UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





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, 2010





o           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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

33134(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

(Zip Code)




145 Almeria Ave., Coral Gables, Florida


(Address of principal executive offices)




(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  ̈
Accelerated filer  ̈Non-accelerated filer  ̈
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 14,333,378 shares of common stock issued and outstanding on November 12, 2010.





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.





INDEX




PART IItem 1.
Consolidated Financial Statements


3Consolidated Statements of Financial Condition as of September 30, 2010 and December 31, 2009


3Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009


4Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss)


5Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009


6Notes to Consolidated Interim Financial Statements


7Item 2.
Management’s Discussion and Analysis


26Item 3.
Quantitative and Qualitative Disclosures About Market Risk


37Item 4.
Controls and Procedures


37PART IIItem 1.
Legal Proceedings


38Item 1A.
Risk Factors


39Item 2.
Unregistered Sale of Equity Securities and Use of Proceeds


39Item 3.
Default Upon Senior Securities


39Item 4.
Submission of Matters to a Vote


39Item 5.
Other Information


39Item 6.
Exhibits


39Signature Page


40







PART I - FINANCIAL INFORMATION


Item 1. Financial Statements





SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
  September 30,


December 31,2010


2009ASSETS

(Unaudited)Cash and cash equivalents

$
1,045,713


$
130,631Securities owned at fair value, including restricted securitiesof $400,000 as of December 31, 2009


214,214



1,288,654Due from clearing broker


751,379



193,809Commissions receivable


7,464



13,947Investment in AR Growth


52,170



52,170Investment in Nexo Emprendimientos, S.A. (see Note 14)


1,250,000



1,250,000Other assets






13,239Property and equipment,net


1,628,938



1,682,471Total assets

$
4,949,878


$
4,624,921LIABILITIES AND STOCKHOLDERS' EQUITYLiabilitiesAccounts payable and accrued expenses

$
256,059


$
251,425Payable to customers


758,039



177,810Obligations under capital lease


6,834



9,609Notes payable


770,709



1,126,557Total liabilities


1,791,641



1,565,401Commitments and contingenciesStockholders' equitySeries C 8% convertible preferred stock, no par value, 2.5 million shares authorized,520,000 issued and outstanding


5,200,000



5,200,000Common stock, no par value, 100 million shares authorized; 14,333,378 sharesissued and outstanding at September 30, 2010 and December 31, 2009, respectively


9,002,986



9,002,986Additional paid-in-capital


1,503,439



1,357,612Accumulated deficit


(12,655,594
)


(12,608,316
)Accumulated other comprehensive income (loss)


(7,081
)


2,918Total Southern Trust Securities Holding Corp. and Subsidiaries stockholders' equity


3,043,750



2,955,200Noncontrolling interest


114,487



104,320Total stockholders' equity


3,158,237



3,059,520Total Liabilities and Stockholders' Equity

$
4,949,878


$
4,624,921









3


SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSThree Months


Three Months


Nine Months


Nine MonthsEnded


Ended


Ended


EndedSeptember 30,


September 30,


September 30,


September 30,2010


2009


2010


2009(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)RevenuesCommissions

$
161,415


$
138,585


$
691,030


$
399,467Trading income


628,310



104,363



1,351,722



430,630Investment banking fees






-



-



47,770Managed account fees


15,791



19,843



46,759



60,399Interest and dividend income


20,674



6,415



66,151



25,976Other miscellaneous income


798



3,457



34,707



6,879826,988



272,663



2,190,369



971,121ExpensesCommissions and clearing fees


417,560



101,733



1,086,476



389,721Employee compensation and benefits


171,722



305,280



514,665



1,185,149Occupancy


17,114



14,520



46,246



49,933Communications and market data


29,217



28,602



94,429



85,386Professional fees


109,765



86,092



253,669



542,196Travel and entertainment


20,738



27,051



24,111



133,123Depreciation


16,037



18,892



53,533



56,646Interest expense


15,236



22,169



48,822



65,777Other operational expenses


43,930



61,168



105,529



162,086841,319



665,507



2,227,480



2,670,017Net loss before noncontrolling interest


(14,331
)


(392,844
)


(37,111
)


(1,698,896
)Net income (loss) attributable to noncontrolling interest


3,165



-



10,167



(3,961
)Net loss attributable to Southern Trust Securities Holding Corp.and Subsidiares


(17,496
)


(392,844
)


(47,278
)


(1,702,857
)Preferred stock dividends


-



(104,000
)


-



(312,000
)Net loss applicable to common stockholders

$
(17,496
)

$
(496,844
)

$
(47,278
)

$
(2,014,857
)Weighted average common shares outstandingBasic and diluted


14,333,378



13,833,378



14,333,378



13,833,378Income (loss) per common shareBasic and diluted

$
(0.00
)

$
(0.04
)

$
(0.00
)

$
(0.15
)


4
 
 SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)AccumulatedAdditional





Other


TotalPreferred Stock


Common Stock


Paid-In


Accumulated


Comprehensive


Stockholders'


Noncontrolling


TotalShares


Amount


Shares


Amount


Capital


Deficit


Income (loss)


Equity


Interest


EquityBalances,January 1, 2009


520,000


$
5,200,000



13,833,378


$
8,752,986


$
1,158,758


$
(9,503,831
)


(631
)

$
5,607,282


$
101,951


$
5,709,233Stock-based compensation










500,000



250,000



198,854











448,854







448,854Dividends to preferred stockholders






















(312,000
)






(312,000
)






(312,000
)Comprehensive loss:Net loss






















(2,792,485
)






(2,792,485
)


2,369



(2,790,116
)Foreign currencytranslation adjustment


























3,549



3,549







3,549Total comprehensive loss






























(2,788,936
)


