Southern Trust Securities Holding Corp - FORM 10-Q

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EX-31.1 - CERTIFICATION - Southern Trust Securities Holding Corp	sohl_ex311.htm
EX-32.2 - CERTIFICATION - Southern Trust Securities Holding Corp	sohl_ex32.htm

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, 2009

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ___________

Commission file number: 000-52618

SOUTHERN TRUST SECURITIES HOLDING CORP.

(Exact name of registrant as specified in its charter)


Florida		651001593
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

145 Almeria Ave., Coral Gables, Florida 33134

(Address of principal executive offices) (Zip Code)

(305) 446-4800

(Registrant’s telephone area, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 ¨ 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 13,833,378 shares of common stock issued and outstanding on November 14, 2009, excluding 375,000 of unissued shares and 4,125,000 unvested shares of common stock.

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 I FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Financial Condition as of September 30, 2009 and December 31, 2008

Consolidated Statements of Operations for the three months and nine months ended
September 30, 2009 and 2008

Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008

Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss

Notes to Interim Financial Statement

Item 2. Management's Discussion and Analysis

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures.

PART II

Item 1. Legal Proceedings.

Item 1A. Risk Factors

Item 2. Unregistered Sales of Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits

Signatures

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


	September 30, 2009 (Unaudited)			December 31, 2008
ASSETS
Cash and cash equivalents	$	708,413		$	652,783
Securities owned at fair value, including restricted securities of $400,000		756,243			2,512,786
Investment in limited liability company, equity method		––			240,661
Due from clearing broker		22,162			7,669
Commissions receivable		7,079			7,569
Investment in AR Growth, net of impairment charge of $1,250,000 at December 31, 2008		100,000			1,350,000
Investment in Nexo Emprendimientos, S.A.		1,250,000			––
Other assets		76,835			68,890
Property and equipment, net		2,501,348			2,556,533
Total Assets	$	5,422,080		$	7,396,891

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities

Accounts payable and accrued expenses	$	197,087		$	478,623
Obligations under capital lease		10,475			12,911
Notes payable		1,144,454			1,196,124
Total Liabilities		1,352,016			1,687,658
Commitments and contingencies

Stockholders' equity

Series C 8% convertible preferred stock, no par value, 2.5 million shares authorized, 520,000 issued and outstanding		5,200,000			5,200,000
Common stock, no par value, 100 million shares authorized, 13,833,378 issued and outstanding, respectively		8,752,986			8,752,986
Additional paid-in-capital		1,522,782			1,158,758
Accumulated deficit		(11,518,688	)		(9,503,831	)
Accumulated other comprehensive income (loss)		7,072			(631	)
Total Southern Trust Securities Holding Corp. and Subsidiaries stockholders' equity		3,964,152			5,607,282
Noncontrolling interest		105,912			101,951
Total Stockholders' Equity		4,070,064			5,709,233
Total Liabilities and Stockholders' Equity	$	5,422,080		$	7,396,891

See accompanying notes to consolidated interim financial statements.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenues
Commissions	$	138,585		$	66,668		$	399,467			284,602
Trading income		104,363			49,374			430,630			247,681
Investment banking fees		––			840,000			47,770			2,243,200
Managed account fees		19,843			14,877			60,399			66,973
Interest and dividend income		6,415			75,226			25,976			222,475
Other miscellaneous income		3,457			1,772			6,879			5,311
		272,663			1,047,917			971,121			3,070,242
Expenses
Commissions and clearing fees		101,733			898,128			389,721			2,199,510
Employee compensation and benefits		305,280			335,121			1,185,149			1,258,581
Occupancy		14,520			19,931			49,933			47,316
Communications and market data		28,602			40,956			85,386			138,815
Professional fees		86,092			226,795			542,196			620,983
Travel and entertainment		27,051			51,238			133,123			165,490
Depreciation		18,892			18,739			56,646			56,091
Interest expense		22,169			24,381			65,777			71,221
Other operational expenses		61,168			53,104			162,086			169,611
		665,507			1,668,393			2,670,017			4,727,618

Net loss		(392,844	)		(620,476	)		(1,698,896	)		(1,657,376	)
Net income (loss) attributable to noncontrolling interest		––			2,859			(3,961	)		2,859

Net loss attributable to Southern Trust Securities Holding Corp.and Subsidiares		(392,844	)		(617,617	)		(1,702,857	)		(1,654,517	)

Preferred stock dividends		(104,000	)		(104,000	)		(312,000	)		(283,521	)

Loss applicable to common stockholders	$	(496,844	)	$	(721,617	)	$	(2,014,857	)	$	(1,938,038	)

Weighted average common shares outstanding
Basic and diluted		13,833,378			13,833,378			13,833,378			13,748,472

Loss per common share
Basic and diluted	$	(0.04	)	$	(0.05	)	$	(0.15	)	$	(0.14	)

See accompanying notes to consolidated interim financial statements.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30, 2009			Nine Months Ended September 30, 2008



	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net loss	$	(1,698,896	)	$	(1,651,658	)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Stock-based compensation		364,024			483,347
Depreciation		56,646			56,092
Changes in operating assets and liabilities:
Securities owned		1,756,543			53,776
Due from clearing broker		(14,493	)		67,292
Commissions receivable		490			(104,172	)
Other assets		(7,880	)		33,680
Accounts payable and accrued expenses		(281,536	)		(183,274	)
Net cash provided by (used in) operating activities		174,898			(1,244,917	)

Cash flows from investing activities
Payments for purchases of property and equipment		(1,526	)		(1,147	)
Investment in AR Growth		––			(1,500,000	)
Redemption of investment in limited liability company		240,661			––
Earnings from investment in limited liability company		––			5,905
Net cash flows provided by (used in) investing activities		239,135			(1,495,242	)

Cash flows from financing activities
Proceeds from issuance of preferred stock		––			900,000
Cash acquired in consolidation of joint venture					102,748
Dividends paid to preferred stockholders		(312,000	)		(283,521	)
Principal payments on notes payable and capital lease obligations		(54,106	)		(50,103	)
Net cash flows (used in) provided by financing activities		(366,106	)		669,124

Effect of foreign exchange rate changes on cash and cash equivalents		7,703			7,662

Net increase (decrease) in cash and cash equivalents		55,630			(2,063,373	)

Cash and cash equivalents, beginning of period		652,783			2,449,201

Cash and cash equivalents, end of period	$	708,413		$	385,828

Supplementary disclosure of cash flow information,Cash paid during the periods for interest	$	65,777		$	71,221

