Southern Trust Securities Holding Corp - FORM 10-Q

Attached files

file	filename
EX-32 - CERTIFICATION - Southern Trust Securities Holding Corp	solh_ex32.htm
EX-31 - CERTIFICATION - Southern Trust Securities Holding Corp	solh_ex31.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 June 30, 2012

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

For the transition period from ______ to ___________

Commission file number: 000-52618

SOUTHERN TRUST SECURITIES HOLDING CORP.

(Exact name of registrant as specified in its charter)

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

145 Almeria Ave., Coral Gables, Florida		33134
(Address of principal executive offices)		(Zip Code)

(305) 446-4800

(Registrant’s telephone area, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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

The registrant had 19,177,826 shares of common stock issued and outstanding on July 18, 2012.

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

Item 1.	Consolidated Interim Financial Statements

	Consolidated Statements of Financial Condition as of June 30, 2012 and December 31, 2011	3

	Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011	4

	Consolidated Statements of Changes in Stockholders’ Equity	5

	Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	41

PART II

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	45

Item 3.	Default Upon Senior Securities	45

Item 4.	None.	45

Item 5.	Other Information	45

Item 6.	Exhibits	45

Signature Page		46

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	June 30,			December 31,
	2012			2011
	(Unaudited)
ASSETS

Cash and cash equivalents	$	298,779		$	339,445

Securities owned at fair value	$	1,006,642			957,953

Receivable from ProBenefit, S.A.	$	1,100,000			-

Due from clearing brokers	$	5,966,648			4,480,177

Commissions receivable	$	76,774			76,566

Investment in AR Growth	$	22,370			22,370

Investment in Nexo Emprendimientos, S.A. (see Note 16)	$	1,524,704			1,763,855

Other assets	$	27,734			17,322

Property and equipment, net	$	1,552,722			1,555,628

Total assets	$	11,576,373		$	9,213,316



LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
Accounts payable and accrued expenses	$	432,712		$	290,805
Payable to customers		6,077,764			4,715,566
Notes payable		671,032			700,739

Total liabilities	$	7,181,508			5,707,110

Commitments and contingencies (notes 15 and 16)

Stockholders' equity
Series C 8% convertible preferred stock, no par value, 2.5 million shares authorized,
520,000 issued and outstanding		5,200,000			5,200,000
Common stock, no par value, 100 million shares authorized; 19,177,826 and 19,177,826
shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively		10,474,760			10,474,760
Additional paid-in capital		1,866,515			1,729,538
Accumulated deficit		(13,240,187	)		(13,992,111	)
Accumulated other comprehensive loss		(24,531	)		(18,154	)

Total Southern Trust Securities Holding Corp. and Subsidiaries stockholders' equity		4,276,557			3,394,033
Noncontrolling interest		118,308			112,173
Total stockholders' equity		4,394,865			3,506,206

Total liabilities and stockholders' equity	$	11,576,373		$	9,213,316

See accompanying notes to consolidated financial statements.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30,			June 30,			June 30,			June 30,
	2012			2011			2012			2011
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenues
Trading income	$	387,486		$	532,207		$	970,063		$	897,010
Commissions	$	278,300		$	177,853		$	370,287		$	558,189
Investment banking fees	$	-		$	-		$	-		$	3,704
Managed account fees	$	25,027		$	19,027		$	47,627		$	38,742
Interest and dividend income	$	12,989		$	12,346		$	47,375		$	22,292
Other income	$	180,844		$	75,000		$	196,167		$	75,000

		884,646		$	816,433		$	1,631,519		$	1,594,937

Expenses
Commissions and clearing fees		379,758		$	420,551		$	769,012		$	853,971
Employee compensation and benefits		225,627		$	186,751		$	430,066		$	373,572
Occupancy		12,021		$	16,506		$	33,397		$	33,309
Communications and market data		70,449		$	49,379		$	121,648		$	80,259
Professional fees		145,284		$	107,394		$	271,546		$	224,609
Travel and entertainment		18,060		$	22,851		$	33,144		$	31,539
Depreciation and amortization		17,088		$	15,814		$	32,047		$	31,627
Interest expense		12,711		$	3,945		$	25,618		$	27,925
Other operational expenses		59,350		$	63,524		$	117,831		$	101,233

		940,348		$	886,715		$	1,834,309		$	1,758,044


Loss from operations		(55,702	)		(70,282	)		(202,790	)		(163,107	)

Gain on exercise of put option		750,242		$	-		$	750,242		$	-

Income (loss) before equity income (loss) of NEXO Emprendimientos SA		694,540			(70,282	)		547,452			(163,107	)

Equity in income (loss) of NEXO Emprendimientos SA		351,427		$	(106,725	)	$	210,607		$	(262,502	)

Net income (loss)		1,045,967		$	(177,007	)	$	758,059		$	(425,609	)

Net income attributable to noncontrolling interest		5,541		$	24		$	6,135		$	915

Net income (loss) attributable to Southern Trust Securities Holding Corp.
and Subsidiaries	$	1,040,426		$	(177,031	)	$	751,924		$	(426,524	)
Preferred Stock Dividends	$	-		$	(52,000	)	$	-		$	(52,000	)


Net income (loss) applicable to common stockholders	$	1,040,426		$	(229,031	)	$	751,924		$	(478,524	)


Comprehensive income (loss):
Net income (loss)	$	1,045,967		$	(177,007	)	$	758,059		$	(425,609	)
Foreign currency translation adjustment		(12,654	)	$	4,659		$	(6,377	)	$	16,002

Total Comprehensive income (loss)		1,033,313		$	(172,348	)	$	751,682		$	(409,607	)
Comprehensive income (loss) attributable to noncontrolling interest		5,541		$	24		$	6,135		$	915

Comprehensive income (loss) attributable to Southern Trust Securities Holding Corp. and subsidiaries	$	1,027,772		$	(172,372	)	$	745,547		$	(410,522	)


Weighted average common shares outstanding
Basic		19,177,826			15,451,328		$	19,177,826		$	14,895,441