2,369



(2,786,567
)Balances, December 31, 2009


520,000



5,200,000



14,333,378



9,002,986



1,357,612



(12,608,316
)


2,918



2,955,200



104,320



3,059,520Stock-based compensation


















145,827











145,827







145,827Comprehensive loss:Net income






















(47,278
)






(47,278
)


10,167



(37,111
)Foreign currencytranslation adjustment


























(9,999
)


(9,999
)






(9,999
)Total comprehensive loss






























(57,277
)


10,167



(47,110
)Balances, September 30, 2010 (unaudited)


520,000


$
5,200,000



14,333,378


$
9,002,986


$
1,503,439


$
(12,655,594
)

$
(7,081
)

$
3,043,750


$
114,487


$
3,158,237


5


SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS  Nine Months


Nine MonthsEnded


EndedSeptember 30,


September 30,2010


2009(Unaudited)


(Unaudited)Cash flows from operating activitiesNet loss

$
(37,111
)

$
(1,698,896
)Adjustments to reconcile net loss to net cash provided by(used in) operating activities:Stock-based compensation


145,827



364,024Depreciation


53,534



56,646Changes in operating assets and liabilities:Securities owned


1,066,925



1,756,543Due from clearing broker


(561,921
)


(14,493
)Commissions receivable


10,615



490Other assets


13,210



(7,880
)Accounts payable and accrued expenses


4,780



(281,536
)Payable to customers


580,228



-Net cash provided by operating activities


1,276,087



174,898Cash flows from investing activitiesPurchases of property and equipment


-



(1,526
)Redemption of investment in limited liability company


-



240,661Net cash flows provided by investing activities


-



239,135Cash flows from financing activitiesDividends paid to preferred stockholders


-



(312,000
)Principal payments on notes payable and capital lease obligations


(358,623
)


(54,106
)Net cash flows used in financing activities


(358,623
)


(366,106
)Effect of foreign exchange rate changeson cash and cash equivalents


(2,382
)


7,703Net increase in cash and cash equivalents


915,082



55,630Cash and cash equivalents,beginning of period


130,631



652,783Cash and cash equivalents,end of period

$
1,045,713


$
708,413Supplementary disclosure of cash flow information:Cash paid during the periods for interest

$
48,822


$
65,777


6


SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




1. Basis of Presentation





We are providing herein the unaudited consolidated interim statements of financial condition of Southern Trust Securities Holding Corp. and Subsidiaries (collectively the "Company") as of  September 30, 2010 and December 31, 2009, and the unaudited related consolidated interim statements of operations for the three and nine months ended September 30, 2010 and 2009, and cash flows for the nine months ended September 30, 2010 and 2009, and the unaudited consolidated interim statements of changes in stockholders’ equity (deficit) and comprehensive income (loss) for the nine months ended September 30, 2010 and the year ended December 31, 2009. 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 unaudited 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, 2009 as filed with the SEC on April 15, 2010. The consolidated statement of financial condition as of December 31, 2009 was derived from the Company’s audited financial statements but does not include all disclosures required in accordance with accounting principles generally accepted in the United States of America.




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 three and nine month periods ended September 30, 2010, are not necessarily indicative of results that may be expected for the full fiscal year ending December 31, 2010.





2. Nature of Operations





Southern Trust Securities Holding Corp. (the "STSHC”) owns Southern Trust Securities, Inc. ("STS"), Southern Trust Metals, Inc. (“STM”) and Southern Trust Securities Asset Management, Inc. ("STSAM").  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.




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, was formed on October 29, 2009 to capitalize on investor interest in the trading of precious metals such as gold, silver, platinum, and palladium.


7
 SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




3. Liquidity





The Company reported a net loss of approximately $37,000 for the nine month period ended September 30, 2010, compared to the net loss of approximately $1,700,000 reported for the same period in 2009, which reflects changes it made to its corporate management practices to ensure that the Company would be in a position to meet its ongoing obligations.  These changes, implemented during 2009, included a reduction in salaries paid to certain employees and a reduction in payout percentages to match the current economic environment.  For the nine month period ended September 30, 2010 cash flows from operations was approximately $1,276,000, compared to cash flows provided by operations of approximately $175,000 for the same period in 2009.




The Company continues to review all expense categories across all of the companies that comprise the consolidated entity, with the objective of reducing costs and improving the costs efficiency of its brokerage operations.




Should the Company’s 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, 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. The consolidated subsidiaries that are less then wholly owned are referred to as non-controlling interests. The portion of net income attributable to non-controlling interests for such subsidiaries is presented as net income (loss) applicable to non-controlling interests on the consolidated statements of operations, and the portion of equity of such subsidiaries is presented as non-controlling interests on the consolidated statements of changes in stockholders’ equity (deficit) and comprehensive income (loss).




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.




8





SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




4. Summary of significant accounting policies (continued)





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 over the following estimated useful lives:




Building and improvement

40

yearsOffice equipment

5

yearsFurniture and fixtures

10

years
 
 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 nine month periods ended September 30, 2010 and 2009.




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.






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 Company files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. state and local jurisdictions.  Generally the Company is no longer subject to income tax examinations by major taxing authorities for years before 2007. 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 net assets. 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.  It must be applied to all existing tax positions upon initial adoption and the cumulative effect, if any, is to be reported as an adjustment to stockholder’s equity as of January 1, 2009.  Based on its analysis, the Company has determined that it has not incurred a liability for unrecognized tax benefits as of September 30, 2010. However, 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.




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.  Foreign currency translation adjustments resulted in losses of $9,999 and $7,703 for the nine month periods ended September 30, 2010 and 2009, respectively.




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.




10





SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




4. Summary of significant accounting policies (continued)





Comprehensive Income




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 income (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, 2010 and 2009.




