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EX-31.1 - CERTIFICATION - Southern Trust Securities Holding Corpsohl_ex311.htm
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EXCEL - IDEA: XBRL DOCUMENT - Southern Trust Securities Holding CorpFinancial_Report.xls


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
   
Exercised
2010
   
Expired
2010
   
Balance
December 31,
2010
   
Warrants
Issued
   
Exercised
2011
   
Expired
2011
   
Balance
September
30, 2011
 
$ 2.16  
May 29, 2010
    15,500       -       -       15,500       -       -       -             -  
$ 2.16  
August 17, 2010
    1,000       -       -       1,000       -       -       -             -  
$ 2.16  
October 29, 2010
    5,000       -       -       5,000       -       -       -             -  
$ 1.25  
April 11, 2011
    500       -       -       -       500       -       -       500       -  
$ 1.25  
May 30, 2011
    4,000       -       -       -       4,000       -       -       4,000       -  
     
Totals
    26,000       -       -       21,500       4,500       -       -       4,500       -  

All warrants outstanding at December 31, 2010 were exercisable. There are no warrants outstanding at September 30, 2011.
 
13.  
Employee benefit plan

The Company has established a retirement and savings plan for the benefit of employees who have at least one hour of service and have attained the age of 21 years.  Under the provisions of the plan, participants may contribute up to 25 percent of their compensation.  The Company has the option of matching a percentage of employee contributions. The Company did not make any contributions to the plan in 2011 and 2010.
 
14.  
Net capital requirement

STS is a member of FINRA and is subject to the SEC Uniform Net Capital Rule 15c3-1.  This Rule requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1 and that equity capital may not be withdrawn or dividends paid if the resulting net capital ratio would exceed 10 to 1.  STS is also subject to the Commodity Futures Trading Commission’s minimum financial requirements which require that it maintains net capital, as defined for securities brokers and dealers, equal to or in excess of the greater of $45,000 or the amount of net capital required by the SEC Rule 15c3-1.  At September 30, 2011, STS’s net capital was approximately $704,000, which was approximately $604,000 in excess of its minimum requirement of $100,000.

15.  
Exemption from Rule 15c3-3

STS is exempt from the SEC Rule 15c3-3 pursuant to the exemptive provision under sub-paragraph (k)(2)(ii) and, therefore, is not required to maintain a "Special Reserve Bank Account for the Exclusive Benefit of Customers."
 
 
24

 

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
16.  
Concentration of risk

Off-balance Sheet Risk

Pursuant to a clearance agreement, STS introduces all of its securities transactions to a clearing broker on a fully-disclosed basis.  All of the customers' money balances and long and short security positions are carried on the books of the clearing broker.  In accordance with the clearance agreement, STS has agreed to indemnify the clearing broker for losses, if any, which the clearing broker may sustain from carrying securities transactions introduced by STS.  In accordance with industry practice and regulatory requirements, STS and the clearing broker monitor collateral on the customers' accounts. In addition, the receivable from clearing broker is pursuant to the clearance agreement.

In the normal course of business, STS’s customer activities involve the execution, settlement and financing of various customer securities transactions.  These activities may expose STS to off-balance sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and STS has to purchase or sell the financial instrument underlying the contract at a loss.

Credit Risk

The Company maintains its cash in financial institutions, which at times, may exceed federally insured limits.  The Company has not experienced any losses in such accounts and believes it is not subject to any significant credit risk on cash.

17.  
Commitments and contingencies

Legal Claims

In the ordinary course of business, incidental to the Company’s operations, the Company retains outside counsel to address claims with which the Company is involved. As of September 30, 2011, the Company was not aware of any legal proceedings, which management has determined to be material to its business operations; however, the Company has been named in the following three actions which it is vigorously defending and which actions, based on management's assessment in coordination with outside litigation counsel, the Company believes to be frivolous and without merit:

Salvatore Frieri, individually and as beneficiary of the Robert J. Escobio and Salvador Frieri-Gallo Trust, Plaintiff v. Robert Escobio, individually and as trustee of the Robert J. Escobio and Salvador Frieri-Gallo Trust, Southern Trust Securities Holding Corporation and Southern Trust Securities, Inc f/k/a Capital Investment Services, Inc., Defendants, in the Circuit Court of the Eleventh Judicial Circuit In and For Miami-Dade County, Florida, Case No. 08-07586 CA 08. The initial complaint in this action was filed on February 12, 2008. An amended complaint was filed on October 14, 2008. The amended complaint attempts to plead various causes of action related to the purchase and sale by the Salvador Frieri-Gallo Trust of STSHC’s stock in a private placement in 2005. The plaintiff seeks rescission of the transaction. Management does not believe there is any merit to plaintiff’s claims and the case is in an early stage.
 
 
25

 

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

17.  
Commitments and contingencies (continued)

In November 2008, the STS initiated legal action against two individuals and their related company. One of the individuals named in the suit is also an individual who has brought legal action against STS, as discussed in the preceding paragraph. STS’s actions seek to recover compensation owed to it for work performed in connection with extensive financial and investment advice work, and services provided in preparation of a bid for Defendants regarding the restructuring, financing, investing, and acquisition of an interest in Aerovias Nacionales de Colombia S.A. Avianca (“Avianca S.A.”) and its subsidiaries (“Avianca”) in connection with Avianca’s bankruptcy reorganization under Chapter 11 of the U.S. Bankruptcy Code. After serving one of the individuals and the related company, STS moved for and obtained defaults against these two Defendants on September 17, 2009.  These two Defendants moved to set aside the defaults against them, which the Court set aside on November 2, 2009. On December 11, 2009, these two Defendants filed a Motion to Dismiss based on alleged failure to join an indispensable party, the ACDAC (Pilot Association).  We do not believe that motion has any merit.  We have served process on the second individual defendant. Based on information that is now available, STS claims the Defendants owe it approximately $8.35 million dollars plus prejudgment interest from on or about January 2005. In the opinion of outside counsel, it is too early to predict the ultimate recovery from Defendants.
 