Diluted		21,257,826			15,451,328			21,257,826			14,895,441

Net income (loss) per common share
Basic	$	0.05		$	(0.01	)	$	0.04		$	(0.03	)

Diluted	$	0.05		$	(0.01	)	$	0.04		$	(0.03	)

See accompanying notes to consolidated financial statements.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLERS' EQUITY


																	Total Southern Trust Securities Holding


														Accumulated			Corp. and
									Additional					Other			Subsidiaries					Total
	Preferred Stock				Common Stock				Paid-In		Accumulated			Comprehensive			Stockholders'			Noncontrolling		Stockholders'
	Shares		Amount		Shares		Amount		Capital		Deficit			(loss)			Equity			Interest		Equity

Balance, December 31, 2011		520,000	$	5,200,000		19,177,826	$	10,474,760	$	1,729,538	$	(13,992,111	)	$	(18,154	)	$	3,394,033		$	112,173	$	3,506,206


Stock based compensation										136,977								136,977					136,977

Comprehensive loss:

Net income												751,924						751,924			6,135		758,059
Foreign currency
currency adjustment															(6,377	)		(6,377	)				(6,377	)

Balance, June 30, 2012		520,000	$	5,200,000		19,177,826	$	10,474,760	$	1,866,515	$	(13,240,187	)	$	(24,531	)	$	4,276,557		$	118,308	$	4,394,865

See accompanying notes to consolidated financial statements.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months			Six Months
	Ended			Ended
	June 30,			June 30,
	2012			2011
	(Unaudited)			(Unaudited)
Cash flows from operating activities

Net income (loss )	$	758,059		$	(425,609	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Stock-based compensation - employees	$	136,977			95,947
Depreciation and amortization	$	32,047			31,627
(Gain) Loss in equity of affiliate	$	(210,607	)		262,502
Gain on exercise of put option	$	(750,242	)		-
Changes in operating assets and liabilities:
Securities owned	$	(48,689	)		(8,073	)
Due from clearing broker	$	(1,486,471	)		(2,134,059	)
Commissions receivable	$	(208	)		51,968
Other assets	$	(10,412	)		3,351
Accounts payable and accrued expenses	$	141,907			76,376
Payable to customers	$	1,362,198			2,230,468

Net cash (used in) provided by operating activities	$	(75,441	)		184,498

Cash Flows from investing activities

Purchases of equipment	$	(29,141	)		-
Purchases of equity investment	$	-			(1,000,000	)
Proceeds from exercise of put option	$	100,000			-

Net cash provided by (used in) investing activities	$	70,859			(1,000,000	)

Cash flows from financing activities

Proceeds from sale of common stock	$	-			1,042,857
Dividends paid to preferred stockholders	$	-			(52,000	)
Principal payments on notes payable and capital lease obligations	$	(29,707	)		(30,198	)

Net cash flows (used in) provided by financing activities	$	(29,707	)		960,659

Effect of foreign exchange rate changes
on cash and cash equivalents	$	(6,377	)		16,002

Net (decrease) increase in cash and cash equivalents	$	(40,666	)		161,159

Cash and cash equivalents, beginning of period	$	339,445			281,878

Cash and cash equivalents, end of period	$	298,779		$	443,037

Supplementary disclosure of cash flow information:

Cash paid during the years for interest	$	25,618		$	27,925

Noncash investing and financing activities
Receivable from ProBenefit, S.A. in connection with exercise of put	$	1,100,000		$	-

See accompanying notes to consolidated financial statements.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The following (a) condensed consolidated statement of financial condition as of June 30, 2012, which has been derived from audited financial statements, and (b) the unaudited condensed consolidated interim financial statements included herein have been prepared by Southern Trust Securities Holding Corp. and subsidiaries (collectively, the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to the quarterly report on Form 10-Q and Rule 8-03 of Regulation S-X. We are providing herein the consolidated interim statements of financial condition of Southern Trust Securities Holding Corp. and subsidiaries (collectively the "Company") as of June 30, 2012 and December 31, 2011, and the related consolidated interim statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2012 and 2011, and cash flows for the six months ended June 30, 2012 and 2011 and the consolidated interim statements of changes in stockholders equity and comprehensive income (loss) for the six months ended June 30, 2012. 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, 2011 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 six months ended June 30, 2012 are not necessarily indicative of results that may be expected for the fiscal year ending December 31, 2012

2. Nature of operations

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

The Company contributed $105,653 in cash to form a new company, IPWM, España S.A. ("IPWM Spain") under a partnership agreement with a Swiss Financial Group, International Private Wealth Management, SA (“IPWM, SA”), in exchange for a 50.01% interest and control of the newly created company. During July 2008, IPWM Spain commenced operations and opened offices in the cities of Barcelona, Spain, San Sebastian, Spain and Marbella, Spain. IPWM Spain had limited operations for the six months ended June 30, 2012 and the year ended December 31, 2011.

The Company is a Florida corporation and was organized on January 25, 2000. STS, a Florida corporation, was organized on June 10, 1999 and is registered as an introducing broker/dealer with the Securities and Exchange Commission (“SEC”). STS is a member of the Financial Industry Regulatory Authority (“FINRA”) and National Futures Association (“NFA”). STS operates as an introducing broker clearing customer trades on a fully disclosed basis through clearing firms. 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 certain of the transaction clearing functions and related services for STS. STSAM, a Florida corporation formed on November 22, 2005, is a fee-based investment advisory company which offers its services to retail customers. STM, a Florida corporation formed on October 29, 2009, to capitalize on investor interest in the trading of precious metals such as gold, silver, platinum, and palladium. LOR, a British Virgin Islands corporation, was formed on May 19, 2004, and acts as an international intermediary for STM’s international trading transactions; the corporation had been inactive until 2010.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of significant accounting policies

Basis of Presentation and Principles of Consolidation

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

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

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities at the date of the consolidated 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.

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.