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 applicable 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 9,500 warrants, 3,000,000 shares of common stock issuable to an officer upon expiration of a stock waiver period as of July 4, 2010, 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 and 2009, 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). As of September 30, 2010 and 2009, there has been no adjustment to the carrying value of the Company’s common stock investment in AR Growth.





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




11





SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




4. Summary of significant accounting policies (continued)





Stock-Based Compensation (continued)





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, 2010 and 2009, the Company recorded approximately $146,000 and $364,000, respectively, as additional 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 GAAP 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:




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.




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)




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 period. At September 30, 2010, 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 6.




Government Bonds




The fair value of sovereign government bonds is generally based on quoted prices in active markets. When quoted prices are not available, fair value is determined based on a valuation model that uses inputs that include interest-rate yield curves, cross-currency-basis index spreads, and country credit spreads similar to the bond in terms of issuer, maturity and seniority. At September 30, 2010 and December 31, 2009 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.




13





SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




4. Summary of significant accounting policies (continued)





Derivative Contracts (continued)The fair value of the derivate contacts traded by the Company are 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.





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, 2010, the Company offset cash collateral receivables of $6,319 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 a material financial impact on the Company’s consolidated financial statements.




In December 2009, the FASB issued Accounting Standards Update (ASU) 2009-17, “Consolidations (FASB ASC Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which codifies FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). ASU 2009-17 represents a revision to former FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities,” and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance.  ASU 2009-17 also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements.  ASU 2009-17 became effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or the Company’s fiscal year beginning January 1, 2010. The Company adopted the pronouncement on January 1, 2010 resulting in no impact to the Company’s consolidated balance sheets, statements of operations and cash flows.




In February 2010, the FASB issued ASU No. 2010-09, which requires that an SEC filer, as defined, evaluate subsequent events through the date that the financial statements are issued. The update also removed the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. The adoption of this guidance on January 1, 2010 did not have a material effect on the Company’s consolidated financial statements.




14





SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




5. Securities owned, at fair value





The balance of securities owned at fair value consisted of the following at September 30, 2010 and December 31, 2009:




September 30,


December 31,2010


2009(unaudited)Certificates of deposits

$
-


$
200,000Money market


-



200,000U.S. Government obiligations


-



562,878Options and futures


6,319



150,543Corporate bonds


180,113



149,381Equity securities


27,782



25,852$
214,214


$
1,288,654
 
 At December 31, 2009, a $200,000 certificate of deposit and a $200,000 money market served as collateral for a note payable to a bank. The note was paid in full during the first quarter of 2010.





6. 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 4 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 (see Note 5).




The following table presents information about the Company's assets and liabilities measured at fair value as of September 30, 2010 (unaudited) and December 31, 2009.


Quoted Prices in


SignificantActive Markets


Other


Significant





Balancefor


Observable


Unobservable


Collateral


as ofIdentical Assets


Inputs


Inputs


Held


September 30,Assets

(Level 1)


(Level 2)


(Level 3)


at Broker


2010Securities owned, at fair value:U.S. Government obligations

$
-


$
-


$
-


$
-


$
-Options and futures


-











6,319



6,319Corporate bonds


180,113















180,113Equity securities


27,782











-



27,782$
207,895


$
-


$
-


$
6,319


$
214,214Investment in AR Growth common stock

$
-


$
52,170


$
-


$
-


$
52,170


15





SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




6. Fair value measurements (continued)





December 31, 2009Quoted Pricesin Active


SignificantMarkets


Other


Significant





Balancesfor Identical


Observable


Unobservable


Collaterial


as ofAssets


Inputs


Inputs


Held


December 31,(Level 1)


(Level 2)


(Level 3)


at Broker


2009AssetsSecurities owned, at fair value:Certificates of deposits

$
200,000


$
-


$
-


$
-


$
200,000U.S. Government obligations


562,878















562,878Money market


200,000















200,000Corporate bonds


149,381















149,381Options and futures


18,062











132,481



150,543Equity securities


25,852















25,852$
1,156,173


$
-


$
-


$
132,481


$
1,288,654Investment in AR Growthcommon stock

$
-


$
52,170


$
-


$
-


$
52,170
 
  16
 SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





7. Income Taxes





At September 30, 2010, the Company had approximately $7.1 million of net operating losses (“NOL”) carry-forwards for federal and state income tax purposes.  These losses are available for future years and expire through 2029.  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 31,2010


2009(unaudited)Deferred tax asset:Net operating loss carryforwards

$
2,683,000


$
2,717,000Other temporary differences


949,000



955,000Deferred tax assets


3,632,000



3,672,000Less:  Valuation allowance


(3,632,000
)


(3,672,000
)Net deferred tax asset

$
-


$
-
  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 31,2010


2009(unaudited)(34
)%


(34
)%State and local income tax


(4
)


(4
)(net of federal benefits)Other temporary differences


8



8Valuation 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 $7.1 million at September 30, 2010 and December 31, 2009, due to the uncertainty of realizing the future tax benefits.




17





SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




7. Income Taxes (continued)




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.





8. 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 that occured prior to the nine month period ended September 30, 2010 and for the year ended December 31, 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 178.12%. Options vest ratably between one and five years and are excerciable over ten years. For the the nine month periods ended September 30, 2010 and 2009, the Company recognized approximately $14,000 and $83,000 respectively, of stock-based compensation expense related to the issuance of options.