On December 7, 2010, STS filed a FINRA arbitration against Joseph Meuse, Rosewood Securities, LLC, BP Capital, LLC, and China Values Technology, Inc.  The FINRA filing was amended on January 18, 2011, before FINRA commenced serving the Respondents.  STS seeks to recover compensation it was entitled to receive for acting as placement agent under an agreement involving an offering of securities in a reverse merger into a publicly traded company, Respondent China Valves, which closed on May 18, 2009. The Agreement provided that STS would receive 23,490 warrant shares of China Valves, but it only received 5,739 warrant shares.  Thus, STS has sued the Respondents to recover the additional 17,751 warrant shares that it should have received on May 18, 2009, their valued, lost profits, and lost opportunity costs caused by the failure to timely deliver the shares as required. The Respondents, in response to STS’s pre-filing demands for payment, each blamed the other for the claimed failures to timely deliver the missing warrant shares.
 
On October 14, 2011, STS received a Wells Letter from FINRA recommending disciplinary action concerning alleged excessive marks-up on corporate bonds. In response, STS engaged the services of the outside counsel, which submitted a response to the Wells letter on behalf of STS on November 11, 2011, objecting to the recommended disciplinary action based on the facts of the transactions. STS's corrective actions, lack of disciplinary history and its discretion in the mark-up rules. STS is not able to further quantify the effect of the matter at this time.
 
 
26

 

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

17.  
Commitments and contingencies (continued)

Legal Claims (continued)

On April 7, 2011, the Company entered into a Settlement Agreement (“Agreement”) with BP Capital, LLC, for which Joseph Meuse as managing member (“BP Capital”) and Joseph Muse (“Meuse”) an individual.  The Agreement provides that Meuse will make a payment to STS in the amount of $125,000, in full settlement with Meuse and BP Capital.  The payment will be made by Meuse to STS in five (5) installments, with the first payment of $25,000 due on the date of the signing of the Agreement and four successive payments of $25,000 due thirty (30) days following each prior payment until the full payment has been made.

On or about December 28, 2010, plaintiffs attempted to serve process on STSCH by serving STS, with an Amended Complaint filed in the United States Federal District Court for the Southern District Court of New York.  The trust of the Amended Complaint seems to be that Plaintiffs invested about $12.5 million in a company named Aamaxen Transport Group, Inc. (“AAXT”), pursuant to a Securities Purchase Agreement, dated April 14, 2008, in exchange for AAXT’s Series A Convertible Preferred Stock.  AAXT, a publicly traded company, shares are listed on the OTC Bulletin Board.  AAXT, a Delaware Company, has its principal place of business in Shanghai, China.  AAXT was to ultimately invest in and own a significant beneficial interest in Shanghai Atrip Medical Technology, Co., Ltd. (“SMT”), another Chinese company.  Plaintiffs claim the transaction did not take place as agreed and that the Chinese principals in certain of the entities involved continued to maintain control over some entities, when they should not have and AAXT and other Plaintiffs’ invested funds were ultimately embezzled.  The investors sued those allegedly involved in the embezzlement, the attorneys involved in the transactions, and those who allegedly provided investment banking advice.  The Amended Complaint includes STSHC along with certain entities controlled by Joseph Meuse and used to provide investment, business, and structuring advice under the names Belmont Partners, LLC (“Belmont”) and Rosewood Securities, LLC (“Rosewood”).  The Amended Complaint defines Belmont to include Belmont Partners, Rosewood, or Meuse.  STSHC had nothing to do with this matter.  STS, which was not named a defendant, had a branch office agreement, whereby Rosewood operated as a branch office of STS managed by Meuse during part of the period involved.  As determined so far, STS had no involvement in the transaction and whose only possible connection the parties was through the Rosewood branch office agreement, which was terminated in December 2009. STSHC retained New York counsel to represent it in this case.  Counsel received an order from the Court extending the date for STSHC to respond to the Amended Complaint until March 11, 2011.  STSHC responded to the Amended Complaint as required and filed its motion to dismiss.  On March 18, 2011 the court issued an order requiring that opposing affidavits to motions to dismiss be filed by May 16, 2011.

On November 18, 2011, the United States District Court, Southern District of New York granted the Company’s motion to dismiss the Amended Complaint and also granted the plaintiffs leave to re-plead.

Based on what is known, management does not believe that STSHC had any involvement whatsoever and is not a proper defendant, and it also does not believe STS had any involvement, other than the possibility that the Rosewood branch office having some involvement without STS’s knowledge or participation.

Employment Agreements

On January 4, 2007, the Company entered into employment agreements with several of its key executives.  The agreements are for two to three-year duration and renew automatically for one year unless either party provides notice of non-renewal 30 days prior to the anniversary date of the agreement or the agreement is earlier terminated in accordance with its terms.  Two of the agreements are for two-year duration with total compensation of $247,000 per year. The third agreement is for three-year duration with total compensation of $150,000 per year.
 
 
27

 

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

17.  
Commitments and contingencies (continued)

Employment Agreements (continued)

As part of the agreements, the Company granted 4,500,000 shares of common stock vesting over five years to one of the executives, reduced to 3,500,000 shares pursuant to a stock waiver agreement entered into on November 18, 2009; on August 4, 2010, the executive waived his right, title, and interest to vest the remaining 3,000,000 shares, the balance after 500,000 were vested and issued in December 2009. Also, as part of the employment agreements, the Company  granted 922,389 shares vesting equally over eighteen months to another executive, and 200,000 options to the third executive exercisable on December 31, 2007 and for a period of ten years.