Supplementary disclosure of investing and financing activities

Exchange of AR Growth preferred stock for Nexo Emprendimiento S.A. common stock	$	1,250,000		$	––

See accompanying notes to consolidated interim financial statements.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS


							Additional					Accumulated other			Total			Noncontr
	Preferred Stock			Common Stock			Paid-In-		Accumulated			comprehensive			Stockholders'			-olling			Total
	Shares	Amount		Shares	Amount		Capital		Deficit			loss			Equity			Interest			Equity
Balances, January 1, 2008	430,000	$	4,300,000	13,525,917	$	8,599,254	$	715,109	$	(5,536,084	)	$	––		$	8,078,279		$	––		$	8,078,279

Issuance of Series C preferred stock	90,000		900,000	––		––		––		––						900,000						900,000

Capital contribution from noncontrolling interest																			106,523			106,523

Stock-based compensation	––		––	307,461		153,732		443,649		––						597,381						597,381

Dividends to preferred stockholders										(387,521	)					(387,521	)					(387,521	)


Comprehensive loss:
Net loss										(3,580,226	)					(3,580,226	)		(4,572	)		(3,584,798	)
Foreign currency translation adjustment													(631	)		(631	)					(631	)

Total comprehensive loss																(3,580,857	)		(4,572	)		(3,585,429	)

Balances, December 31, 2008	520,000		5,200,000	13,833,378		8,752,986		1,158,758		(9,503,831	)		(631	)		5,607,282			101,951			5,709,233


Stock-based compensation								364,024								364,024						364,024

Dividends to preferred stockholders										(312,000	)					(312,000	)					(312,000	)

Comprehensive loss:
Net income (loss)										(1,702,857	)					(1,702,857	)		3,961			(1,698,896	)
Foreign currency translation adjustment													7,703			7,703						7,703

Total comprehensive income (loss)																(1,695,154	)		3,961			(1,691,193	)


Balances, September 30, 2009 (unaudited)	520,000	$	5,200,000	13,833,378	$	8,752,986	$	1,522,782	$	(11,518,688	)	$	7,072		$	3,964,152		$	105,845		$	4,070,064

See accompanying notes to consolidated interim financial statements.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

We are providing herein the consolidated interim statements of financial condition of Southern Trust Securities Holding Corp. (the "Company") and subsidiaries (collectively the "Company") as of September 30, 2009 and December 31, 2008, and the related consolidated interim statements of operations and cash flows for the three and nine months ended September 30, 2009 and 2008, the consolidated interim statements of cash flows for the nine months ended September 30, 2009 and 2008, and the consolidated interim statements of changes in stockholders’ equity and comprehensive income (loss) for the nine months ended September 30, 2009 and the year ended December 31, 2008. The consolidated interim financial statements presented herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The consolidated interim financial statements should be read in conjunction with the Company's consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the SEC.

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 months ended September 30, 2009 are not necessarily indicative of results that may be expected for the fiscal year ended December 31, 2009.

Nature of operations

Southern Trust Securities Holding Corp. (the "Company”) owns Southern Trust Securities, Inc. ("STS") 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 limited operations since inception.

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 SEC. STS is a member of the Financial Industry Regulatory Authority (“FINRA”), an entity created through the consolidation of the National Association of Securities Dealers (“NASD”) and the member regulation, enforcement and arbitration functions of the New York Stock Exchange and is also a member of the 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 service which offers its services to retail customers.

The Company contributed $105,653 in cash to form a new company, IPWM, España S.A. ("IPWM Spain") under a partnership agreement with a Swiss Financial Group, International Private Wealth Management, SA (“IPWM, SA”), in exchange for a 50.01% interest and control of the newly created company. During July 2008, IPWM Spain commenced operations and opened offices in the cities of Barcelona, Spain, San Sebastian, Spain and Marbella, Spain. IPWM Spain has had limited operations since inception and have not been material to the consolidated interim financial statements.

Liquidity

In response to the current economic environment, the Company has implemented changes to its capital management practices to ensure the Company will be able to continue to meet its obligations. Specifically during March 2009 and July 2009 certain employee salaries and payout percentages were reduced to match current business levels, and recent employee resignations will not be immediately filled. Management has also undertaken the task of reviewing the other general expenses incurred with the objective of reducing the brokerage operations and proceeds from private placements of preferred stock, management is currently exploring overall charges.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nature of operations (continued)

As the Company primarily finances its operations through cash flows generated through its proceeds from private placements of preferred stock, management is currently exploring an additional offering of 12% series D preferred stock. There can be no assurance the Company will be able to complete this offering on terms acceptable to the Company, if at all. Approximately $356,243 is readily accessible from the securities owned at fair value at September 30, 2009.

Summary of significant accounting policies

Principles of Consolidation

The accompanying consolidated interim financial statements include the accounts of the Company and its wholly-owned subsidiaries, STS, 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 non controlling interest. All intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

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

Securities Owned

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

Property and Equipment

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

The Company provides for depreciation and amortization over the following estimated useful lives:


Building and improvements	40 years
Office equipment	5 years
Furniture and fixtures	10 years

Long-Lived Assets

In accordance with Financial Accounting Standard Board “FASB” Accounting Standards Codification “ASC” Topic 360, 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 months ended September 30, 2009 or 2008.

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.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of significant accounting policies (continued)

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.

Income Taxes

The Company files a consolidated income tax return with its subsidiaries. The Company complies with FASB ASC Topic 740. Deferred taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts at year end, based on enacted tax laws and statutory tax rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company adopted FASB ASC Topic 740 which provides guidance for recognizing and measuring tax positions taken or expected to be taken in a tax return that directly or indirectly affect amounts reported in the consolidated financial statements. The adoption had no impact on the Company’s consolidated financial statements and did not result in unrecognized tax expenses being recorded. Accordingly, no corresponding interest and penalties have been accrued.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

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 a gain of $7,703 for the nine months ended September 30, 2009.

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

Comprehensive Income

The Company complies with FASB ASC Topic 220, “Comprehensive Income”. FASB ASC Topic 220 establishes rules for the reporting and display of comprehensive income (loss) and its components. The FASB ASC Topic 220 requires the Company’s change in foreign currency translation adjustments to be included in other comprehensive loss, and 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 interim statements of financial condition at September 30, 2009 and December 31, 2008.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of significant accounting policies (continued)

Loss Per Common Share

The Company complies with the accounting and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share”. Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per common share incorporates the dilutive effect of common stock equivalents on an average basis during the period. The calculation of diluted net loss per share excludes 26,000 warrants, 4,500,000 shares of common stock issuable to an officer upon expiration of the forfeiture period as of September 30, 2009 and 2008, and 2,080,000 shares of common stock issuable upon the conversion of the Series C 8% convertible preferred stock as of September 30, 2009 and 2008, since their effect is anti-dilutive.