Government and Other Regulation

The business of STS is subject to significant regulation by various governmental agencies and self-regulatory organizations. Such regulation includes, among other things, periodic examinations by these regulatory bodies to determine whether the Company is conducting and reporting its operations in accordance with the applicable requirements of these organizations.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of significant accounting policies (continued)

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation and amortization. Improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the respective assets or the lease term. 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. When property and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations.

Long-Lived Assets

In accordance with Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360 “Property, Plant, and Equipment,” the Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. There were no impairment charges during the six months ended June 30, 2012 and 2011.

Fair Value of Financial Instruments – Definition and Hierarchy

In accordance with GAAP, 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, the Company uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of significant accounting policies (continued)

Fair Value of Financial Instruments – Definition and Hierarchy (continued)

The fair value hierarchy is categorized into three levels based on the inputs as follows:

Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities the Company has the ability to access.

Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined.

Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 5. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular instruments. Changes in assumptions or in market conditions could significantly affect the estimates.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of significant accounting policies (continued)

Valuation Techniques

Derivative Contracts

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

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

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 June 30, 2012 and December 31, 2011, the Company offset cash collateral receivables of approximately $20,000 and $9,000 against its net derivative positions, respectively.

Broker Receivable and Payable to Customers

As part of its operations STM collects funds from customers and remits the amounts to the respective clearing broker. The receivable and payable amounts are stated at the amounts transferred. Upon liquidation of customer positions, STM typically remits the proceeds back to the customer after deducting commission and other fees. As further discussed in Note 14, the Company is dependent upon clearing brokers to satisfy its obligations to the Company in order for the Company to liquidate its payable to the customers.

Securities Transactions

Revenues for executing customer securities transactions and associated expenses are recorded as earned and incurred, on a trade date basis. Securities owned are valued at fair value. Unrealized appreciation or depreciation is reflected in income currently.

Commissions

Commissions and related clearing expenses are recorded on a trade-date basis as securities transactions occur.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of significant accounting policies (continued)

Investment Banking Fees

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

Managed Account Fees

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

Investments-Equity Method to Cost Method

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

The Company purchased an additional 12.2% interest on May 26, 2011, raising its overall interest in Nexo to 29.5%. This required the Company to change its method of accounting for this investment from the cost method to the equity method. According to ASC 323-10-35-33, the investment, results of operations (current and prior periods presented), and retained earnings of the investor shall be adjusted retroactively as if the equity method had been in effect during all previous periods in which the investment was held.

As a result of the method change noted in the prior paragraph, the 2010 investment accumulated deficit was adjusted to give effect to equity method accounting. The change to equity method affected the net loss for the first six months of 2011 through retrospective application of the equity method.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of significant accounting policies (continued)

Investments-Equity Method to Cost Method (continued)

Three Months Ended

Effect of

June 30, 2011

Three Months

Correction of

Giving Effect to

Ended

Error in

Correction of

June 30, 2011

Retrospective

Error in Retrospective

As originally

Application of

Reported

Equity Method

Equity in income of NEXO Emprendimientos SA

(76,962

)

(29,763

)

(106,725

)

Six Months Ended

Effect of

June 30, 2011

Six Months

Correction of

Giving Effect to

Ended

Error in

Correction of

June 30, 2011

Retrospective

Error in Retrospective

As originally

Application of

Reported

Equity Method

Equity in income of NEXO Emprendimientos SA

(133,311

)

(129,191

)

(262,502

)

On March 21, 2012, Nexo executed a debt for equity exchange which resulted in the issuance of new shares by Nexo, reducing the Company’s level of ownership in Nexo from 29.5% to 25.13%. On May 10, 2012, the Company exercised a put option to sell 2,184,250 of its 9,621,582 shares of Nexo to ProBenefit, S.A., thereby reducing its ownership to 19.42%. At this point, the Company began recording its investment in Nexo under the cost method of accounting.

The fair value of our cost-method investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. The Company does not believe there are any events which occurred in the three months ended June 30, 2012 that would indicate impairment. Additionally, the Company believes that it is not practicable to estimate the fair value of this investment without incurring excessive costs.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of significant accounting policies (continued)

Income Taxes

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

The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company’s consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from tax authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes in the consolidated financial statements as appropriate.

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

Interest and Penalty Recognition on Unrecognized Tax Benefits

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other operational expenses. No interest expense or penalties have been recognized as of and for the six month periods ended June 30, 2012 and 2011 and the year ended December 31, 2011.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of significant accounting policies (continued)

Foreign Currency Adjustments

The financial position and results of operations of the Company’s foreign subsidiary is measured using the foreign subsidiary’s local currency as the functional currency in accordance with FASB ASC Topic 830, “Foreign Currency Matters.” Revenues and expenses of such subsidiary have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange as of the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders’ equity. Foreign currency translation adjustments resulted in a loss of $12,654 and $6,377 for the three and six months ended June 30, 2012, respectively, and a gain of $4,659 and $16,002 for the three and six months ended June 30, 2011.

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 consolidated results of operations as incurred.

Comprehensive Income (Loss)

The Company complies with FASB ASC Topic 220, “Comprehensive Income,” which establishes rules for the reporting and display of comprehensive income (loss) and its components. FASB ASC Topic 220 requires the Company’s change in foreign currency translation adjustments to be included in other comprehensive income (loss), and is reflected as a separate component of stockholders’ equity.

Fair Value of Financial Instruments

The approximate fair value of the mortgage loan as of June 30, 2012 and December 31, 2011 was $888,000 and $944,000, respectively. The carrying amount of all other financial assets and liabilities that qualify as financial instruments under FASB ASC Topic 825, “Financial Instruments,” approximate their carrying amounts presented in the accompanying consolidated statements of financial condition at June 30, 2012 and December 31, 2011.

Income (Loss) Per Common Share

The Company complies with the accounting and disclosure requirements of FASB ASC 260, “Earnings Per Share.” Basic income (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 earnings per common share is computed by dividing net income attributable to the Company by the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s share-based compensation plans, stock warrants and shares of common stock issuable upon the conversion of the Series C 8% convertible preferred stock and the weighted average number of common shares outstanding during the reporting period.