One of the key executive’s agreements provides for a lump-sum payment of $5 million and the repurchase of all shares based on their fair market value, if his employment is terminated as a result of a change of control.  Should the executive’s employment be terminated for any other reason, the Company would have to pay him $2 million and repurchase all of his shares based on their fair market value.  Lastly, another agreement provides for a lump-sum payment of $1 million to one of the executives if his employment is terminated due to change of control.

18.  
Investment in AR Growth Finance Corp. and Nexo Emprendimientos S.A.

During the first quarter of 2007, the Company entered into an agreement to work in concert with two Argentine companies, Inversora Castellanos, S.A. (“ICSA”), a company comprised of executives from SanCor, the largest dairy cooperative in Argentina, and Administración de Carteras S.A. (“ACSA”), whereas we purchased a controlling interest in AR Growth Finance Corp. (“AR Growth”). The Company, together with ICSA and ACSA, intend to implement an acquisition plan to acquire finance related companies in Argentina through AR Growth. Presently AR Growth has no operations and minimal assets and liabilities. Currently the Company owns 869,506 shares of AR Growth, which is approximately 9.94% of the total outstanding shares.

Robert Escobio is the CEO and a director of STSHC and also the President and a director of AR Growth, and Kevin Fitzgerald is the President and a director of STSHC and also the CEO and a director of AR Growth.

During 2007 and 2008 the Company invested $2,500,000 in Series A preferred stock of AR Growth. These funds were used by AR Growth to purchase interests in ProBenefit, S.A. ("ProBenefit"), an Argentine financial services holding company. As a result of the changes in the operations of ProBenefit, the Company recorded an other-than-temporary impairment charge of $1,250,000 against its preferred stock investment in AR Growth of $2,500,000 in December 2008.

On August 4, 2009, the Company restructured its investment in AR Growth. In summary, the Company exchanged its $2.5 million Preferred Stock investment in AR Growth for a 22% (subsequently reduced to 17.3%) common stock interest in Nexo Emprendimientos S.A. (“Nexo”). Nexo is a fast growing consumer credit card company based in Sunchales, Argentina.

ProBenefit and the Company are the major shareholders of Nexo. As part of the terms of the restructuring, the Company has a put option on the shares of Nexo it now owns whereby ProBenefit will be required to buy back from the Company its Nexo shares at the request of the Company at any time either (i) commencing one year from the date of the agreement and for a period of two years thereafter; or (ii) upon a change of control of Nexo by any person other than the Company. The payment under the put option will commence in September 2012 and continue quarterly for 10 quarters and provides for interest at 8% per annum. Should the Company exercise the put option for 100% of its Nexo shares, ProBenefit will be obligated to pay the Company $2.5 million plus accrued interest.
 
 
28

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

18.  
Investment in AR Growth Finance Corp. and Nexo Emprendimientos S.A. (continued)

On May 26, 2011, the Company entered into a Stock Purchase Agreement (“Agreement’) with Rentier Fideicomiso Financiero (“Rentier”) to purchase an additional 12.2% equity interest in Nexo pursuant to the terms of Letter of Intent (“LOI”) dated April 18, 2011. Rentier had acquired its Nexo shares from ProBenefit in 2011. Under the terms of the Agreement, the Company purchased a total of 2,763,246 shares of the voting common stock of Nexo in consideration of a $1.0 million cash payment and the issuance by the Company to Rentier of 1,864,857 newly issued restricted shares of the common stock of the Company, which represents 9.72% of its common shares currently outstanding.  The 1,864,857 shares were valued at $0.23 per share.  After the acquisition, the Company now owns 29.5% of Nexo.

The financing for the acquisition of the 2,763,246 shares was obtained through a private placement of 2,979,591 newly issued restricted shares of the Company, which generated $1,042,857 in cash proceeds. Rentier invested $42,857 in the private placement.

As a result of the acquisition of the additional 12.2% interest in Nexo, thereby increasing its holdings to 29.5%, the Company changed its method of accounting for this investment from the cost method to the equity method. Under the cost method, the investment is recorded at cost and dividends are treated as income when received.  Under the equity method, the Company records its proportionate share of the earnings or losses of Nexo.  The effect of the change was to increase net income for the three and nine month periods ended September 30, 2010 by $3,165 and $10,167, respectively. Due to the retroactive application of the equity method of accounting, a beginning balance adjustment was made to accumulated deficit for $19,363 for the Nexo investment.
 
The following presents statements of income summary for Nexo Emprendimientos S.A.. Such summary information has been provided herein based upon the individual significance of the unconsolidated equity investments to the consolidated financial information of the Company.
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
 2011
   
 2010
   
 2011
   
 2010
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Revenues
 
$
388,238
   
$
1,076,624
   
$
2,348,192
   
$
4,251,662
 
Cost of services
   
1,727,832
     
1,595,773
     
4,713,076
     
4,375,175
 
Operating income (loss)
   
(1,339,594
)
   
(519,149
)
   
(2,364,884
)
   
(123,513
)
Net income (loss)
   
(872,935
)
   
(332,953
)
   
(1,530,870
)
   
(199,988
)
 
   
For the Years Ended
December 31,
 
   
 2010
   
 2009
 
   
(unaudited)
   
(unaudited)
 
Revenues
 
$
5,328,948
   
$
2,631,247
 
Cost of services
   
5,970,948
     
2,303,372
 
Operating income (loss)
   
(642,663
)
   
327,876
 
Net income (loss)
   
(532,941
)
   
110,192
 
 
 
29

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain “forward-looking statements” including statements about our beliefs and expectations. There are many risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. All forward-looking statements are based on information available to us on the date of this filing, and we assume no obligation to update such statements. The following discussion should be read in conjunction with the consolidated financial statements and the related notes included in this Quarterly Report on Form 10-Q.