Investment

The Company classifies its common stock investment in AR Growth Finance Corp. (“AR Growth”) and Nexo Emprendimientos S.A. (“NEXO”) as available-for-sale in accordance with FASB ASC Topic 320, “Investments-Debt and Equity Securities.” Available-for-sale investments are carried on the statement of financial condition at their fair value with the current period adjustments to carrying value recorded in accumulated other comprehensive income (loss). As of September 30, 2009 and December 31, 2008, there has been no adjustment to the carrying value of the Company’s common stock investment in AR Growth and Nexo.

Stock-Based Compensation

The Company complies with FASB ASC Topic 718 “Compensation – Stock Compensation”, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. FASB ASC Topic 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. FASB ASC Topic 718 requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award the requisite service period (usually the vesting period). No compensation costs are recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. Based on stock options and stock awards that vested during the nine months ended September 30, 2009 and 2008, the Company recorded approximately $364,000 and $483,000, respectively, as additional compensation expense under FASB ASC Topic 718.

Use of Estimates

The preparation of consolidated interim financial statements in conformity with accounting principles generally accepted in the United States of America 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.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of significant accounting policies (continued)

Valuation of Investments in Securities and Securities at fair value – Definition and Hierarchy

The Company complies with FASB ASC Topic 820, “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It applies to other accounting pronouncements where the FASB requires or permits fair value measurements but does not require any new fair value measurements. The Company had adopted FASB ASC Topic 820 which had deferred the effective date for the disclosure of fair value measurements related to nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The adoption of FASB ASC Topic 820 did not have any material impact on the Company’s consolidated financial statements.

Valuation of Investments in Securities and Securities at fair value

FASB ASC Topic 820 defines fair value, thereby eliminating inconsistencies in guidance found in various prior accounting pronouncements, and increases disclosures surrounding fair value calculations. FASB ASC Topic 820 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:

Level 1 – unadjusted quoted prices for identical assets or liabilities in active markets accessible by the Company at the measurement date.

Level 2 – inputs that are observable in the marketplace other than those inputs classified as Level 1

Level 3 – inputs that are unobservable in the marketplace and significant to the valuation

FASB ASC Topic 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.

Valuation Techniques

The Company values 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, 2009 and at December 31, 2008 all of the Company’s investments classified as securities owned on the interim statements of financial condition are classified as Level 1 investments on the fair value hierarchy table in Note 5.

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, 2009 and December 31, 2008 all government bonds are categorized as level 1 investments in the fair value hierarchy.

Certificate of Deposits

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

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, 2009 and at December 31, 2008, the Company offset cash collateral receivables of $127,590 and $131,059 against its net derivative positions.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of significant accounting policies (continued)

Recently Adopted Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (R), codified in FASB ASC Topic 805, ‘‘Business Combinations’’. FASB ASC Topic 805 replaces SFAS 141 and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. FASB ASC Topic 805 also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. FASB ASC Topic 805 is effective for business combinations occurring in the fiscal years beginning on or after December 15, 2008. The adoption of FASB ASC Topic 805 did not have a significant impact on our consolidated financial position, results of operations or cash flows.

In December 2007, FASB issued SFAS No. 160, codified in FASB ASC Topic 810, ‘‘Non-controlling Interests in Consolidated Financial Statements, an amendment of FASB ASC 810-10-10”, which changes the accounting and reporting for minority interests. Minority interests will be re-characterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. FASB ASC 810-10-65 is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retroactively. The adoption of FASB ASC 810-10-65 did not have a significant impact on our consolidated financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, codified in FASB ASC 815-10-15, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB ASC 815-10-05”. This new standard requires enhanced disclosures for derivative instruments, including those used in hedging activities. FASB ASC 815-10-15 is effective for periods beginning after November 15, 2008 and interim periods within those fiscal years. The adoption of FASB ASC 815-10-15 did not have a significant impact on our consolidated financial position, results of operations or cash flows.

In April 2009, the FASB issued FSP FAS 157-4, codified in FASB ASC 820-10-65, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. FASB ASC 820-10-65 provides guidance for determining when a transaction is not orderly and for estimating fair value in accordance with FASB ASC 820-10-05, Fair Value Measurements, when there has been a significant decrease in the volume and level of activity for an asset or liability. FASB ASC 820-10-65 does not change the measurement objective of FASB ASC 820-10-05 which is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” FASB ASC 820-10-65 shall be effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The adoption of FASB ASC 820-10-65 did not have a significant impact on our consolidated financial position, results of operations or cash flows.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, codified in FASB ASC 320-10-65, Recognition and Presentation of Other-Than-Temporary Impairments. FASB ASC 320-10-65 modifies the existing other-than-temporary impairment guidance to require the recognition of an other-than-temporary impairment when an entity has the intent to sell a debt security or when it is more likely than not an entity will be required to sell the debt security before its anticipated recovery.

FASB ASC 320-10-65 shall be effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FASB ASC 320-10-65 did not have a significant impact on our consolidated financial position, results of operations or cash flows.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of significant accounting policies (continued)

Recently Adopted Accounting Pronouncements (continued)

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, codified in FASB ASC 825-10-65 Interim Disclosures about Fair Value of Financial Instruments. FASB ASC 825-10-65 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require fair value of financial instrument disclosures whenever a publicly traded company issues financial information in interim reporting periods in addition to the annual disclosures at year-end. The provisions of FASB ASC 825-10-65 are effective for interim periods ending after June 15, 2009. The adoption of FASB ASC 825-10-65 did not have a significant impact on our consolidated financial position, results of operations or cash flows.

In May 2009, the FASB issued SFAS No. 160 (ASC 855), codified in FASB ASC Topic 855, “Subsequent Events”. This Statement requires entities to recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including estimates inherent in the process of preparing financial statements (“recognizable subsequent events”). This Statement also requires entities to disclose the date through which subsequent events have been evaluated and the nature and estimated financial effects of certain subsequent events. FASB ASC Topic 855 is effective for interim or annual financial periods ending after June 15, 2009. The adoption of FASB ASC Topic 855-10-15 did not have a significant impact on our consolidated financial statements.