Employee stock options to purchase approximately 8,360,000 shares of common stock during the three months and six months ended June 30, 2012, were outstanding but not included in the computation of diluted earnings per common share because the stock option’s exercise prices were less than the average market price of the common stock while they were outstanding. For the three and six months ended June 30, 2012 the 2,080,000 shares of common stock issuable upon the conversion of the Series C 8% convertible preferred stock were outstanding and included in the computation of diluted earnings per share. Employee stock options to purchase approximately

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of significant accounting policies (continued)

5,010,000 shares of common stock, 4,500 warrants and 2,080,000 shares of common stock issuable upon the conversion of the Series C 8% convertible preferred stock during the three and six months ended June 30, 2011, were outstanding but not included in the computation of diluted earnings per common share because the effect would be anti-dilutive.

Loss Contingencies

The Company recognizes contingent losses that are both probable and estimable. In this context, the Company defines probability as circumstances under which events are likely to occur. In regards to legal cost, we record such costs as incurred.

Funds received from court awarded legal settlements

The Company accounts for funds received from court awarded legal settlements on the cash basis. These funds are reported as miscellaneous income on the consolidated statements of operations and comprehensive income (loss).

Investment

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

Stock-Based Compensation

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of significant accounting policies (continued)

Stock-Based Compensation (continued)

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 three and six months ended June 30, 2012, the Company recorded approximately $76,000 and $128,000, respectively, as compensation expense under FASB ASC 718 and $48,000 and $96,000, respectively, during the three and six months ended June 30, 2011.

Nonemployee awards

The fair value of equity instruments issued to a nonemployee is measured by using the stock price and other measurement assumptions as of the date of either: (i) a commitment for performance by the nonemployee has been reached; or (ii) the counterparty’s performance is complete. Expenses related to nonemployee awards are generally recognized in the same period as the Company incurs the related liability for goods and services received. The Company recorded stock compensation of approximately $4,600 and $9,200 for the three and six months ended June 30, 2012, respectively, and $-0- and $-0- for the three and six months ended June 30, 2011, related to consulting services.

Recently Adopted Accounting Pronouncements

On June 16, 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income (Topic 220),” which requires companies to report total net income, each component of comprehensive income, and total comprehensive income on the face of the income statement, or as two consecutive statements. The components of comprehensive income will not be changed, nor does the ASU affect how earnings per share is calculated or reported. These amendments will be reported retrospectively upon adoption. The adoption of the ASU had no material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued an accounting standard update which works to achieve common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards. The update both clarifies the FASB’s intent about the application of existing fair value guidance, and also changes certain principles regarding measurement and disclosure. The update is effective prospectively and is effective for annual periods beginning after December 15, 2011. The adoption of the ASU had no material impact on the Company’s consolidated financial statements.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Clearing Arrangements

STS, the Company’s broker-dealer subsidiary, has clearing agreements with clearing brokers to provide execution and clearing services on behalf of its customers on a fully disclosed basis. All customer records and accounts are maintained by the clearing brokers. STS maintains a deposit with one of the clearing brokers. A termination fee may apply if the Company were to terminate its relationship with the respective clearing broker.

5. Fair value measurements

The Company's assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with GAAP guidance for fair value measurement. See Note 3 for a discussion of the Company's policies regarding this hierarchy.

Cash and cash equivalents, receivables, as well as accounts payable and accrued expenses, and other current liabilities, as reflected in the consolidated financial statements, approximate fair value because of the short-term maturity of these instruments.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

June 30, 2012

December 31, 2011

Fair Value

Carrying

Fair

Carrying

Fair

Hierarchy

Amount

Value

Amount

Value

Liabilities:

Mortgage payable at 7.28% due 2020

Level 3

671,032

888,187

700,739

943,735

The fair value estimates of these financial instruments were based upon a discounted cash flow analysis taking into consideration current rates.

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.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Fair value measurements (continued)

	Quoted Prices
	in Active		Significant
	Markets		Other		Significant				Balance
	for Identical		Observable		Unobservable		Collateral		as of
	Assets		Inputs		Inputs		Held		June 30,
	(Level 1)		(level 2)		(Level 3)		at Broker		2012
Assets
Securities owned, at fair value:
Money market	$	259,521	$	-	$	-	$	-	$	259,521
Options and futures		-		-		-		20,290		20,290
Corporate bonds		509,211		-		-				509,211
Equity securities		217,620		-		-		-		217,620

	$	986,352	$	-	$	-	$	20,290	$	1,006,642

Investment in A/R Growth common stock	$	-	$	-	$	22,370	$	-	$	22,370

	Quoted
	Prices in Active		Significant
	Markets		Other		Significant				Balance
	For Identical		Observable		Unobservable		Collateral		as of
	Assets		Inputs		Inputs		Held		December 31,
	(Level 1)		(level 2)		(Level 3)		at Broker		2011
Assets
Securities owned, at fair value:
Money market	$	250,766	$	-	$	-	$	-	$	250,766
Options and futures		-		-		-		8,744		8,744
Corporate bonds		501,064		-		-				501,064
Equity securities		197,379		-		-		-		197,379

	$	949,209	$	-	$	-	$	8,744	$	957,953

Investment in A/R Growth common stock	$	-	$	-	$	22,370	$	-	$	22,370

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Fair value measurements (continued)

Derivatives

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

Options

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

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

Futures Contracts

The Company is subject to equity price risk in the normal course of pursuing its investment objectives. The Company may use futures contracts to gain exposure to, or hedge against, changes in the value of equities. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. At June 30, 2012, there are two futures contracts held and are classified by commodity price risk, the fair value of which amounted to approximately ($2,300). At December 31, 2011, the fair value of open contracts amounted to approximately ($500) and is reflected in the Securities Owned at fair value caption of the accompanying consolidated statements of financial condition.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Property and equipment, net

Property and equipment, net consisted of the following at June 30, 2012 and December 31:

	June 30,			December 31,
	2012			2011

Building and improvements	$	1,075,942		$	1,075,942

Land		725,000			725,000

Furniture and fixtures		75,042			72,178

Office equipment		95,929			69,652

		1,971,913			1,942,772

Less: accumulated depreciation and amortization		(419,191	)		(387,144	)

	$	1,552,722		$	1,555,628

Depreciation and amortization expense for the three months ended June 30, 2012 and 2011 was $17,088 and $15,814, respectively. Depreciation for the six months ending June 30, 2012 and June 30, 2011 was $32,047 and $31,627, respectively.