Overview
 
We were formed as a Florida corporation on January 14, 1998. We are the holding company for Southern Trust Securities, Inc. (“STS”), which is registered as an introducing broker-dealer with the United States Securities Exchange Commission (“SEC”) and is a member of, or subject to regulations of, the SEC, the Financial Industry Regulatory Authority (“FINRA”), the National Futures Association (“NFA”), the Commodities and Futures Trading Commission (“CFTC”), Securities Investor Protection Corporation (“SIPC”) and the Municipal Securities Rulemaking Board (“MSRB”). We are also the holding company: (i) for Southern Trust Securities Asset Management, Inc. (“STSAM”) a fee-based investment advisory service registered with the State of Florida, which offers its services to retail customers and (ii) Southern Trust Metals, a trader of primarily gold, silver and palladium.
 
Our principal business is the business of STS. We offer clients access to all major domestic and international securities and options exchanges, as well as trading in fixed income products, corporate, government, agencies, municipals, and emerging market debt.  We also offer fixed and variable annuities and life insurance. We currently offer hundreds of domestic and international mutual funds, as well as retirement plans. We manage portfolios for individuals, pension funds, retirement plans, foundations, trusts and corporations. Our corporate services facilitate restricted stock dispositions and employee stock options exercises.  Our offshore services give clients access to foreign trusts and corporations, which they can use to structure their financial planning.

We provide traditional as well as innovative securities transaction structures.  Our focus is on merger and acquisition services, private placements convertible into publicly-traded shares, and private placements bridging to public offerings through reverse mergers into publicly-traded shell corporations.

Southern Trust Metals, Inc. (STM) was formed to capitalize on the investor interest in the trading of precious metals such as gold, silver, platinum, and palladium.    STM is a separate subsidiary of STSHC and separately managed.  STM will work with its own clients to generate new business through the innovative trading of metals.

 
30

 
 
Critical Accounting Policies and Estimates
 
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to the valuation of securities owned and deferred tax assets. We base 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 could differ from those estimates. We believe the that the significant accounting policies summarized in footnote three of the unaudited financial statements filed as part of this quarterly report are critical accounting policies, which affect our judgments and estimates used in the preparation of our consolidated financial statements.
 
Results of Operations for the Three Months Ended September 30, 2011 and 2010

The following table sets forth a summary of financial highlights at and for the three months ended September 30:
 
   
2011
   
2010
   
% Change
   
Change
 
Statement of Operations Data:
 
(unaudited)
   
(unaudited)
             
    Revenues
    763,355       826,988       8 %     (63,633 )
    Expenses
    851,925       841,319       1 %     10,605  
Net loss (income) applicable to common stock holders
    (336,487 )     (75,097 )     (348 %)     261,389  
    Loss per common share
    (0.02 )     (0.01 )                

For the three months ended September 30, 2011, we experienced a net loss applicable to common stockholders of $336,487 as compared to a net loss of $75,097 for the three months ended September 30, 2010. The reason for the increase in the net loss is primarily attributable to increased expenses related to the payment of commissions, clearing fees and professional fees.
 
 
31

 
 
Revenues
 
Our commissions for the three months ended September 30, 2011, decreased to $281,577 from $628,310 for the three months ended September 30, 2010. The decrease in commissions is mainly attributable to a decrease in both the volume of transactions and number of customers trading in fixed income products.
 
Our trading income for the three months ended September 30, 2011 increased approximately $266,295 from $161,415 recognized for the three months ended September 30, 2010 to $427,710 for the three months ended September 30, 2011. We were able to acquire new customers who were interested in investing in fixed income products and we have recognized income from our medals trading subsidiary.  These results are not indicative of how we will do for the rest of 2011, and thus our ability to increase our trading revenues will depend mostly on the future economic conditions and our ability to generate more customer accounts.
 
We had no material investment banking revenue in the first quarter of either 2011 or 2010. Investment banking fees are generally determined as a percentage of the size of the deal or contract and are recognized when the transaction is done and closed.  Market conditions for private securities transactions have been weak.  We remain committed to this aspect of our business as a full service boutique broker/dealer.
 
Managed account fees increased $3,320 to $19,111 for the three months ended September 30, 2011 from $15,791 for the three months ended September 30, 2010.  The main reason for the increase is related to an increase in activity in these managed accounts.
 
Our interest and dividend income decreased $8,605 to $12,069 for the three months ended September 30, 2011 when compared to $20,674 for the same period in 2010. This decrease is mainly attributable to a decreased interest rate environment.
 
Other miscellaneous income increased $22,091 to $22,889 for the three months ended September 30, 2011 from $798 for the three months ended September 30, 2010. This reflects an increase in other fees earned by our broker dealer and a settlement of $53,000 received during the nine months ended September 30, 2011.
 
 
32

 
 
Expenses
 
Commissions and clearing fees expenses incurred during the three months ended September 30, 2011 increased $25,546 to $443,106 as compared to $417,560 the three months ended September 30, 2010. Commissions and clearing fees expenses increased due to the increase in revenues, which included revenues from our precious metals trading company that began trading operations during the fourth quarter of 2009, and higher clearing fees due to higher transactional volumes. Commissions paid to registered representatives represent 51% and 50% of total compensable revenues for the three months ended September 30, 2011 and 2010, respectively.  The percentage of commissions paid to the registered representatives is generally aligned to commission compensation paid throughout the brokerage industry. Clearing fees paid for the three months ended September 30, 2011 and 2010 were $13,984 and $48,564, respectively.
 