Recently Issued Accounting Standards

In June 2009, the FASB issued SFAS No. 168 (ASC 105), codified in FASB ASC 105-10-65, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”, a replacement of SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. The Statement establishes the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative accounting principles recognized by the FASB in the preparation of financial statements in conformity with U.S. GAAP. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of ASC 105-10-65 did not have a material impact on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 codified in FASB ASC 860-10-15. This Statement improves the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This statement is effective for interim and annual reporting periods beginning after November 15, 2009, and is not expected to have a material impact on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FAS Interpretation No. 46 (R) codified in FASB ASC 860-10-15 (“SFAS 167”). This statement which eliminates exceptions to consolidating qualifying special purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. This Statement clarifies, but does not significantly change, the characteristics that identify a variable interest entity. This Statement is effective for fiscal years and interim periods beginning after November 15, 2009, and is not expected to have a material impact on our consolidated financial statements

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of significant accounting policies (continued)

Reclassification

Certain amounts in the 2008 financial statements have been reclassified to conform to the 2009 financial statement presentation.

Securities owned, at fair value

The balance of securities owned at fair value consisted of the following:


	September 30,		December 31,
	2009		2008
	(unaudited)
Certificates of deposit	$	200,000	$	1,200,000
U.K. government obligations		-		437,877
Offshore securities investments		201,157		513,702
Money market		200,000		200,000
Options and futures		127,590		129,034
Equity securities		27,496		32,173

	$	756,243	$	2,512,786

At September 30, 2009 and December 31, 2008, a $200,000 certificate of deposit and a $200,000 money market served as collateral for a note payable to a bank.

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 FASB ASC Topic 820. See Note 3 for a discussion of the Company's policies regarding this hierarchy. The Company's financial assets and liabilities measured at fair value on a recurring basis include those securities classified as securities owned on the consolidated statements of financial condition (see Note 3).

The following fair value hierarchy table presents information about the Company's assets and liabilities measured at fair value:


Assets	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Collateral Held at Broker		Balance as of June 30, 2009 (unaudited)
Securities owned, at fair value:
Certificates of deposit	$	200,000	$		$	––	$	––	$	200,000
Offshore securities investments		201,157								201,157
Money market		200,000								200,000
Options and futures								127,590		127,590
Equity securities		27,496								27,496

	$	628,653	$	––	$	––	$	127,590	$	756,243

Investment in AR Growth common stock	$	––	$	––	$	100,000	$	––	$	100,000

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income taxes

At September 30, 2009, the Company had net operating loss (“NOL”) carry-forwards for federal and state income purposes approximating $6.8 million. 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,
	2009			2008
	(unaudited)
Deferred tax assets:
Net operating loss carryforwards	$	2,548,000		$	1,882,000
Other temporary differences		659,000			663,000

Deferred tax assets		3,207,000			2,545,000

Less: Valuation allowance		(3,207,000	)		(2,545,000	)

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,			June 30,
	2009			2008
	(unaudited)			(unaudited)
Statutory federal income tax expense		(34	) %		(34	) %

State and local income tax (net of federal benefits)		(4	)		(4	)

Other temporary differences		1			1

Valuation allowance		37			37
		––	%		––	%

The Company has taken a 100% valuation allowance against the other timing differences and the deferred tax asset attributable to the NOL carry-forwards of $3.2 million and $2.5 million at September 30, 2009 and at December 31, 2008, respectively, due to the uncertainty of realizing the future tax benefits. The increase in valuation allowance of $662,000 is attributable to the Company’s net operating loss incurred during the nine month period ended September 30, 2009.

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, “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.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. The following weighted average assumptions were used for options granted during the nine months ended September 30, 2009, and for the year ended December 31, 2008: risk free interest rate between 2.25% and 4.65%, no dividend yield, expected lives of ten years and volatility between 124.82% and 178.12%. Options vest ratibly between one and five years and are excersiable over ten years. For the nine months ended September 30, 2009 and 2008, the Company recognized approximately $83,000 and $48,000, respectively, of stock-based compensation expense related to the issuance of options.

The following is a summary of all option activity through September 30, 2009:


	Number of Shares Outstanding		Weighted Average Price		Weighted Average Remaining Term (in years)		Aggregate Instrinsic Value
Options granted and outstanding at December 31, 2008		830,000	$	0.87		9.0	$	850,000
Granted in 2009		30,000		1.50
Options outstanding at September 30, 2009		860,000	$	0.89		8.4	$	––

		579,833	$	0.83		8.4	$	––

The total compensation cost not yet recognized of approximately $108,000 (for non-vested option awards) has a weighted average period of 3 years over which the compensation expense is expected to be recognized.

On January 4, 2007, the Company granted its Chief Executive Office, in accordance with the executive’s employment agreement, 4,500,000 shares. 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. The Company, beginning in January 2007, has been recognizing stock compensation expense over the service period of the employment contract of five and half years. The Company did not issue the shares vested for the period July through September 2009 until November 2009.

The total compensation cost not yet recognized of $1,031,250 (for non-vested shares) has a weighted average period of approximately three 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. Additionally, the Board granted 100,000 options to a member of the Board as compensation for services rendered during 2008.

For the nine months ended September 30, 2009 and the year ended December 31, 2008, warrant activity is as follows:

Exercise

Price

Per

Share

Warrants

Expiring

Balance

January 1,

2008

Warrants

Issued

Exercised

2008

Expired

2008

Balance

December

31,

2008

Warrants

Issued

Exercised

2009

Expired

2009

Balance September 30,

2009

$ 1.00

March 1, 2008

62,500

––

62,500

––

$ 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

––

4,000

Totals

84,000

4,500

––

62,500

26,000

––

26,000

All warrants outstanding at June 30, 2009 are exercisable.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2009, STS’s net capital was approximately $748,000 which was approximately $648,000 in excess of its minimum requirement of $100,000.

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."

10.

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.

11.

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, 2009, the Company was not aware of any legal proceedings, which management has determined to be material to its business operations; however, the Company has been named in the following three actions which it is vigorously defending and which actions, based on management's assessment in coordination with outside litigation counsel, the Company believes to be frivolous and without merit:

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.

Commitments and contingencies (continued)

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, EMILIO 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 MALLOY, 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 Company’s outside litigation counsel has advised that the filing of the bankruptcy has automatically stayed the third party action filed by the debtor against STS.