7. Notes Payable

Notes payable consisted of the following at June 30, 2012:

Mortgage payable to a bank, secured by the
building, monthly payments of $9,207, including
interest at 7.28% per annum, due July 20, 2020.	$	671,032

Maturities of notes payable are approximately as follows at June 30, 2012:

2012	$	31,000
2013		65,000
2014		70,000
2015		76,000
2016		81,000
Thereafter		348,000

	$	671,000

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Income taxes

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

The Company had no income tax expense (benefit) for the six month periods ended June 30, 2012 and 2011. At December 31, 2011, the Company had approximately $5.5 million of net operating losses (“NOL”) carry-forwards for federal and state income purposes. These losses are available for future years and expire through 2031. Utilization of these losses may be severely or completely limited if the Company undergoes an ownership change pursuant to Internal Revenue Code Section 382. The Company has taken a full valuation allowance against the other timing differences and the deferred asset attributable to the NOL carry-forwards at June 30, 2012 and December 31, 2011, respectively, due to the uncertainty of realizing the future tax benefits.

9. Common stock

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

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

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

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Preferred stock

No Series C preferred stock was sold during the six months ended June 30, 2012 and 2011. The Series C 8% Convertible Preferred Stock provides for non-cumulative dividends at the rate of 8% per year. Subject to certain restrictions, the Series C 8% Convertible Preferred Stock shall automatically convert into shares of the Company’s Common Stock upon any of the following events: (i) the sale by the Corporation of all or substantially all of its assets; (ii) the consummation of a merger or a consolidation in which the Corporation is not the survivor or (iii) the sale or exchange of all or substantially all of the outstanding shares of the Corporation’s common stock. The Series C 8% Convertible Preferred Stock is redeemable, at the option of the Company, for cash in the amount of $11.00 per share of Series C Convertible Preferred Stock or for shares of the Company’s Common Stock in accordance with a conversion rate.

The holders of preferred stock have liquidation preferences over the holders of the Company’s common stock.

11. Stock options

The Company accounts for its stock option awards under FASB ASC Topic 718 “Compensation—Stock Compensation.” The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for each grant for the six months ended June 30, 2012; risk free interest rate between 1.95% and 2.22%, no dividend yield, expected lives of ten years and volatility between 140.32% and 157.01%. The expected term of stock option awards granted is generally based up the “simplified” method for “plain vanilla” options discussed in SEC Staff Accounting Bulletin (“SAB”) No. 107, as amended by SAB No. 110. The expected volatility is derived from historical volaltility of the Company’s stock on the OTCBB for a period that matches the expected term of the option. The risk free interest rate is the yield from a Treasury bond or note corresponding to the expected term of the option.

Options vest ratably between one and ten years and are exercisable over ten years. The Company granted 3,350,000 options to employees during the six month period ended June 30, 2012.

During the three and six months ended June 30, 2012, the Company recognized stock-based compensation expense of approximately $76,000 and $128,000, respectively, and $48,000 and $96,000, respectively, during the three and six months ended June 30, 2011. This expense is reported within Employee compensation and benefits in the accompanying consolidated statements of operations.

The Company has not paid cash dividends and does not expect to pay cash dividends in the future. Forfeiture rates are based on management’s estimates.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Stock options (continued)

Options Outstanding								Options Exercisable

		Number		Weighted				Number
		Outstanding		Average		Weighted		Exercisable		Weighted
		at		Remaining		Average		at		Average
Exercise		June 30,		Contractual		Exercise		June 30,		Exercise
Price		2012		Life		Price		2012		Price

$	0.25		4,250,000		8.3	$	0.25		1,131,250	$	0.25

$	0.35		3,350,000		9.7	$	0.35		-	$	0.35

$	0.50		200,000		4.5	$	0.50		200,000	$	0.50

$	0.75		100,000		6.5	$	0.75		70,000	$	0.75

$	1.00		400,000		4.7	$	1.00		400,000	$	1.00

$	1.50		60,000		6.3	$	1.50		51,000	$	1.50
								\
			8,360,000		8.5	$	0.35		1,852,250	$	0.49

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Stock options (continued)

The following is a summary of all option activity through June 30, 2012:

	Number of		Weighted		Remaining		Aggregate
	Shares		Average		Term		Instrinsic
	Outstanding		Price		(in years)		Value


Options outsanding at December 31, 2011		5,010,000	$	0.34		8.3	$	-

Granted in 2012		3,350,000	$	0.35
Canceled in 2012		-		-

Options outstanding at June 30, 2012		8,360,000	$	0.35

Excercisable at June 30, 2012		1,852,250	$	0.49		7.2	$	-

				Weighted Average
	Stock			Grant Date
	Options			Fair Value

Options unvested, December 31, 2011		3,491,667		$	0.25

Options granted		3,350,000		$	0.11

Options vested		(333,917	)	$	0.26

Options unvested, June 30, 2012		6,507,750		$	0.18

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Stock options (continued)

Cash flows resulting from excess tax benefits are to classified as part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions of exercised options in excess of the deferred tax asset attributable to the compensation cost for such options. There were no options exercised during the six months ended June 30, 2012 and 2011; therefore, the Company did not receive any cash payments or recognize any tax benefits from options exercised during the six month periods ended June 30, 2012 and 2011.

12. 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 STS 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 June 30, 2012, STS’s net capital was approximately $691,000 which was approximately $591,000 in excess of its minimum requirement of $100,000. STS’s ratio of aggregate indebtedness to net capital was 0.27 to 1 as of June 30, 2012.

13. Exemption from Rule 15c3-3

The Company 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.”