Total employee compensation and benefits increased by $6,609 to $178,331 for the three months ended September 30, 2011 as compared to $171,722 for the three months ended September 30, 2010, primarily due to the an increase in equity compensation amortization.  Employee compensation and benefits expenses include the amortization of equity compensation expenses related to options given to certain key employees. Based on stock options awards that vested during the three month periods ended September 30, 2011 and 2010, we recorded approximately $46,007 and $48,600, respectively, as additional compensation expense. The vesting period for these equity compensation awards range.
 
As part of the employment agreements entered with several of our key executives on January 4, 2007, one executive was granted 4,500,000 shares of common stock vesting equally on a monthly basis over three year but was later amended in June 2007 to vest over five years, prospectively. In November 2009, the executive entered into a Stock Waiver Agreement with respect to shares that would have otherwise vested in December 2009 through August 2010, giving the executive the right to waive his right to such shares and have such shares be thus canceled.  The executive waived his right to have 375,000 shares vest during the three months ended March 31, 2010. In August 2010, the executive waived his right to all additional restricted shares. In October 2010, he was granted 3,350,000 options for shares of common stock, none of which vest in the first year of grant.
 
Occupancy costs decreased by $2,431 to $14,683 for the three months ended September 30, 2011, up from $17,114 for the three months ended September 30, 2010. Major expenses included under occupancy costs are property taxes, utilities and common repair and maintenance of our office building.
 
Communications and market data expenses represent mostly charges on our terminals used to monitor and analyze real-time financial market data movements, telephone expenses, licenses and registration expenses associated with our broker-dealer operations. Communications and market data expenses decreased $3,116 to $26,101 for the three months ended September 30, 2011, from $29,217 incurred in the three months ended September 30, 2010.
 
Professional fees decreased $28,572 for the three months ended September 30, 2011 to $81,193 as compared to $109,765 the three months ended September 30, 2010, mainly due to legal expenses incurred related to the settlement of legal matters incidental to our retail brokerage services business.  As of September 30, 2011, there are no material legal disputes that may have an adverse impact on our financial statements.
 
Our travel and entertainment expenses increased to $26,737 for the three months ended September 30, 2011 as compared to $20,738 for the three months ended September 30, 2010.
 
Our other operational expenses include miscellaneous expenses and insurance premiums. Other operational expenses increased $8,494 to $52,424 for the three months ended September 30, 2011 from $43,930 incurred for the same time period in 2010. The decrease is mostly attributable to expenses related to maintenance and insurance premiums.
 
We did not pay any dividends to our preferred stockholders for the three months ended September 30, 2011 or 2010 due to a suspension in the dividend payment on the non-cumulative Series C preferred stock outstanding.
 
 
33

 
 
Results of Operations for the Nine Months Ended September 30, 2011 and 2010

The following table sets forth a summary of financial highlights at and for the nine months ended September 30:
 
   
2011
   
2010
   
% Change
   
Change
 
Statement of Operations Data:
 
(unaudited)
   
(unaudited)
             
    Revenues
  $ 2,358,292     $ 2,190,369       8 %   $ 167,923  
    Expenses
  $ 2,609,968     $ 2,227,480       17 %   $ 382,488  
Net loss (income) applicable to common stock holders
  $ ( 685,879 )   $ ( 81,876 )     737 %   $ 604,003  
    Loss per common share
    (0.04 )     (0.01 )                

For the nine months ended September 30, 2011, we experienced a net loss to common stockholders of $685,879 as compared to a net loss to common stockholders of $81,876 for the nine months ended September 31, 2010. The reason for the net loss is primarily attributable to increased expenses related to the payment of commissions, clearing fees and professional fees.
 
Revenues
 
Our commissions for the nine months ended September 30, 2011, decreased to $839,766 from $1,351,722 for the nine months ended September 30, 2010. The decrease in commissions is mainly attributable to a decrease in both the volume of transactions and number of customers trading in fixed income products.
 
Our trading income for the nine months ended September 30, 2011 increased approximately $633,690 from $691,030 recognized for the nine months ended September 30, 2010 to $1,324,720 for the comparable period in 2011. We were able to acquire new customers who were interested in investing in fixed income products and we have recognized income from our medals trading subsidiary.  These results are not indicative of how we will do for the rest of 2011, and thus our ability to increase our trading revenues will depend mostly on the future economic conditions and our ability to generate more customer accounts.
 
We had no material investment banking revenue in the third quarter of either 2011 or 2010. Investment banking fees are generally determined as a percentage of the size of the deal or contract and are recognized when the transaction is done and closed.  Market conditions for private securities transactions have been weak.  We remain committed to this aspect of our business as a full service boutique broker/dealer.
 
Managed account fees increased $11,094 to $57,853 for the nine months ended September 30, 2011 from $46,759 for the nine months ended September 30, 2010.  The main reason for the increase is related to an increase in activity in these managed accounts.
 
Our interest and dividend income decreased $31,790 to $34,361 for the nine months ended September 30, 2011 when compared to $66,151 for the same period in 2010.  This decrease is mainly attributable to a decrease in our cash equivalents and investments.
 
Other miscellaneous income increased $63,182 to $97,889 for the nine months ended September 30, 2011 from $34,707 for the nine months ended September 30, 2010. This increase is primarily attributable to the receipt of $98,000 in funds from a legal settlement with Joseph Muse and others during the nine months ended September 30, 2011 (See Note 17.  Commitments and contingencies).
 