JORGE HABIB, individually, AIR TEMP DE MEXICO S.A. C.V., a Mexican corporation and AIR TEMP NORTH AMERICA, INC., a Florida corporation, v. ROBERT ESCOBIO, individually, KEVIN FITZGERALD, individually, ADOLFO PORRO, individually, SOUTHERN TRUST SECURITIES, INC. f/k/a CAPITAL INVESTMENT SERVICES, INC., a Florida corporation and SOUTHERN TRUST SECURITIES HOLDING CORP., a Florida corporation - In the Circuit Court in and for the Eleventh Judicial Circuit Court for Miami-Dade County, Florida - Case No. 08-39619 CA 40. This complaint was filed on July 20, 2008. In April 2009, the Company entered into a confidential settlement agreement, through mediation, whereas the financial terms and conditions, which cannot be disclosed at this moment, will not have a material impact in the Company’s business operations or financial condition.

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 the Company’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. 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.

In November 2008, 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.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.

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 a 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 a 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, 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 agreement 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.

12.

Related party transactions

During the nine months ended September 30, 2008, STS acted as placement agent for AR Growth Finance Corp. (“AR Growth”), an entity that the Company has an equity investment in (see Note 15), for the issuance and sale of its stock. As compensation for services rendered, STS earned $150,000.

During 2008, the Company issued 4,500 warrants to STS as compensation for acting as the placement agent in the issuance of the Series C 8% convertible preferred stock.

13.

Investment in limited liability company

In October 2007, the Company entered into an operating agreement, with two other third parties and became a member in a limited liability company (the “LLC”) and made a capital contribution to the LLC of $250,000. The purpose of the LLC is to engage in proprietary trading of all forms of exchange-traded and over the counter financial instruments. Subsequent to the formation of the LLC and receipt of the capital contributions, the LLC became a member in an introducing broker-dealer, where the broker-dealer will trade the investment amount and the LLC will be allocated earnings and losses based solely on the investment of the LLC. The Company accounts for its investment in the LLC under the equity method.

During the month of February 2009, the Company and the two other parties decided to terminate the LLC, effective March 31, 2009. Subsequently, the Company received $240,662 as final liquidation of the LLC, in April 2009.

14.

Investment in AR Growth Finance Corp.

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 common stock of AR Growth trades on the Pink Sheets under the symbol “ARGW.PK”. The Company, together with ICSA and ACSA, intend to implement an acquisition plan to acquire finance related companies in Argentina through AR Growth. The Company accounts for its preferred stock investment in AR Growth, as discussed below, under the cost method of accounting.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.

Investment in AR Growth Finance Corp. (continued)

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. The Series A ARGW provides for cumulative dividends at the rate of 8% per year, payable quarterly, in cash or shares of AR Growth’s common stock at AR Growth’s election. Each share of Series A ARGW shall be convertible into 3.9 shares of AR Growth’s common stock at any time after six (6) months from date of issuance of the preferred stock and prior to notice of redemption at the option of the holder, subject to adjustment for customary anti-dilution events (Conversion Rate). Subject to certain restrictions, the Series A ARGW shall automatically convert into shares of AR Growth’s common stock upon any of the following events: (i) the sale by AR Growth of all, or substantially all, of its assets; (ii) the consummation of a merger or a consolidation; or (iii) the sale or exchange of all, or substantially all, of the outstanding shares of AR Growth’s common stock.

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.

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.

The Company determined that the business of ProBenefit, AR Growth’s primary operating entity, has been adversely affected by recent law changes in Argentina. 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.

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 due for the three quarters ended September 30, 2009 and the fourth quarter ended December 31, 2008.

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.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.

Investment in AR Growth Finance Corp. (continued)

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%. 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.

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

15.

Subsequent event

The Company has evaluated subsequent events through November 13, 2009, the date of issuance of these financial statements, as required by FASB ASC Topic 855.

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 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.

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.

Investment banking is a vital part of our business. 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.

Fiscal 2008 and most of 2009 have experienced one of the worst economic downturns since World War II. Major investment banks disappeared or were converted to bank holding companies, in order to accept customer deposits and thus access permanent liquidity and funding. Additionally, the largest insurance company and the largest savings and loan were both bailed out by the government. As a result of these events, as well as turbulent market conditions and the various “Ponzi scheme” scandals, we have experienced and expect to continue to experience increased scrutiny from the various regulators with jurisdiction over our operations. There is also a certain lack of “trust” on the part of the investing public, which has had, and may continue to have, an adverse affect on brokerage and investment banking operations for the foreseeable future.

The US Government and the Federal Reserve (“FED”) have been actively pursuing initiatives to provide liquidity and stability to the financial markets and as such, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (initially introduced as the Troubled Asset Relief Program or “TARP”) was enacted. Up to the close of February 2009, the major financial indices, DOW Jones, NASDAQ and Standard & Poor’s were down 20%, 13% and 19%, respectively, when compared to their December 31, 2008 levels. However, from March and up to September 30, 2009 these indices have shown some positive trends and momentum and have increased 44%, 60% and 51%, respectively, from their February 2009 closing levels. Furthermore, the DOW Jones, the NASDAQ and Standard & Poor indices have increased 11%, 35% and 17% respectively, as of September 30 when compared to their December 31, 2008 close. These results so far would tend to indicate that the economy is moving towards a recovery and that the government actions might be having a constructive impact. As far as the Fed Funds are concerned, the FED lowered its rate to a range of zero to 25 basis points during the end of 2008, the lowest rates in its history, and has maintained them at those historical lows.

The subprime mortgage crisis of 2007, which still lingers throughout the economy, coupled with the 2008 financial global markets meltdown, has had a direct impact on our business and the current economic outlook for 2009,

although it has shown some recovery, is obscured by credit anxieties, slowing growth, expensive commodities, higher unemployment rates and the decreasing purchasing power of the U.S. dollar. All of which may adversely impact our capital markets activities and consequently, our ability to increase our trading and commission revenues will depend mostly on the future economic conditions and our ability to generate more customer accounts.

Critical Accounting Policies and Estimates

Our consolidated interim 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 interim financial statements.

Valuation of Investments in Securities and Securities at Fair Value - Definition and Hierarchy. We adopted the provisions of FASB ASC 820-10-15, “Fair Value Measurements”, effective January 1, 2008. Under FASB ASC 820-10-15, fair value is defined as the price that would be received to sell 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. FASB ASC 820-10-15 establishes a fair value hierarchy for inputs 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. The fair value hierarchy is categorized into three levels based on the inputs 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.