Options Outstanding


Options ExercisableNumber


Weighted





NumberOutstanding


Average


Weighted


Exercisable


Weightedat


Remaining


Average


at


AverageExercise


September 30,


Contractual


Exercise


September 30,


ExercisePrice


2010


Life


Price


2010


Price$
0.50



200,000



6.2


$
0.50



200,000


$
0.50$
0.75



100,000



8.2



0.75



35,000



0.75$
1.00



400,000



6.5



1.00



400,000



1.00$
1.50



60,000



8.0



1.50



30,000



1.50760,000






$
0.88



665,000


$
0.86
 
 18




SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




8. Stock options and warrants (continued)





The following is a summary of all option activity through September 30, 2010:




Shares


Average


Term


InstrinsicOutstanding


Price


(in years)


ValueOptions outstanding at January 1, 2009


830,000


$
0.87



8.0


$
850,000Granted in 2009


30,000



1.50Cancelled in 2009


(100,000
)


1.00Options outstanding at December 31, 2009


760,000


$
0.88



8.0


$
-Granted in 2010


-



-Cancelled in 2010


-



-Options outstanding at September 30, 2010


760,000


$
0.88



7.5Excercisable at September 30, 2009


579,833


$
0.83



8.4


$
-Exercisable at September 30, 2010


665,000


$
0.86



7.3


$
-
 
 The total compensation cost not yet recognized of approximately $99,750 (for non-vested awards) has a weighted average period of 2.4 years over which the compensation expense is expected to be recognized.




On 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 13). The issuances of the shares were subject to a forfeiture period which ended in July 2009, at which point the shares 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 1⁄2 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. For the nine month periods ended September 30, 2010 and 2009, the Company recognized $131,700 and $281,250, respectively, of stock-based compensation expense related to the issuance of the shares.




The total compensation cost not yet recognized of $321,930 (for non-vested shares) has a weighted average period of approximately 1.8 years over which the compensation expense is expected to be recognized.




During 2009, the Board of Directors granted 30,000 options to a financial executive with a strike price of $1.50, vesting equally for five years, with an expiration date of ten years.  During 2008, the board of directors granted 30,000 and 100,000 options to two newly hired financial executives with a strike price of $1.50 and $1.00, respectively, vesting equally for three years and five years, with an expiration date of ten years.  The 100,000 option grant was cancelled in 2009.




19





SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




8. Stock options and warrants (continued)





For the nine month period ended September 30, 2010 and the year ended December 31, 2009, warrant activity was as follows:




Exercise Price Per Share

Warrants Expiring

Balance January 1, 2009

Warrants Issued

Exercised 2009

Expired 2009

Balance December 31, 2009

Warrants Issued

Exercised 2010

Expired 2010

Balance September 30, 2010$       2.16

May 29, 2010

15,500

-

-

-

15,500

-

-

15,500

-$       2.16

August 17, 2010

1,000

-

-

-

1,000

-

-

1,000

-$       2.16

October 29, 2010

5,000

-

-

-

5,000

-

-

-

5,000$       1.25

April 11, 2011

500

-

-

-

500

-

-

-

500$       1.25

May 30, 2011

4,000

-

-

-

4,000

-

-

-

4,000Totals

26,000

-

-

-

26,000

-

-

16,500

9,500
 
 All warrants outstanding at September 30, 2010 and December 31, 2009 are exercisable.




9. 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 to the plan.  The Company has the option of matching a percentage of employee contributions. The Company did not make any contributions to the plan during the nine months ended September 30, 2010 or 2009.





10. 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, 2010, STS’s net capital was approximately $844,700 which was approximately $744,700 in excess of its minimum requirement of $100,000.





11. 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."




20





SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




12. 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.




13. 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, 2010, 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 two 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:




Alistair T. Snowie, individually as a shareholder on behalf of American Ammunition, Inc. Plaintiff/Counter defendant v. J.A. Fernandez, Sr., individually, Andres Fernandez, individually, Emilo Jara, individually, Maria A. Fernandez, individually, and American Ammunition Inc., a Nevada corporation and nominal Defendant, Defendants/Counter plaintiffs/Third-Party Plaintiffs v. Streller Universal, S.A., a foreign corporation, La Terraza Trading Asset Management, Ltd., a foreign corporation, Glenda Mallow, individually and William Malloy, individually, Southern Trust Securities, Inc. f/k/a Capital Investment Services, Inc., Robert J. Escobio, individually and Susan Escobio, individually, Third-Party Defendants - In the Circuit Court in and for the Eleventh Judicial Circuit in and for Miami-Dade County, Florida, Case No.07-44328 CA 40. The Third Party Complaint in this action was initially filed against STS on April 1, 2008. It was further amended on July 14, 2008. In the complaint, various causes of action are alleged relating to STS’s role related to an escrow account holding shares of American Ammunition, Inc. stock. American Ammunition, Inc. filed for bankruptcy relief in the United States Bankruptcy Court in the Southern District of Florida on September 23, 2008. The civil case, pending in Miami-Dade County Circuit Court, has been stayed as a result of American Ammunition, Inc. filing bankruptcy. A settlement was agreed upon in the bankruptcy proceeding where Southern Trust Securities, Inc. agreed and paid American Ammunition, Inc. $32,500 in full and complete settlement of all claims asserted against Third Party Defendants.


21
  SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


13. Commitments and contingencies (continued)




Legal Claims (continued)




The United States Bankruptcy Court, Southern District of Florida, by Order dated December 8, 2009 approved the settlement agreed to between American Ammunition, Inc. and Southern Trust Securities, Inc. and Robert and Susan Escobio with Proposed Order of Dismissal and Prejudice, which was submitted to Judge Freeman in the Circuit Court case for entry of the Order of Dismissal with Prejudice. On February 19, 2010 the court entered the Order of Dismissal with Prejudice of all claims against third party defendants, STS, Robert Escobio and Susan Escobio. Thus, STS and the Escobios are no longer party to that case.




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.




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.







22




SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




13. Commitments and contingencies (continued)




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 a 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.




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, 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.




14. 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, intended to implement an acquisition plan to acquire finance related companies in Argentina through AR Growth.