 
34

 
 
Expenses
 
Commissions and clearing fees expenses incurred during the nine months ended September 30, 2011 increased $210,601 to $1,297,077 as compared to $1,086,476 for the nine months ended September 30, 2010. Commissions and clearing fees expenses increased due to the increase in revenues, which included revenues from our precious metals trading company that began trading operations during the fourth quarter of 2009, and higher clearing fees due to higher transactional volumes. Commissions paid to registered representatives represent 54% and 49% of total compensable revenues for the nine months ended September 30, 2011 and 2010, respectively.  The percentage of commissions paid to the registered representatives is generally aligned to commission compensation paid throughout the brokerage industry. Clearing fees paid for the nine months ended September, 30, 2011 and 2010 were $8,638 and $87,664, respectively.
 
Total employee compensation and benefits increased by $37,238 to $551,903 for the nine months ended September 30, 2011 as compared to $514,665 for the nine months ended September 30, 2010, primarily due to the an increase in equity compensation amortization. Employee compensation and benefits expenses include the amortization of equity compensation expenses related to options given to certain key employees. Based on stock options awards that vested during the nine month periods ended September 30, 2011 and 2010, we recorded approximately $142,000 and $146,000, respectively, as additional compensation expense. The vesting period for these equity compensation awards range.
 
As part of the employment agreements entered with several of our key executives on January 4, 2007, one executive was granted 4,500,000 shares of common stock vesting equally on a monthly basis over three year but was later amended in June 2007 to vest over five years, prospectively. In November 2009, the executive entered into a Stock Waiver Agreement with respect to shares that would have otherwise vested in December 2009 through August 2010, giving the executive the right to waive his right to such shares and have such shares be thus canceled.  The executive waived his right to have 375,000 shares vest during the six months ended March 31, 2010. In August 2010, the executive waived his right to all additional restricted shares. In October 2010, he was granted 3,350,000 options for shares of common stock, none of which vest in the first year of grant.
 
Occupancy costs increased by $1,746 to $47,992 for the nine months ended September 30, 2011, up from $46,246 for the nine months ended September 30, 2010. Major expenses included under occupancy costs are property taxes, utilities and common repair and maintenance of our office building.
 
Communications and market data expenses represent mostly charges on our terminals used to monitor and analyze real-time financial market data movements, telephone expenses, licenses and registration expenses associated with our broker-dealer operations. Communications and market data expenses increased $11,931 to $106,360 for the nine months ended September 30, 2011, from $94,429 incurred in the nine months ended September 30, 2010.
 
Professional fees increased $52,133 for the nine months ended September 30, 2011 to $305,802 as compared to $253,669 the nine months ended September 30, 2010, mainly due to legal expenses incurred related to the settlement of legal matters incidental to our retail brokerage services business.  As of September 30, 2011, there are no material legal disputes that may have an adverse impact on our financial statements.
 
Our travel and entertainment expenses increased $34,165 to $58,276 for the nine months ended September 30, 2011 as compared to $24,111 for the nine months ended September 30, 2010.
 
Our other operational expenses include miscellaneous expenses and insurance premiums. Other operational expenses increased $48,128 to $153,657 for the nine months ended September 30, 2011 from $105,529 incurred for the same time period in 2010. The decrease of is mostly attributable to expenses related to maintenance and insurance premiums.
 
We incurred $52,000 in paying a dividend on our non-cumulative Series C preferred stock outstanding during the nine months ended September 30, 2011. We did not pay any dividends to our preferred stockholders for the nine months ended September 30, 2010 due to a suspension in the dividend payment on the non-cumulative Series C preferred stock outstanding.
 
 
35

 
 
Liquidity and Capital Resources
 
As of September 30, 2011, liquid assets consisted primarily of cash and cash equivalents of approximately $516,851 and securities owned of approximately $941,673 for a total of $1,458,524, which is $205,485 higher than the approximately $1,250,039 in liquid assets as of December 31, 2010. Historically, we have financed our business primarily through cash generated by our brokerage operations, as well as proceeds from our private placement of preferred stock and issuance of common stock.
 
Cash and cash equivalents increased approximately $234,973 to $516,851 at September 30, 2011 as compared to $281,878 at December 31, 2010, which results from the following:
 
Net loss before noncontrolling interest   $ (625,963)  
Adjustments to reconcile net loss before controlling interest to net cash provided by operating activities     563,697  
Changes in operating assets and liabilities     350,264  
Net cash provided by operating activities     287,998  
Investing activities     (1,001,968 )
Financing activities     946,164  
Effect of foreign exchange rate changes on cash and cash equivalents     2,779  
Net increase in cash and cash equivalents   $ 234,973  
 
Cash provided by our operating activities for the nine months ended September 30, 2011 was approximately $287,998, comprised of a net loss before noncontrolling interest of  $(625,963), noncash reconciling adjustments of $563,697, and changes in operating assets and liabilities of $350,264. Noncash reconciling adjustments include stock-based compensation charges of $141,955, depreciation and amortization of $47,453, and loss in equity of affiliate of $374,288.
 
The $350,264 change in operating assets and liabilities is primarily attributable to an increase of $3,395,579 in payable to customers, partially offset by a $3,072,483 increase in due from clearing broker. All of the $3,395,579 increase in payable to customers and $3,048,508 (99%) of the $3,072,483 increase due from clearing brokers is attributable to payables associated with our metals trading subsidiary and receivables due from clearing brokers processing transactions on behalf of our metals trading subsidiary, respectively. The increases in payable to customers and due from clearing broker is the direct result of the growth in trading activity, customers, and total assets under management as reported by our subsidiary company, STM, formed in the fourth quarter of 2009 to capitalize on investor interest in trading precious metals such as gold, silver, platinum, and palladium.  Due to the ongoing volatility in the traditional equity markets, many investors have moved into the trading of precious metals, which has driven our growth since the fourth quarter of 2009.  Over the seven quarters ended September 30, 2011, we have averaged a quarter over quarter increase of approximately $43,000 (average growth of 61 %.). For the nine months ended September 30, 2011 and 2010, we reported gross trading revenue of approximately $759,000 and $339,000, respectively, an increase of approximately $420,000, or 124%. Since January 2010, assets under management have grown significantly, as a result of the growth in trading volume and in customer accounts managed by STM, which has resulted in the large increase in amounts payable to customers and due from clearing broker.
 