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. Concentration of risk

Off-balance Sheet Risk

Pursuant to a clearance agreement, certain of the Company’s subsidiaries introduce 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 addition, STM has entered into several clearance agreements with clearing brokers. In accordance with the clearance agreements, certain of the Company’s subsidiaries have agreed to indemnify the clearing broker for losses, if any, which the clearing brokers may sustain from carrying securities transactions introduced by the Company.

In accordance with industry practice and regulatory requirements, certain of the Company’s subsidiaries and the clearing broker monitor collateral on the customers' accounts. In addition, the receivable from clearing broker is pursuant to the clearance agreement.

The maximum potential amount of future payments that certain of the Company’s subsidiaries could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the consolidated financial statements for these indemnifications.

In the normal course of business, the Company’s customer activities involve the execution, settlement and financing of various customer securities transactions. These activities may expose the Company to off-balance sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and the Company 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.

15. 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 June 30, 2012, the Company was not aware of any legal proceedings, which management has determined to be material to its business operations; however, the Company has been named in the following two actions which it is vigorously defending and which actions, based on management's assessment in coordination with outside litigation counsel, the Company believes to be frivolous and without merit:

On December 7, 2010, the Company filed a FINRA arbitration against Joseph Meuse, Rosewood Securities, LLC, BP Capital, LLC, and China Values Technology, Inc. The FINRA filing was amended on January 18, 2011, before FINRA commenced serving the respondents. The Company seeks to recover compensation it was entitled to receive for acting as placement agent under an agreement involving an offering of securities in a reverse merger into a publicly traded company, Respondent China Valves, which closed on May 18, 2009.

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. Commitments and contingencies (continued)

Legal Claims (continued)

The Agreement provided that the Company would receive 23,490 warrant shares of China Valves, but it only received 5,739 warrant shares. Thus, the Company has sued the respondents to recover the additional 17,751 warrant shares that it should have received on May 18, 2009, their value, lost profits, and lost opportunity costs caused by the failure to timely deliver the shares as required. The respondents, in response to the Company’s pre-filing demands for payment, each blamed the other for the claimed failures to timely deliver the missing warrant shares.

On April 7, 2011, the Company entered into a Settlement Agreement (“Agreement”) with BP Capital, LLC, for which Joseph Meuse as managing member (“BP Capital”) and Joseph Meuse (“Meuse”) an individual. The Agreement provides that Meuse will make a payment to the Company in the amount of $125,000, in full settlement with Meuse and BP Capital. The payment will be made by Meuse to the Company in five (5) installments, with the first payment of $25,000 due on the date of the signing of the Agreement and four successive payments of $25,000 due thirty (30) days following each prior payment until the full payment has been made. On April 2, 2012, the Company received payment of the remaining balance in accordance in satisfaction of the Agreement. These amounts were included in the applicable consolidated statement of operations as other miscellaneous income.

Employment Agreements

During the six months ended June 30, 2012, the Company entered into employment agreements with certain employees, which provides that they will be paid on a profit sharing and/or commission basis, based on the results of the business unit managed by these employees. In connection with the agreement, the Company granted stock options to the two employees totaling 950,000 shares of its common stock with an option price of $0.35 per shares vesting equally over three years.

On January 4, 2007, the Company entered into employment agreements with several of its key executives. The agreements are for two to three-year duration and renew automatically for one year unless either party provides notice of non-renewal 30 days prior to the anniversary date of the agreement or the agreement is earlier terminated in accordance with its terms. Two of the agreements are for two-year duration with total compensation of $247,000 per year. The third agreement is for three-year duration with total compensation of $150,000 per year. In July 2009, two of our executive officers, Robert Escobio, CEO, and Kevin Fitzgerald, President, agreed to take a reduction in salary, commencing in July 2009, with the right to request payment pursuant to the terms of their employment agreements, when the Company’s financial condition will allow it to do so.

As part of the agreements, the Company granted 4,500,000 shares of common stock vesting over five years to one of the executives, reduced to 3,500,000 shares pursuant to a stock waiver agreement entered into on November 18, 2009; on August 4, 2010, the executive waived his right, title, and interest to vest the remaining 3,000,000 shares, the balance after 500,000 were vested and issued in December 2009. Also, as part of the

SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. Commitments and contingencies (continued)

Employment Agreements (continued)

employment agreements, the Company granted 922,389 shares vesting equally over eighteen months to another executive, and 200,000 options to the third executive exercisable on December 31, 2007 for a period of ten years.

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

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

The following presents statements of operations for Nexo Emprendimientos S.A. (“Nexo”). Such summary information has been provided herein based upon the individual significance of the unconsolidated equity investments to the consolidated information of the Company. The three months and six months ended June 30, 2012 shows the financial results through May 10, 2012, the exercise date of the put option for the Nexo investment. On this date, the Company’s interest in Nexo decreased from 25.13% to 19.42% resulting in a change from the equity method to the cost method of accounting for the investment prospectively.

	For the Period						For the Period
	April 1 through						January 1 through
	May 10, 2012			June 30, 2011			May 10, 2012			June 30, 2011

Revenues	$	307,811		$	1,198,419		$	885,684		$	2,070,023

Cost of services		(278,999	)		(1,824,709	)		(1,417,297	)		(3,588,707	)

Operating income (loss)		28,812			(626,290	)		(531,612	)		(1,518,684	)

Net income (loss)		28,580			(185,108	)		(531,785	)		(1,077,595	)

On May 10, 2012, the Company exercised a put option which required ProBenefit, S.A., an Argentine financial services holding company to repurchase 2,184,250 shares of Nexo Emprendimientos S.A. for $1,200,000 which resulted in a gain on those shares of approximately $750,000. At June 30, 2012, $1,100,000 was outstanding from ProBenefit, S.A.

The impact of any dilution to the Company's ownership in equity method investments is recorded in Equity in income (loss) of NEXO Emprendimientos S.A. in the Statement of Operations and Comprehensive Income(loss), in accordance with ASC 323-10.