In November 2007, the Company invested $1 million for 100,000 shares of the Series A 8% convertible preferred stock (“Series A ARGW”) of AR Growth. On February 25, 2008, the Company invested an additional $1.5 million for 150,000 shares of Series A ARGW. Simultaneously on that date, AR Growth acquired ProBenefit, S.A. (“ProBenefit”), a privately owned Argentine based holding company comprised of pension, insurance and annuity companies as well as a consumer credit card company, through the following transactions: A) AR Growth acquired the originally issued shares of ProBenefit representing a 37.76% ownership interest for an aggregate purchase price of $7.5 million dollars, of which $2.5 million was paid in cash and $5.0 million (plus interest) shall be paid before February 18, 2010 through the issuance of an 8% Senior Promissory Note by AR Growth to ProBenefit and B) on the same date, AR Growth acquired a 57.34% ownership interest in ProBenefit through the issuance of 11,521,055 shares of common stock of AR Growth and a $12.0 million 8% Junior Subordinated Convertible Debenture due December 15, 2010 to SFN Santafesina de Negocios, S.A., an Argentine company created to consolidate existing ProBenefit investors.




23





SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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






Following all of these transactions, the Company has a 4.3% ownership interest in the common stock of AR Growth and 250,000 non-voting shares of Series A 8% Convertible Preferred Stock of AR Growth convertible into common at 3.9:1. 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 October 2008, the Argentinean government proposed a law to nationalize approximately $26 billion in private pensions, stating that the current pension system had failed. In December 2008, the government’s proposed law was passed and the government took control of the country’s pension assets. While ProBenefit still has the insurance, annuity and consumer credit card businesses, the takeover of the pension business had a detrimental effect on ProBenefit’s operations and earnings.  Further, the Argentinean government has indicated that it will compensate those companies affected by the takeover of their pension business, however the amount of the compensation, if any, and the timing and form of such compensation has yet to be determined by the Argentinean government. The Company determined that the business of ProBenefit, AR Growth’s primary operating entity, has been adversely affected by recent law changes in Argentina.




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. The preferred stock is the Company’s only investment carried under the cost method. The Company has also reserved the dividends receivable for the fourth quarter of 2008, full year 2009 and the first and second quarter of 2010.




Any future recovery relative to the value in preferred stock will not be recognized until realized as the impairment has effectively reduced the cost of the preferred stock to $1,250,000. Additionally, future charges may be required pending further deterioration in ProBenefit’s operations, lack of compensation from the Argentinean government and the changes resulting from the restructure of the original transaction, as summarized below.




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% common stock interest in Nexo Emprendimientos S.A. (“Nexo”). Nexo is a fast growing consumer credit card company based in Sunchales, Argentina. Subsequently, in 2010 Probenefit exchanged certain Nexo debt held by it into additional Nexo equity resulting in the Company's ownership in Nexo decreasing to 17.29%.




ProBenefit S.A., a financial services holding corporation (“ProBenefit”), the Company and AR Growth will be 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.




24





SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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




The Company accounts for its investment in Nexo under the cost method of accounting.




15. Subsequent Events




On October 1, 2010, the Company granted non-statutory stock option awards to certain of its officers and directors.  Robert Escobio, the chief executive officer and chief financial officer and a director of the Corporation agreed to forfeit 3,000,000 shares of unvested restricted common stock previously awarded to him, and he was granted options for 3,350,000 shares of common stock with an exercise price of $.25 per share, which shall vest 1/10th each year over ten years commencing October 1, 2011.  Susan Escobio, Robert’s spouse, the Company’s  treasurer and chief compliance officer and a director was granted options for 300,000 shares of common stock with an exercise price of $.25 per share, which shall vest 1/5th each year over five years commencing October 1, 2011.  Kevin Fitzgerald, the Company’s president and a director was granted options for 300,000 shares of common stock with an exercise price of $.25 per share, which shall vest on an equal basis monthly over 24 months commencing November 1, 2010.  Ramon Amilibia, a director of the Company, was granted options for 300,000 shares of common stock with an exercise price of $.25 per share, which shall vest on an equal basis monthly over 24 months commencing November 1, 2010.




25




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.





26





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 following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.




Valuation of Investments in Securities and Securities at Fair Value – Definition and Hierachy.We adopted FASB ASC Topic 820 (formerly SFAS 157, “Fair Value Measurements and Disclosures”) effective January 1, 2008, which 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 we use 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 us.  Unobservable inputs reflect our 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:





Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have 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.





27





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 we exercise 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 our own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date.  We use 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





We value investment 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, 2010, all of our 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 6 to our consolidated financial statements.





Clearing Arrangements.STS does not carry accounts for customers or perform custodial functions related to customers’ securities. STS introduces all of its customer transactions, which are not reflected in these financial statements, to its primary clearing broker, which maintains the customers’ accounts and clears such transactions. These activities may expose us to off-balance-sheet risk in the event that customers do not fulfill their obligations with the primary clearing broker, as we have agreed to indemnify our primary clearing broker for any resulting losses. We continually assess risk associated with each customer who is on margin credit and record an estimated loss when we believe collection from the customer is unlikely. Our losses incurred from these arrangements were not significant for the three or nine months ended September 30, 2010 and 2009.





Stock Based Compensation. We comply with FASB ASC Topic 718 “Compensation: Stock compensation” [formerly SFAS No. 123(R), “Share-Based Payment], 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, and 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. FASB ASC Topic 718, which became effective for us during the first quarter of 2006, eliminates the use of APB No. 25 and the intrinsic value method of accounting.  Prior to December 31, 2005, we complied with SFAS 123, which specified a fair value based method of accounting for all stock-based compensation.





28





Revenue Recognition.Commissions, revenue and related clearing expenses are recorded on a trade-date basis as security transactions occur. Riskless principal transactions in regular-way trades are recorded on the trade date, as if they had settled.