Cash used in investing activities was $1,001,968, one million of which is related to our purchase of additional equity interests in Nexo Emprendimientos, S.A. Cash provided from or used in our financing activities was approximately $946,164, of which $1,042,857, comes from the sale of our common stock. We made a payment of $52,000 in interest on our non-cumulative Series C preferred stock and principal payments of $44,693 on notes payable and capital lease obligations.
 
STS, as a broker-dealer, is subject to Rule15c3-1 of the Securities Exchange Act of 1934, which specifies uniform minimum net capital requirements, as defined, for their registrants. As of September 30, 2011, STS had regulatory net capital of approximately $704,438, which exceeded the required amount by approximately $604,226.
 
In response to the current economic environment, we have implemented changes to our capital management practices to ensure we will be able to continue to meet our obligations.  Specifically certain employee salaries and payout percentages were reduced in July 2009 and continue to be reduced to match current business levels and recent employee resignations will not be immediately filled. We have also undertaken the task of reviewing the other general expenses incurred with the objective cost reductions.
 
Since we have primarily financed our operations through cash flows generated by our brokerage operations and proceeds from private placements of preferred stock, we are currently exploring an additional offering of preferred stock. There can be no assurance that we will be able to complete this offering on terms acceptable to us, if at all.
 
The following is a table summarizing our significant commitments as of September, 2011, consisting of debt payments related to our notes payable:
 
Year ending December 31,
 
Total
 
       
2011
  $ 15,000  
2012
    61,000  
2013
    65,000  
2014
    70,000  
2015
    76,000  
Thereafter
    428,000  
Total commitments
  $ 715,000  
 
Off-Balance Sheet Arrangements 
 
We were not a party to any off-balance sheet arrangements during the period ended September 30, 2011, except for the one identified in “Clearing Arrangements” above.  In particular, we do not have any interest in so-called limited purpose entities, which include special purpose entities and structured finance entities.

 
36

 
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.
 
ITEM 4. CONTROLS AND PROCEDURES.
 
As of the end of the period covered by this quarterly report on Form 10-Q, Robert Escobio who is both our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures. Based upon that evaluation,
he identified a material weakness in its disclosure controls namely, that the Company lacked appropriate resources in the accounting and finance department, including a lack of personnel that are appropriately qualified in the areas of U.S. GAAP and SEC reporting. While this material weakness did not have an effect on our reported results or any related disclosures, it nevertheless constitutes a deficiency in our controls and led our Chief Executive Officer and Chief Financial Officer to conclude that our disclosure controls and procedures continue to not be effective at the reasonable assurance level as of September 30, 2011. Despite this deficiency, management believes that there are no material inaccuracies or omissions of fact in this quarterly report. Due to our small size and limited resources it is difficult for us to attract qualified personnel. As soon as finances allow, we will add resources to our corporate and finance department to remediate this deficiency. The material weakness will not be considered remediated until the applicable remedial procedures are tested and management has concluded that the procedures are operating effectively. Based on its evaluation, the Company identified a weakness in its disclosure controls namely, that the Company lacked appropriate resources in the accounting and finance department, including a lack of personnel that are appropriately qualified in the areas of U.S. GAAP and SEC reporting.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

In addition, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15 or Rule 15d-15 under the Securities Act of 1934, as amended) during the quarter ended September, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
37

 
 
PART II

ITEM 1. LEGAL PROCEEDINGS.
 
In the ordinary course of business, incidental to our operations, we retain outside counsel to address claims with which we are involved. As of September 30, 2011, we are not aware of any legal proceedings, which management has determined to be material to our business operations; however, we have been named in the following three actions which we are vigorously defending and which actions, based on management's assessment in coordination with outside litigation counsel, we believe to be without merit:

Salvatore Frieri, individually and as beneficiary of the Robert J. Escobio and Salvador Frieri-Gallo Trust, Plaintiff v. Robert Escobio, individually and as trustee of the Robert J. Escobio and Salvador Frieri-Gallo Trust, Southern Trust Securities Holding Corporation and Capital Investment Services, Inc., Defendants”, in the Circuit Court of the Eleventh Judicial Circuit In and For Miami-Dade County, Florida, Case No. 08-07586 CA 08. The initial complaint in this action was filed on February 12, 2008. An amended complaint was filed on October 14, 2008. The amended complaint attempts to plead various causes of action related to the purchase and sale by the Salvador Frieri-Gallo Trust of our stock in a private placement in 2005. The plaintiff seeks rescission of the transaction. We do not believe there is any merit to plaintiff’s claims and the case is in an early stage. Based on events to date, management believes the case may likely be dismissed just as a prior case based on the same facts brought by the plaintiff several years ago.
 
