by Section 4(2) of the Act, which exempts from registration “transactions by an issuer not involving any public offering.”
 
 
21

 
 
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.  
Preferred stock

No Series C preferred stock was sold during 2011 or 2010.

12.  
Stock options and warrants

The Company accounts for its stock option awards under FASB ASC Topic 718 “Compensation—Stock compensation.” The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for each grant for the years ended December 31, 2010 and 2009: risk free interest rate between 2.25% and 4.65%, no dividend yield, expected lives of ten years and volatility between 129.73% and 185.76%. Options vest ratably between one and ten years and are excerciable over ten years. For the nine month periods ended September  30, 2011 and 2010, the Company recognized approximately $142,000 and $146,000, respectively, of stock-based compensation expense related to the issuance of options.

Options Outstanding
   
Options Exercisable
 
                                 
     
Number
   
Weighted
         
Number
       
     
Outstanding
   
Average
   
Weighted
   
Exercisable
   
Weighted
 
     
at
   
Remaining
   
Average
   
at
   
Average
 
Exercise
   
September 30,
   
Contractual
   
Exercise
   
September 30,
   
Exercise
 
Price
   
2011
   
Life
   
Price
   
2011
   
Price
 
                                 
$ 0.25       4,250,000       9.0     $ 0.25       637,083     $ 0.25  
                                             
$ 0.50       200,000       5.3     $ 0.50       200,000     $ 0.50  
                                             
$ 0.75       100,000       7.2     $ 0.75       55,000     $ 0.75  
                                             
$ 1.00       400,000       5.5     $ 1.00       400,000     $ 1.00  
                                             
$ 1.50       60,000       7.1     $ 1.50       46,000     $ 1.50  
                                             
          5,010,000             $ 0.34       1,338,083     $ 0.68  
 
 
22

 

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.  
Stock options and warrants (continued)

               
Weighted
       
               
Average
       
   
Number of
   
Weighted
   
Remaining
   
Aggregate
 
   
Shares
   
Average
   
Term
   
Instrinsic
 
   
Outstanding
   
Price
   
(in years)
   
Value
 
                         
Options outsanding at December 31, 2010
    5,010,000     $ 0.88       7.6     $ -  
                                 
Granted in 2011
    -       -                  
Canceled in 2011
    -       -                  
                                 
Options outstanding at September 30, 2011
    5,010,000     $ 0.34                  
                                 
Exercisable at December 31, 2010
    795,039     $ 0.77       7.6     $ -  
                                 
Excercisable at September 30, 2011
    1,338,083     $ 0.68       6.8     $ -  
 
The total compensation cost not yet recognized of approximately $929,270 (for non-vested awards) has a weighted average period of 2.8 years over which the compensation expense is expected to be recognized.

In January 4, 2007, the Company granted its chief executive officer 4,500,000 shares, in accordance with the executive’s employment agreement, reduced to 3,500,000 shares pursuant to a stock waiver agreement entered into on November 18, 2009 (see Note 16). The issuances of the shares were subject to a forfeiture period which ended in July 2009, at which point the shares would vest over a three year period. Since January 2007, the Company has been recognizing stock compensation expense over the service period of the employment contract of 5 ½ years.  For the four month period ended November 4, 2009, 500,000 shares of the 3,500,000 share grant vested; these shares were issued in December 2009.  On August 4, 2010, the chief executive officer waived his right, title, and interest to vest in the remaining 3,000,000 shares of restricted common stock.  For the years ended December 31, 2010 and 2009, the Company recognized $131,700 and $358,871, respectively, of stock-based compensation expense related to the issuance of the shares.
 
During 2010, the Board of Directors granted 3,350,000 options to its chief executive officer with a strike price of $0.25, vesting equally over ten years, 300,000 options to its president, with a strike price of $0.25, vesting equally over two years, 300,000 options each to two financial executives with a strike price of $0.25, vesting equally over two years and five years, respectively.
 
 
23

 

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.  
Stock options and warrants (continued)

For the three month period ended September 30, 2011 and the year ended December 31, 2010, warrant activity was as follows:

Exercise
Price Per Share
 
Warrants
Expiring
 
Balance
January
1, 2010
   
Warrants
Issued