Investment banking revenue includes private placement agency fees earned through our participation in private placements of equity and convertible debt securities and fees earned as financial advisor in mergers and acquisitions and similar transactions. Merger and acquisition fees and other advisory service revenue are generally earned and recognized only upon successful completion of the engagement. Unreimbursed expenses associated with private placement and advisory transactions are recorded as expenses as incurred.





Asset management (or managed accounts) 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.  We also offer fee-based investment advisory services to our customers and independent registered investment advisors through our wholly-owned subsidiary, STSAM.





Metals revenues are derived from a combination of account opening fees and accruals of interest generated from trading precious metals.





Deferred Tax Valuation Allowance.We account for income taxes in accordance with the provision of FASB ASC Topic 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities at tax rates expected to be in effect when these balances reverse. Future tax benefits attributable to temporary differences are recognized to the extent that the realization of such benefits is more likely than not. We have concluded that it is more likely than not that our deferred tax assets as of December 31, 2009 and 2008 will not be realized based on the scheduling of deferred tax assets and projected taxable income. The amount of the deferred tax assets actually realized, however, could vary if there are differences in the timing or amount of future reversals of existing deferred tax assets or changes in the actual amounts of future taxable income. Should we determine that we will be able to realize all or part of the deferred tax asset in the future, an adjustment to the deferred tax asset will be recorded in the period such determination is made.





Net Capital Requirement.Our broker-dealer subsidiary, 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 requires it to maintain 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, 2010, STS’s net capital was approximately $844,700 which was approximately $744,700 in excess of its minimum requirement of $100,000.





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Commissions and Clearing Costs.Commissions and clearing costs include commissions paid to our employee registered representatives, independent contractor arrangements and fees paid to clearing entities for certain clearance and settlement services. Commissions paid to registered representatives vary according to the contracted payout percentage and clearing costs generally fluctuate based on revenues generated on trades and on the volume of transactions.





Accounting for Contingencies.We accrue for contingencies in accordance with FASB ASC Topic 855, “Subsequent Events,” when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require our exercise of judgment both in assessing whether or not a liability or loss has been incurred and estimated the amount of probable loss. There were none at either September 30, 2010 or December 31, 2009.





Results of Operations for the Three Months Ended September 30, 2010 and 2009





The following table sets forth a summary of financial highlights at and for the three months ended September 30:




2010


2009


% Change


ChangeStatement of Operations Data:

(unaudited)


(unaudited)Revenues

$
826,988


$
272,663



203.3
%

$
554,325Expenses


841,319



665,507



26.4
%

$
175,812Net loss applicable to common stockholders


(17,496
)


(496,844
)


96.5
%

$
479,348Loss per common share


0



(0.04
)

NM


NM





For the three months ended September 30, 2010, we experienced a net loss of $17,496 as compared to a net loss before dividends to preferred stockholders of $496,844 for the three months ended September 30, 2009. The decrease in the net loss is primarily attributable to increased revenues from trading revenue, and to a lesser extent, commissions and decreased expenses, as well as a suspension of the payment of the dividend on the non-cumulative Series C preferred stock for the three months ended September 30, 2010.




30


Revenues




Our commissions for the three months ended September 30, 2010, increased $22,830, or 16.5% to $161,415 up from $138,585 for the three months ended September 30, 2009. The increase in commissions is mainly attributable to an increase 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, 2010 increased $523,947 from $104,363 recognized for the three months ended September 30, 2009, or a 502.0% increase, to $628,310. 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 2010, 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 investment banking revenue for the three months ended September 30, 2010 or 2009. 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 decreased $4,052 to $15,791 for the three months ended September 30, 2010 from $19,843 for the three months ended September 30, 2009.  The main reason for the decrease is related to a decrease in activity by our European affiliate.




Our interest and dividend income increased 222.3% or $14,259 to $20,674 for the three months ended September 30, 2010 when compared to $6,415 for the same period in 2009.  This increase is mainly attributable to a substantial increase in our cash equivalents and investments.




In the fourth quarter of 2009, we began offering trading services through our subsidiary, STM, for investors with an interest in trading in precious metals.  During the three months ended September 30, 2010, we reported gross revenue of approximately $107,000 compared to $290,000 for the fourth quarter of 2009, which was the first quarter of operations for STM, approximately $105,000 reported for the quarter ended March 31, 2010, and approximately $155,000 for the quarter ended June 30, 2010. This revenue growth is primarily attributable to the significant increase in new accounts combined with the overall growth of investors’ interest in trading in precious metals.




Expenses




Commissions and clearing fees expenses incurred during the three months ended September 30, 2010 increased $315,827 or 310.4% to $417,560 as compared to $101,733 the three months ended September 30, 2009. 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 40% and 50% of total compensable revenues for the three months ended September 30, 2010 and 2009, 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, 2010 and 2009 were $13,985 and $22,223, respectively.




31


Total employee compensation and benefits decreased 43.7% to $171,722 for the three months ended September 30, 2010 as compared to $305,280 for the three months ended September 30, 2009, primarily due to the decrease in executive salaries, the elimination of an executive position following an officer’s resignation and a decrease in share-based compensation amortization.  Employee compensation and benefits expenses include the amortization of share-based compensation expenses related to shares and options given to certain key employees during 2007 and 2008. Based on stock options and stock awards that vested during the three month periods ended September 30, 2010 and 2009, we recorded approximately $48,600 and $121,800, respectively, as additional compensation expense. The vesting period for these share-based compensation awards range from twelve to sixty months.