SOUTHERN TRUST SECURITIES, INC., f/k/a CAPITAL INVESTMENT SERVICES, INC., a Florida corporation v. MARKWOOD INVESTMENTS, LTD., a British Virgin Islands company, SALVADOR VICENTE FRIERI-GALLO and ARTURO RAFAEL FRIERI-GALLO in the Circuit Court of Miami-Dade County, Florida, Case No. 08-72353 CA 15.  In November 2008, STS initiated this legal action seeking to recover compensation owed to it for work performed in connection with extensive financial and investment advice work, and services provided in preparation of a bid for Defendants regarding the restructuring, financing, investing, and acquisition of an interest in Aerovias Nacionales de Colombia S.A. Avianca (“Avianca S.A.”) and its subsidiaries (“Avianca”) in connection with Avianca’s bankruptcy reorganization under Chapter 11 of the U.S. Bankruptcy Code. After serving one of the individuals and the related company, STS moved for and obtained defaults against these two Defendants on September 17, 2009.  These two Defendants moved to set aside the defaults against them, which the Court set aside on November 2, 2009. On December 11, 2009, these two Defendants filed a Motion to Dismiss based on alleged failure to join an indispensable party, the ACDAC (Pilot Association).  We do not believe that motion has any merit.  We have now served process on the second individual Defendant. Based on information that is now available, STS claims the Defendants owe it approximately $8.35 million dollars plus prejudgment interest from on or about January 2005. In the opinion of outside counsel, it is too early to predict the ultimate recovery from Defendants.
 
 
38

 
 
On December 7, 2010, STS filed a FINRA arbitration against Joseph Meuse, Rosewood Securities, LLC, BP Capital, LLC, and China Values Technology, Inc.  The FINRA filing was amended on January 18, 2011, before FINRA commenced serving the Respondents.  STS seeks to recover compensation it was entitled to receive for acting as placement agent under an agreement involving an offering of securities in a reverse merger into a publicly traded company, Respondent China Valves, which closed on May 18, 2009. The Agreement provided that STS would receive 23,490 warrant shares of China Valves, but it only received 5,739 warrant shares.  Thus, STS has sued the Respondents to recover the additional 17,751 warrant shares that it should have received on May 18, 2009, their valued, lost profits, and lost opportunity costs caused by the failure to timely deliver the shares as required. The Respondents, in response to STS’s pre-filing demands for payment, each blamed the other for the claimed failures to timely deliver the missing warrant shares.

On April 7, 2011, the Company entered into a Settlement Agreement (“Agreement”) with BP Capital, LLC, for which Joseph Meuse as managing member (“BP Capital”) and Joseph Muse (“Meuse”) an individual.  The Agreement provides that Meuse will make a payment to STS in the amount of $125,000, in full settlement with Meuse and BP Capital.  The payment will be made by Meuse to STS in five (5) installments, with the first payment of $25,000 due on the date of the signing of the Agreement and four successive payments of $25,000 due thirty (30) days following each prior payment until the full payment has been made.

On or about December 28, 2010, plaintiffs attempted to serve process on STSCH by serving STS, with an Amended Complaint filed in the United States Federal District Court for the Southern District Court of New York.  The trust of the Amended Complaint seems to be that Plaintiffs invested about $12.5 million in a company named Aamaxen Transport Group, Inc. (“AAXT”), pursuant to a Securities Purchase Agreement, dated April 14, 2008, in exchange for AAXT’s Series A Convertible Preferred Stock.  AAXT, a publicly traded company, shares are listed on the OTC Bulletin Board.  AAXT, a Delaware Company, has its principal place of business in Shanghai, China.  AAXT was to ultimately invest in and own a significant beneficial interest in Shanghai Atrip Medical Technology, Co., Ltd. (“SMT”), another Chinese company.  Plaintiffs claim the transaction did not take place as agreed and that the Chinese principals in certain of the entities involved continued to maintain control over some entities, when they should not have and AAXT and other Plaintiffs’ invested funds were ultimately embezzled.  The investors sued those allegedly involved in the embezzlement, the attorneys involved in the transactions, and those who allegedly provided investment banking advice.  The Amended Complaint includes STSHC along with certain entities controlled by Joseph Meuse and used to provide investment, business, and structuring advice under the names Belmont Partners, LLC (“Belmont”) and Rosewood Securities, LLC (“Rosewood”).  The Amended Complaint defines Belmont to include Belmont Partners, Rosewood, or Meuse.  STSHC had nothing to do with this matter.  STS, which was not named a defendant, had a branch office agreement, whereby Rosewood operated as a branch office of STS managed by Meuse during part of the period involved.  As determined so far, STS had no involvement in the transaction and whose only possible connection the parties was through the Rosewood branch office agreement, which was terminated in December 2009. STSHC retained New York counsel to represent it in this case.  Counsel received an order from the Court extending the date for STSHC to respond to the Amended Complaint until March 11, 2011.  STSHC responded to the Amended Complaint as required and filed its motion to dismiss.  On March 18, 2011 the court issued an order requiring that opposing affidavits to motions to dismiss be filed by May 16, 2011.

On November 18, 2011, the United States District Court, Southern District of New York granted the Company’s motion to dismiss the Amended Complaint and also granted the plaintiffs leave to re-plead.

Based on what is known, management does not believe that STSHC had any involvement whatsoever and is not a proper defendant, and it also does not believe STS had any involvement, other than the possibility that the Rosewood branch office having some involvement without STS’s knowledge or participation.

 
39

 
 
ITEM 1A.  RISK FACTORS
 
Not applicable.

ITEM 2.  UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. [REMOVED AND RESERVED]

ITEM 5. OTHER INFORMATION

None.
 
ITEM 6.  EXHIBITS
 
31.1   Rule 13a-14(a) Certification of Chief Executive Officer and Chief Financial Officer
     
32.1   Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
     
 31.2   Rule 13a-14(a) Certification of Chief Executive Officer and Chief Financial Officer to Amendment No. 1
     
 32.2   Section 1350 Certification of Chief Executive Officer and Chief Financial Officer to Amendment No. 1
     
99.1   Signature Page to Initial Filing
 
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this Amendment No. 1 to this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  SOUTHERN TRUST SECURITIES HOLDING CORP.  
       
January 23, 2012
By:
/s/ Robert Escobio  
    Robert Escobio   
    Chief Executive Officer and Chief Financial Officer  
    (Principal Executive and Accounting Officer)  
 
 
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