FASB ASC 820-10-15 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.

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 months and six months ended September 30, 2009 and 2008.

Stock Based Compensation. We comply with FASB ASC 718-10-10 “Compensation – Stock Compensation” issued in December 2004. FASB ASC 718-10-10 is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25 (APB No. 25”). Among other items, FASB ASC 718-10-10 eliminates the use of APB No. 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant-date fair value of the award. The effective date of FASB ASC 718-10-10 for us was the first quarter of 2006. Prior to

December 31, 2005, we complied with SFAS No. 123, which specified a fair value based method of accounting for all stock-based compensation.

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.

Deferred Tax Valuation Allowance. We account for income taxes in accordance with the provision of FASB ASC 740-10-05-30, 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 September 30, 2009 and December 31, 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 liabilities 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, 2009 STS’s net capital was approximately $748,000, which was approximately $648,000 in excess of its minimum requirement of $100,000.

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 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 855-10-15, "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, 2009 or December 31, 2008.

Results of Operations – Three Months Ended September 30, 2009 versus September 30, 2008

Revenues

Our commissions for the three months ended September 30, 2009, increased 108% to $138,585 up from $66,668 for the three months ended September 30, 2008. Commissions include all revenue received by Southern Trust Securities, Inc. (“STS”) and its registered representatives on an agency basis, and are primarily derived from transactions in OTC securities and options. The increase in commissions is mainly attributable to the current spike in economic activity, which in turn has improved investor confidence.

Our trading income for the three months ended September 30, 2009 increased $54,989 from $49,374 recognized for the three months ended September 30, 2008, or a 111% increase, to $104,363. Even though the markets and the economy have been struggling for the last few quarters, we were able to acquire new customers who were interested in investing in fixed income products. However, these results are not indicative of how we will perform for the balance of 2009, 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.

Our investment banking revenue for the three months ended September 30, 2009 was $0 versus $840,000 for the three months ended September 30, 2008. The reason for this decrease was due to an investment banking deal for China Valves Holding Co. LTD, which develops, manufactures and sells high-quality metal valves for the electricity, petroleum, chemical, water, gas, nuclear power and metal industries and is a company organized under the laws of the People’s Republic of China, headquartered in Kaifeng , Henan Province, which transaction closed during the three months ended September 30, 2008. The agreed upon payout on this transaction was 95%. Please see “commissions and clearing fees” expenses below for more details.

Managed account fees decreased 29% or $4,336 to $19,843 for the three months ended September 30, 2009 when compared to $14,877 for the same period in 2008. Managed account fees are primarily earned based on a percentage of assets under management and the related fees are computed and due at specified intervals, generally quarterly and recorded when earned. The main reason for the decrease is related to the decrease in value of the assets under management because of current market turmoil, and the attrition of customer accounts.

Our interest and dividend income decreased $68,811 to $6,415 for the three months ended September 30, 2009 from $75,226 for the three months ended September 30, 2008, mainly attributable to a 100% reserve established for the interest income earned from the Series A 8% preferred shares issued by AR Growth Finance Corp. (“ARGW”), for which we recognized approximately $50,400 for the three months ended September 30, 2008.

Expenses

Commissions and clearing fees expenses incurred during the three months ended September 30, 2009 decreased $796,395 or 89% to $101,733 when compared to $898,128 incurred in the three months ended September 30, 2008. The main reason for the decrease is related to the closing of a Chinese investment banking deal, China Valves Holding Co. LTD, during the three months ended September 30, 2008, whereas the payout made on the deal was 95% of total investment banking fees generated, based on an existing contract. Excluding the Chinese transaction, commissions paid to registered representatives represent 33% and 80% of total transaction based revenues for the three months ended September 30, 2009 and 2008, respectively. The decrease in the percentage of commissions paid to the registered representatives for the three months ended 2009 is in part due to a decrease in payout percentages made to better align commission compensation to the brokerage industry. Clearing fees paid for the three months ended September 30, 2009 and 2008 were $22,223 and $11,893, respectively.

Employee compensation and benefits decreased 9% to $305,280 for the three months ended September 30, 2009 as compared to $335,121 for the three months ended September 30, 2008. The decrease of $29,841 is mostly due to the reduction in salaried employees and cost savings initiatives undertaken by management.

Occupancy costs decreased 27% or $5,411 during the three months ended September 30, 2009 to $14,520 from $19,931 for the three months ended September 30, 2008. Major expenses included under occupancy costs are property taxes, utilities and common repair and maintenance of our office building. The reduction is mainly due to a decrease in repairs and maintenance expenses incurred in the upkeep of our main office building.

our broker-dealer operations. Communications and market data expenses decreased $12,354 or 30% from $40,956 incurred in the three months ended September 30, 2008 to $28,602 for the three months ended September 30, 2009. The main reason for the decrease is due to the cancellation of several market data terminals, with the purpose of decreasing overall operational controllable expenses because of the current economic conditions.

Professional fees decreased $140,703 or 62% to $86,092 for the three months ended September 30, 2009 from $226,795 incurred in the three months ended September 30, 2008. The decrease is mostly related to lower legal expenses incurred related to our current lawsuits, which are either stayed or in their final stages as discussed with our outside legal counsel.

Our travel and entertainment expenses decreased 47% or $24,187 to $27,051 for the three months ended September 30, 2009, from $51,238 for the three months ended September 30, 2008. The decrease is a result of fewer trips made during the three months ended September 30, 2009 mainly due to our cost reduction initiatives implemented as part of our efforts in trying to reduce operational expenses for 2009 and because of the current market conditions. Nevertheless, we will continue our efforts to extend our range of services with our active clients, as well as seeking new business opportunities with potential clients on and offshore.

Our other operational expenses include miscellaneous expenses and our Directors and Officers (“D&O”) insurance premium. Other operational expenses increased 15% to $61,168 for the three months ended September 30, 2009 when compared to $ $53,104 incurred for the same time period in 2008. The increase of $8,064 is mostly due to a reserve established on a note receivable from a broker who left our firm in the amount of $22,000, offset in part by an expense sharing agreement with an affiliate, whereas the affiliate reimburses our brokerage division for its use of premises, equipments and other. Amount reimbursed for the three months ended September 30, 2009 amounted to $7,500.

Dividends attributable to our preferred stockholders remained flat at $104,000 for the three months ended September 30, 2009 and 2008, since there was no change in principal during those periods on the outstanding Series C preferred stock. The preferred stock has an 8% dividend rate.