As part of the employment agreements entered with several of our key executives on January 4, 2007, Robert Escobio, our Chief Executive Officer, was granted 4,500,000 shares of common stock vesting equally on a monthly basis over three years but was later amended in September 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 250,000 shares vest during the two months ended August 31, 2010.  On October 1, 2010, Mr. Escobio agreed to forfeit the remaining 3 million shares of unvested restricted stock granted to him.  Under the same agreement, Mr. Escobio accepted the grant of 3,350,000 options for shares of common stock with an exercise price of $.25 per share, which will vest 1/10th a year over ten years commencing October 1, 2011.  For the three-month periods ended September 30, 2010, we recognized $43,900 of stock-based compensation expense related to the issuance of the shares.




Occupancy costs increased slightly, only 17.9% or $2,594 to $17,114 for the three months ended September 30, 2010, up from $14,520 for the three months ended September 30, 2009. 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 to $29,217 for the three months ended September 30, 2010, from $28,602 incurred in the three months ended September 30, 2009. The reason for the slight increase is due to increased trading volume and communications expenses incurred in connection with the operations of STM, our precious metal trading company.




Professional fees increased $23,673 or 27.5% for the three months ended September 30, 2010 to $109,765 as compared to $86,092 the three months ended September 30, 2009, mainly due to the use of outside professionals to perform certain functions previously performed by in-house professionals.   As of September 30 2010, there are no material legal disputes that may have an adverse impact on our financial statements.




Our travel and entertainment expenses decreased 23.3% or $6,313to $20,738 for the three months ended September 30, 2010, down from $27,051 for the three months ended September 30, 2009. The decrease is mainly due to less entertainment expenses incurred as part of our efforts in trying to reduce operational expenses.




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Our other operational expenses include miscellaneous expenses and insurance premiums. Other operational expenses decreased 28.2% to $43,930 for the three months ended September 30, 2010 from $61,168 incurred for the same time period in 2009. The decrease of $17,238 is mostly attributable to lower expenses related to computer repairs, maintenance and insurance premiums.




We did not pay any dividends to our preferred stockholders for the three months ended September 30, 2010 as compared to $104,000 for the three months ended September 30, 2009, due to a suspension in the dividend payment on the non-cumulative Series C preferred stock outstanding.




Results of Operations for the Nine Months Ended September 30, 2010 and 2009





The following table sets forth a summary of financial highlights at and for the nine months ended September 30




2010


2009


% Change


ChangeStatement of Operations Data:

(unaudited)


(unaudited)Revenues

$
2,190,369


$
971,121



125.6
%

$
(1,219,248
)Expenses


2,227,480



2,670,017



16.6
%


442,537Net loss applicable to common stock holders


(47,278
)


(2,014,857
)


97.7
%


1,967,579Loss per common share


0



(0.15
)

NM


NMAt September 30, 2010


At December 31, 2009(unaudited)Financial condition data:Cash and cash equivalents

$
1,045,713


$
130,631



700.5
%

$
915,082Securities owned, at fair value


214,214



1,288,654



-83.4
%


(1,074,440
)Total Assets


4,949,878



4,624,921



7.0
%


324,957Notes Payable


770,709



1,126,557



-31.6
%


(355,848
)Stockholders’ Equity


3,158,237



3,059,520



3.2
%


98,717


For the nine months ended September 30, 2010, we experienced a net loss of $47,278 as compared to a net loss before dividends to preferred stockholders of $2,014,857 for the nine months ended September 30, 2009. The substantial decrease in the net loss is primarily attributable to increased revenues from trading income, and to a lesser extent commission, and decreased expenses due to employee compensation and benefits, as well as a suspension of the payment of the dividend on the non-cumulative Series C preferred stock for the nine months ended September 30, 2010.




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Revenues




Our commissions for the nine months ended September 30, 2010, increased 73.9 to $691,030 up from $399,467 for the nine months ended September 30, 2009. The increase in commissions is mainly attributable to an increase 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, 2010 increased $921,092 from $430,630 recognized for the nine months ended September 30, 2009, or a 213.9% increase, to $1,351,722. 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 2010, 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 recognized no investment banking revenue for the nine months ended September 30, 2010 a decreased from $47,770 the nine months ended September 30, 2009. For the nine months ended September 30, 2010 and 2009, no major investment banking deals were closed; however, for the nine months ended September 30, 2009, we recognized $47,770 for advice.




Managed account fees decreased $13,640 to $46,759 for the nine months ended September 30, 2010 from $60,399 for the nine months ended September 30, 2009.  The main reason for the decrease is related to a decrease in activity by our European affiliate.




Our interest and dividend income increased 154.7% or $40,175 to $66,151 for the nine months ended September 30, 2010 when compared to $25,976 for the same period in 2009.  This increase is mainly attributable to a substantial increase in our cash equivalents and investments.




In the fourth quarter of 2009, we began offering trading services through our subsidiary, STM, for investors with an interest in trading in precious metals. We recognized gross revenue of approximately $339,100 for the nine months ended September 30, 2010. This revenue growth is primarily attributable to the significant increase in new accounts combined with the overall growth of investors’ interest in trading in precious metals.




Expenses




Commissions and clearing fees expenses incurred during the nine months ended September 30, 2010 increased $696,755 or 178.8% to $1,086,476 as compared to $389,721 the nine months ended September 30, 2009. 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 40% and 50% of total compensable revenues for the nine months ended September 30, 2010 and 2009, 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, 2010 and 2009 were $87,664, and $52,288, respectively.




Total employee compensation and benefits decreased 56.6% to $514,665 for the nine months ended September 30, 2010 as compared to $1,185,149 for the nine months ended September 30, 2009, primarily due to the decrease in executive salaries, the elimination of an executive position following an officer’s resignation and a decrease in share-based compensation amortization.  Employee compensation and benefits expenses include the amortization of share-based compensation expenses related to shares and options given to certain key employees during 2007 and 2008. Based on stock options and stock awards that vested during the nine month periods ended September 30, 2010 and 2009, we recorded approximately $145,827 and $364,024, respectively, as additional compensation expense. The vesting period for these share-based compensation awards range from twelve to sixty months. An executive waived his right to have 875,000 shares vest during the eight months ended August 31, 2010.  On October 1, 2010, Mr. Escobio agreed to forfeit the remaining 3 million shares of unvested restricted stock granted to him.  For the nine-month periods ended September 30, 2010 and 2009, we recognized $131,700 and $281,250, respectively, of stock-based compensation expense related to the issuance of the shares.