17. Subsequent events

On May 2, 2012, plaintiffs of the Pope Investments, et. al. matter re-filed the previously dismissed case in the Supreme Court of the State of New York. On July 25,2012, STSHC responded accordingly and filed a motion to dismiss with the Supreme Court of the State of New York, based upon lack of jurisdiction, failure to state a valid cause of action against STSHC and the previous dismissal of the case. The Company does not anticipate any material losses.

The Company received two payments related to its exercise of the option to sell 2,184,250 shares of Nexo to ProBenefit, S.A. for the purchase price of $1,200,000. Specifically, the Company received payments of $150,000 on July 3, 2012 and $450,000 on July 17, 2012. The remaining balance is due to be paid on or before October 15, 2012.

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 Annual Report on Form 10-K.

We were formed as a Florida corporation on January 14, 1998. We are the holding company for STS, which is registered as an introducing broker-dealer with the SEC and is a member of, or subject to regulations of, the SEC, FINRA, the NFA, the CFTC, SIPC and the MSRB. We are also the holding company for both: (i) STSAM a fee-based investment advisory service registered with the State of Florida, which offers its services to retail customers, (ii) Southern Trust Metals, a trader of primarily gold, silver, platinum and palladium, and (iii) Loreley Overseas Corporation (“LOR”), which acts as an international intermediary for STM’s international trading transactions.

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 option exercises. Our offshore services give clients access to foreign trusts and corporations, which they can use to structure their financial planning.

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

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

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to the valuation of securities owned and deferred tax assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

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

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

In determining fair value, the Company uses various valuation approaches. In accordance with generally accepted accounting principles (“GAAP”), a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The fair value hierarchy is categorized into three levels based on the inputs as follows:

Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities the Company has the ability to access.

Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Valuation Techniques

The Company values investments in securities that are freely tradable and are listed on a national securities exchange or reported on the NASDAQ national market at their last sales price as of the last business day of the year. At June 30, 2012, all of the Company’s investments classified as securities owned on the consolidated statements of financial condition are classified as Level 1 investments on the fair value hierarchy table in Note 6, Fair value measurements. The Company’s investment in A/R Growth’s common stock is classified as Level 3.

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 six month periods ended June 30, 2012 and 2011.

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 three and six months ended June 30, 2012, the Company recorded approximately $76,000 and $128,000, respectively, as compensation expense under FASB ASC 718 and $48,000 and $96,000, respectively, during the three and six months ended June 30, 2011.

Revenue Recognition.

Commissions 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.

Revenue Recognition (continued).

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 Topic 740, “Income Taxes,” which requires accounting for deferred income taxes under the asset and liability method. Deferred income tax asset and liabilities are computed for difference between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on the enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce the deferred income tax assets to the amount expected to be realized. We have concluded that it is more likely than not that our deferred tax assets as of June 30, 2012 and December 31, 2011 will not be realized based on the scheduling of deferred tax assets and projected taxable income. The amount of the deferred tax assets actually realized, however, could vary if there are differences in the timing or amount of future reversals of existing deferred tax assets or changes in the actual amounts of future taxable income. Should we determine that we will be able to realize all or part of the deferred tax asset in the future, an adjustment to the deferred tax asset will be recorded in the period such determination is made.

Net Capital Requirement.

Our broker-dealer subsidiary, STS, is a member of FINRA and is subject to the SEC Uniform Net Capital Rule 15c3-1. This rule requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1 and that equity capital may not be withdrawn or dividends paid if the resulting net capital ratio would exceed 10 to 1. STS is also subject to the Commodity Futures Trading Commission’s minimum financial requirements which requires it to maintain net capital, as defined for securities brokers and dealers, equal to or in excess of the greater of $45,000 or the amount of net capital required by the SEC Rule 15c3-1. At June 30, 2012, STS’s net capital was approximately $691,000, which was approximately $591,000 in excess of its minimum requirement of $100,000. STS’s ratio of aggregate indebtedness to net capital was 0.27 to 1 as of June 30, 2012.

Commissions and Clearing Costs.

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

Accounting for Contingencies.

We accrue for contingencies in accordance with FASB ASC Topic 450, “Contingencies,” 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. We did not record an accrual for contingencies at either June 30, 2012 or December 31, 2011.

Results of Operations for the three months ended June 30, 2012 and 2011

The following table sets for a summary of financial highlights.

	Three Months Ended
	June 30,							%
	2012		2011			Change		Change
Statement of operations data:

Revenue	$	884,646	$	816,433		$	68,213		8	%

Expenses		940,348		886,715			53,633		6	%

Gain on exercise of put option		750,242		-			750,242		-
Equity method income (loss)		351,427		(106,725	)		458,152		429	%

Net income (loss) applicable to common stockholders		1,040,426		(229,031	)		1,269,457		554	%

Income (loss) per common share	$	0.05	$	(0.01	)

For the three month period ended June 30, 2012, we reported a net income applicable to common stockholders of $1,040,426, an increase in income of $1,269,457 (554%) from the net loss of $229,031 reported for the three months ended June 30, 2011. This increase in net income applicable to common stockholders is primarily attributable to the gain from the exercise of the put option and a $458,152 increase in income in equity of an affiliate, partially offset by an increase of $53,633 in expenses.

Revenues

For the three months ended June 30, 2012, commissions increased $100,447 (56%) to $278,300 from $177,853 reported for the three months ended June 30, 2011. 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. This increase in commissions is primarily the result of give-up commissions generated by the Chicago office.

Our trading revenues decreased $144,722, or 27%, to $387,486 for the three months ended June 30, 2012 from $532,207 reported for the three months ended June 30, 2011. Trading profits are generated mainly from fixed income products sold to our customers on a riskless trading principal basis. Even though the markets and the economy have been struggling for the last few quarters, we have continued to acquire new customers interested in investing in fixed income products. Our ability to increase our trading revenues will depend mostly on future economic conditions and our ability to generate more customer accounts. The decrease in trading revenue is primarily attributable to a decrease in trading volume and customer accounts from the comparable quarter.