Results of Operations for the nine months ended September 30, 2009 and 2008

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


	2009			2008			% Change			Change
	(unaudited)			(unaudited)
Statement of operations data:
Revenue	$	971,121		$	3,070,242			(68	%)	$	(2,099,121	)
Expenses		2,670,017			4,727,618			(44	%)		(2,057,601	)
Net loss applicable to common stockholders		(2,014,857	)		(1,938,038	)		4	%		76,819
Loss per common share		(0.15	)		(0.14	)	NM			NM

	At September 30, 2009			At December 31, 2008
	(unaudited)
Financial condition data:
Cash and cash equivalents	$	708,413		$	652,783			9	%	$	55,630
Marketable securities owned, at fair value		756,243			2,512,786			(70	%)		(1,756,543	)
Total assets		5,422,080			7,396,891			(27	%)		(1,974,811	)
Notes payable		1,144,454			1,196,124			(4	%)		(51,670	)
Stockholders' equity		3,964,152			5,607,282			(29	%)		(1,643,130	)

For the nine months ended September 30, 2009, we experienced a net loss before dividends to preferred stockholders of $1,702,857 as compared to a net loss before dividends to preferred stockholders of $1,654,517 for the nine months ended September 30, 2008. The decrease in net loss is primarily attributable to the decrease in share-based compensation, partly offset by higher professional fees.

Revenues

Our commissions for the nine months ended September 30, 2009, increased 43% to $399,467 up from $284,602 for the nine months ended September 30, 2008. The increase in commissions is mainly attributable to higher trading activities by our customers and new customer accounts opened during the year.

Our trading income for the nine months ended September 30, 2009 increased $182,949 from $247,681 recognized for the nine months ended September 30, 2008, or a 74% increase, to $430,630. Trading profits are generated mainly from fixed income products sold to our customers on a riskless trading principal basis. Since there has been some improvement in the financial markets and the economy, we have been able to acquire new customers with an appetite for fixed income products. Consequently, our trading on those products has improved substantially when compared to the nine months ended September 30, 2008, when the economy was in the midst of the current recession. However, these results are not indicative of our future revenues for the remainder of 2009, and thus our capacity to increase our trading revenues will depend mostly on the future economic conditions and our ability to generate more customer accounts.

Our investment banking revenue for the nine months ended September 30, 2009 decreased $2,195,430 to $47,770 representing a decrease of 98% when compared with the nine months ended September 30, 2008. The $2,243,200 represents three investment banking deals closed during the nine months ending on September 30, 2008. We recognized $150,000 as placement fees from a closing of a Private Placement of AR Growth Finance Corp. (“ARGW”) in the first quarter of 2008 and $1,253,200 and $840,000 of investment banking fees in the second and third quarters, respectively, earned from two Chinese deals, Shanghai Medical Technology Co Ltd, a hemodialysis company organized under the laws of the People’s Republic of China, and headquartered in Shanghai and China Valves Holding Co. LTD, which develops, manufactures and sells high-quality metal valves for the electricity, petroleum, chemical, water, gas, nuclear power and metal industries. For the nine months ended September 30, 2009, no major investment banking deals were closed and only advisory and referral fees from investment banking customers were generated during such period. Investment banking fees are generally determined as a percentage of the size of the deal or contract.

Managed account fees decreased 10% or $6,574 to $60,399 for the nine months ended September 30, 2009 when compared to $66,973 for the same period in 2008. Managed account fees are primarily earned based on a percentage of assets under management and the related fees are computed and due at specified intervals, generally quarterly, and recorded when earned. The main reason for the decrease is related to the decrease in value of the assets under management because of current market turmoil, and the attrition of customer accounts during the second half of 2008. Assets under management as of September 30, 2009 and 2008 were approximately $7 million and $8 million, respectively.

Our interest and dividend income decreased $196,499 to $25,976 for the nine months ended September 30, 2009 from $222,475 for the nine months ended September 30, 2008, mainly attributable to the 100% reserve of the preferred stock dividend receivable from the investment in the Series A 8% convertible preferred stock of AR Growth (“ARGW”), which approximates $150,000. Because of the adverse effect the changes in the Argentinean law had on the operating company of ARGW, we recorded an other-than-temporary impairment charge of $1,250,000 against our preferred stock investment in ARGW of $2,500,000 in December 2008. On August of 2009, we were able to restructure the investment in AR Growth. Please refer to Note 15 in the consolidated interim financial statements, included herein, for further details.

Expenses

Commissions and clearing fees expenses incurred during the nine months ended September 30, 2009 decreased $1,809,789 to $389,721 when compared to $2,199,510 incurred in the nine months ended September 30, 2008, mainly due to the decrease in revenues, specifically our investment banking fees. As mentioned above, we recognized $2,093,200 of investment banking fee revenues during the nine months ended September 30, 2008, related to two Chinese deals, for which 95%, or $1,988,540, was paid out as commissions to registered firms and representatives. Our broker-dealer, STS, shares a varying percentage of commissions with its registered representatives based on arrangements between STS and each registered representative and based on the nature of the product from which commissions are earned. The portion of the commission paid to a registered representative is an expense on our consolidated statements of operations under “commission and clearing fees.” Also included in “commissions and clearing fees” are referral fees STS pays to foreign finders for transactions effectuated by STS and its registered representatives at the request of such foreign finders. These revenues which are directly

identifiable and attributable to any registered representative or foreign finders are commonly known as “compensable revenues”. Commissions paid to registered representatives are variable in nature and are based on a pre-determined percentage of compensable revenues generated. Compensable revenues include revenues derived from commissions, trading income, investment banking fees and managed account fees. Any other income recognized by us (for example interest and dividend income generated from our investment portfolio) is not considered compensable revenue and thus no payouts to registered representatives are made. Total commissions compensation paid, as a percentage of compensable revenues, decreased from 77% for the nine months ended September 30, 2008 to 38% for the nine months ended September 30, 2009 mainly because of the Chinese investment banking deals closed in 2008 that had a 95% payout. Excluding these transactions, commissions paid to registered representatives for the nine months ended September 30, 2008 would have been 61%; the reason it is lower than the nine months ended September 30, 2009 (38%) is due to a reduction in payouts to registered representatives in order to better align the compensation expenses with the current economic conditions. Clearing fees are costs paid to third party service providers who provide clearance services for our sales transactions. Fees are assessed based on the type of product and, accordingly, vary according to the mix of products and volume generated. Clearing fees paid for the nine months ended September 30, 2009 and 2008 were $52,288 and $42,099, respectively.