34





Occupancy costs decreased 7.4% or $3,687 to $46,246 for the nine months ended September 30, 2010, down from $49,933 for the nine months ended September 30, 2009. Major expenses included under occupancy costs are property taxes, utilities and common repair and maintenance of our office building.




Communications and market data expenses increased to $94,429 for the nine months ended September 30, 2010 or 10.6% from $85,386 incurred in the nine months ended September 30, 2009. The main reason for the increase is due to increased trading volume and communications expenses incurred in connection with the operations of STM, our precious metal trading company.




Professional fees decreased $288,527 or 53.2% for the nine months ended September 30, 2010 to $253,669 as compared to $542,196 for the nine months ended September 30, 2009, mainly due to lower legal expenses incurred related to the settlement of legal matters incidental to our retail brokerage services business.  As of September 30 2010, there are no material legal disputes that may have an adverse impact on our financial statements.




Our travel and entertainment expenses decreased 81.9% or $109,012 to $24,111 for the nine months ended September 30, 2010, down from $133,123 for the nine months ended September 30, 2009. The decrease is mainly due to less entertainment expenses incurred as part of our efforts in trying to reduce operational expenses.




Our other operational expenses include miscellaneous expenses and insurance premiums. Other operational expenses decreased 34.9% to $105,529 for the nine months ended September 30, 2010 from $162,086 incurred for the same time period in 2009. The decrease of $56,557 is mostly attributable to lower expenses related to computer repairs, maintenance and insurance premiums.




We did not pay any dividends to our preferred stockholders for the nine months ended September 30, 2010 as compared to $312,000 for the nine months ended September 30, 2009, due to a suspension in the dividend payment on the non-cumulative Series C preferred stock outstanding.




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Liquidity and Capital Resources




As of September 30, 2010, liquid assets consisted primarily of cash and cash equivalents of approximately $1,045,713 and securities owned of approximately $214,214 for a total of $1,259,927, which is $159,358 lower than the approximately $1,419,285 in liquid assets as of December 31, 2009. 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 $915,082 to $1,045,713 at September 30, 2010 as compared to $130,631 at December 31, 2009. Cash provided by our operating activities for the nine months ended September, 2010 was approximately $1,276,087, which primarily consists of $580,228 related to a payable associated with our metals trading subsidiary. No cash was used in investing activities this period. Cash used in our financing activities was approximately $358,623, which consisted mainly of our prepaying in full the second lien on our office building in the amount of $315,000 in addition to other debt service payments made on our notes payable and capital lease obligations. As a result of the non-recurring pre-payment of the principal on our second lien, we will no longer have this mortgage expense in subsequent periods.  Additionally, we had no payment of interest on our non-cumulative Series C preferred stock as dividend payments were suspended during 2010.




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, 2010, STS had regulatory net capital of approximately $844,700, which exceeded the required amount by approximately $744,700.




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 30, 2010, consisting of debt payments related to our notes payable and employment agreements:





Year ending September 30,

Total


Notes Payable2011

$
55,453


$
55,4532012


59,542



59,5422013


64,234



64,2342014


69,138



69,1382015


74,418



74,418Thereafter


447,924



447,924Total Commitments

$
770,709


$
770,709








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Off-Balance Sheet Arrangements


We were not a party to any off-balance sheet arrangements during the period ended September 30, 2010, 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.





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 concluded that our disclosure controls and procedures are effective as of September 30, 2010. 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 30, 2010, 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, 2010, 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.




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Item 1A.  Risk Factors





Not applicable.





Item 2.  Unregistered Sales of Securities and Use of Proceeds





On October 1, 2010, Southern Trust Securities Holding Corp. (the “Corporation”) granted non-statutory stock option awards to certain of its officer and director.  Robert Escobio, the Chief Executive Officer and Chief Financial Officer and a director of the Corporation agreed to forfeit 3,000,000 shares of unvested restricted common stock previously awarded to him and was granted options for 3,350,000 shares of common stock with an exercise price of $.25 per share, which shall vest 1/10th each year over ten years commencing October 1, 2011.  Susan Escobio, Robert’s spouse, the Corporation’s Treasurer and Chief Compliance Officer and a director was granted options for 300,000 shares of restricted common stock with an exercise price of $.25 per share, which shall vest 1/5th each year over five years commencing October 1, 2011.  Kevin Fitzgerald, the Corporation’s President and a director was granted options for 300,000 shares of restricted common stock with an exercise price of $.25 per share, which shall vest on an equal basis monthly over 24 months commencing November 1, 2010.  Ramon Amilibia, a director of the Corporation, was granted options for 300,000 shares of restricted common stock with an exercise price of $.25 per share, which shall vest on an equal basis monthly over 24 months commencing November 1, 2010.





Item 3.   Defaults Upon Senior Securities





None.





Item 4.   Submission of Matters to a Vote of Security Holders





None.





Item 5.  Other Information





None.





Item 6.  Exhibits





31    Rule 13a-14(a) Certification of Chief Executive Officer and Chief Financial Officer





32    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer


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SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




SOUTHERN TRUST SECURITIES HOLDING CORP.Date: November 15, 2010
By:
/s/ Robert EscobioRobert EscobioChief Executive Officer and Chief Financial Officer

(Principal Executive and Accounting Officer)





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