Employee compensation and benefits decreased 6% to $1,185,149 for the nine months ended September 30, 2009 as compared to $1,258,581 for the nine months ended September 30, 2008. The decrease of $73,432 is mostly due to the reduction in stock-based compensation expenses offset in part by higher guaranteed draws paid to newly hired registered representatives. Stock-based compensation expenses decreased 35%, or $119,322 to $364,024 for the nine months ended September 30, 2009, as compared to $483,346 for the same period ended September 30, 2008. As part of the employment agreements entered with several of our key executives on January 4, 2007, one executive was granted 922,389 shares of common stock vesting equally on a monthly basis over eighteen months, which became fully vested on June 2008. As a result, expenses recognized for stock-based compensation for the nine months ended September 30, 2009 decreased by approximately $154,000, offset in part by stock options granted to officers and employees during 2007, 2008 and 2009.

Occupancy costs increased 6% or $2,617 for the nine months ended September 30, 2009, to $49,933, from $47,316 for the nine months ended September 30, 2008. Major expenses included under occupancy costs are our business insurance expenses, rent, property taxes, depreciation and common repair and maintenance of our office building. The increase is mainly due to higher property taxes paid on our building, offset in part by lower maintenance expenses.

Communications and market data expenses represent mostly charges on our terminals used to monitor and analyze real-time financial market data movements, telephone expenses, and licenses and registration expenses associated with our broker-dealer operations. Communications and market data expenses decreased $53,382 or 38% from $138,815 incurred in the nine months ended September 30, 2008 to $85,386 for the nine months ended September 30, 2009. The main reason for the increase is related to expenses paid to register our broker dealer in additional states and early cancellation fees assessed to cancel one market data terminal.

Professional fees decreased $78,787 or 13% for the nine months ended September 30, 2009 to $542,196 from $620,983 for the nine months ended September 30, 2008, due to lower legal expenses incurred related to our current lawsuits, which are either stayed or in their final stages as discussed with our outside legal counsel. From time to time, STS may be a defendant, or co-defendant, in arbitration matters incidental to its retail brokerage services business. As of September 30, 2009, there are no material legal disputes that may have an adverse impact on our financial statements.

Our travel and entertainment expenses decreased 20% or $32,367 to $133,123 for the nine months ended September 30, 2009, down from $165,490 for the nine months ended September 30, 2008. The decrease is mainly due to our cost reduction initiatives implemented as part of our efforts in trying to reduce operational expenses for 2009 because of the current economic conditions.

Interest expense decreased 8% or $5,444 for the nine months ended September 30, 2009, to $65,777, from $71,221 incurred for the nine months ended September 30, 2008. The reason for the decrease is due to the reduction of principal balances on our loans.

Our other operational expenses include miscellaneous expenses and our Directors and Officers (“D&O”) insurance premium. Other operational expenses decreased 4% to $162,086 for the nine months ended September 30, 2009 when compared to $169,611 incurred for the nine months ended September 30, 2008. The decrease is mostly due to

a reserve established on a note receivable from a broker who left our firm in the amount of $22,000, offset in part by an expense sharing agreement with an affiliate and other cost savings implemented because of the current economic conditions. Under the expense sharing agreement with the affiliate, the affiliate reimburses our brokerage division for its use of premises, equipments and other. Amount reimbursed for the nine months ended September 30, 2009 amounted to $17,500.

Dividends attributable to our preferred stockholders increased 10% or $28,479 to $312,000 for the nine months ended September 30, 2009 when compared to $283,521 for the nine months ended September 30, 2008, mainly due to the increase in the preferred stock outstanding for 2009. For the nine months ended September 30, 2009 and 2008, the Series C 8% noncumulative preferred stock’s weighted average balance was approximately $5.2 million and $4.7 million, respectively.

Liquidity and Capital Resources

As of September 30, 2009, liquid assets consisted primarily of cash and cash equivalents of approximately $708,000 and marketable securities of approximately $756,000 for a total of $1,464,000 which is $1,702,000 lower than the approximately $3,166,000 in liquid assets as of December 31, 2008. 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 $56,000 at September 30, 2009. Cash provided by our operating activities for the nine months ended September 30, 2009 was approximately $175,000, which consists of our net loss of approximately $1,699,000 adjusted for non-cash expenses of approximately $421,000 of stock-based compensation and depreciation and amortization, and a net increase in operating assets and liabilities of approximately $1,453,000. Cash provided by investing activities amounted to approximately $239,000, which represents mainly our redemption of our investment in the limited liability company we had invested in. Cash used in our financing activities was approximately $366,000, which consisted mainly of debt service payments made on our notes payable and capital lease obligations of approximately $54,000 and dividends paid to our preferred stockholders of $312,000.

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, 2009, STS had regulatory net capital of approximately $748,000, which exceeded the required amount by approximately $648,000.

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. During March 2009 and effective July 2009, certain employee salaries and payout percentages were 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 of reducing the overall charges.

The following is a table summarizing our significant commitments as of September 30, 2009, consisting of debt payments related to our notes payable and employment agreements:.


Year Ending September 30,	Total		Notes Payable		Employment Agreements
2010	$	111,000	$	73,000	$	38,000
2011		79,000		79,000		––
2012		84,000		84,000		––
2013		90,000		90,000		––
2014		97,000		97,000		––
Thereafter		721,000		721,000		––
Total commitments	$	1,182,000	$	1,144,000	$	38,000

Off-Balance Sheet Arrangements

We were not a party to any off-balance sheet arrangements during the period ended September 30, 2009, 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, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of September 30, 2009. 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, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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, 2009, 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:

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, EMILIO 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 MALLOY, 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. Our outside litigation counsel has advised us that the filing of the bankruptcy has automatically stayed the third party action filed by the debtor against STS.

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.

In November 2008, we 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 us, as discussed in the preceding paragraph. Our actions seek to recover compensation owed to us for work performed in connection with extensive financial and investment advice work.

Item 1A.

Risk Factors

Not applicable.

Item 2.

Unregistered Sales of Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

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

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.


	By:	/s/ Robert Escobio
		Robert Escobio Chief Executive Officer and Chief Financial Officer (Principal Executive and Accounting Officer)

Date: November 16, 2009

Southern Trust Securities Holding Corp - FORM 10-Q - November 16, 2009

Attached files

Southern Trust Securities Holding Corp Reports