We had no investment banking fees revenue for the three month periods ended June 30, 2012 and 2011. Investment banking fees are generally determined as a percentage of the size of the deal or contract and are recognized when the transaction is completed and closed. Market conditions for private securities transactions have been weak; however, we remain committed to this aspect of our business, as a full service boutique broker-dealer.

Managed account fees increased $6,000 (32%) to $25,027 for the three months ended June 30, 2012 from $19,027 reported for the three months ended June 30, 2011. 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 primary reason for the increase is related to the overall increase in activity of accounts under management by the Company.

For the three months ended June 30, 2012, we reported interest and dividend income of $12,989, a $643 increase (5%) from the $12,346 reported for the three months ended June 30, 2011. This moderate increase is attributed to an increase in margin interest income earned by STM and interest and dividend income earned from our new futures trading activity located in Chicago since the early part of this quarter.

For the three months ended June 30, 2012, we reported a gain on exercise of put option of $750,242 compared to $-0- for the three months ended June 30, 2011. This increase is due to the Company’s sale of 2,184,250 shares of Nexo to ProBenefit, S.A. during the quarter.

For the three month periods ended June 30, 2012 and 2011, we reported other income of $180,844, a $105,844 increase from the $75,000 reported for the three months ended June 30, 2011. This increase is primarily attributable to other fees of $173,846 related to storage, transportation, insurance and platform fees on customer accounts managed by STM.

Expenses

We reported commissions and clearing fees expenses of $379,758 and $420,551 for the three month periods ended June 30, 2012 and 2011, respectively, a decrease of $40,793, or 10%. The decrease is primarily due to the decrease in trading revenue reported by STS and STM, partially offset by an increase in commission revenue reported by STS. 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 finder, 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. Commissions paid registered representatives represent 50% and 49% of total compensable revenues for the three month periods ended June 30, 2012 and 2011, respectively. 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, according to the mix of products and volume generated.

Employee compensation and benefits increased $38,876 (21%) to $225,627 for the three months ended June 30, 2012 from $186,751 reported for the three months ended June 30, 2011. This increase is primarily attributable to an increase in staffing for the Company’s Chicago office as well as higher equity compensation expenses relating to options awarded to certain key employees. For the three month periods ended June 30, 2012 and 2011, we recorded approximately $76,000 and $48,000, respectively, an increase of $28,000. The vesting period for the equity compensation awards range from twelve to 120 months.

During 2011, the Board of Directors granted 200,000 options to an outside consultant, with a strike price of $0.35, per share vesting equally over three years. Total compensation cost related to the consultant of approximately $50,000 (for the non-vested award) has a weighted average period of 2.8 years over which the compensation expense is expected to be recognized.

Occupancy costs decreased $4,485 (27%) to $12,021 for the three months ended June 30, 2012 from $16,506 reported for the three months ended June 30, 2011. Major expenses included under occupancy costs are property taxes, depreciation, and common repair and maintenance of our office building.

Communications and market data expenses represent mostly charges on our terminals used to monitor and analyze real-time financial market data movements, telephone expenses, licenses and registration expenses associated with our broker-dealer operations. Communications and market data expenses increased $21,070, or 43% to $70,449 for the three months ended June 30, 2012 from $49,379 reported for the three months ended June 30, 2011. This increase is primarily attributable to higher communications costs incurred due to the opening of the Chicago office.

Professional fees increased $37,890 (35%) for the three months ended June 30, 2012 to $145,284 from $107,394 for the three months ended June 30, 2011, due to higher audit, legal and professional fees. As of June 30, 2012, there are no material legal disputes that may have an adverse impact on our consolidated financial statements.

Travel and entertainment expenses decreased $4,791 (21%) for the three months ended June 30, 2012 to $18,060 from $22,851 for the three months ended June 30, 2011, due to lower travel activity in the current quarter.

Our other operational expenses include miscellaneous expenses and insurance premiums. Other operational expenses decreased $4,174 (7%), to $59,350 for the three months ended June 30, 2012 from $63,524 reported for the three months ended June 30, 2011. The decrease is primarily attributable to cost reduction efforts.

Depreciation and amortization expenses increased $1,274, (8%), to $17,088 for the three months ended June 30, 2012 from $15,814 for the three months ended June 30, 2011, due to asset purchases related to the Chicago office.

As a result of the acquisition of the additional 12.2% interest in Nexo, thereby increasing its holdings to 29.5%, the Company changed its method of accounting for this investment from the cost method to the equity method. The Company’s interest was reduced to 25.13% based on a debt to equity conversion which Nexo executed. Under the equity method, the Company recorded its proportionate share of the earnings or losses of Nexo.

On May 10, 2012, the Company exercised a put option to sell 2,184,250 shares of Nexo to ProBenefit S.A., thereby reducing its ownership to 19.42%. The Company changed its method of accounting from the equity method to the cost method of accounting for this investment prospectively

Results of Operations for the six months ended June 30, 2012 and 2011

The following table sets forth a summary of financial highlights.

	Six Months Ended
	June 30,							%
	2012		2011			Change		Change
Statement of operations data:

Revenue	$	1,631,519	$	1,594,937		$	36,582		2	%

Expenses		1,834,309		1,758,044			76,265		4	%

Gain on exercise of put option		750,242		-			750,242		-

Equity method loss		210,607		(262,502	)		473,109		180	%


Net income (loss) applicable to
common stockholders		751,924		(478,524	)		1,230,448		257	%

Income (loss) per common share	$	0.04	$	(0.03	)

For the six month period ended June 30, 2012, we reported a net income applicable to common stockholders of $751,924, an increase in income of $1,230,448 (257%) from the net loss of $478,524 reported for the six months ended June 30, 2011. This increase in net income applicable to common stockholders is primarily attributable to the gain from the exercise of the put option, partially offset by an increase of $76,265 in expenses and a $473,109 decrease in loss in equity of an affiliate.

Revenues

For the six months ended June 30, 2012, commissions decreased $187,902 (34%) to $370,287 from $558,189 reported for the six months ended June 30, 2011. 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. This decrease in commissions is primarily the result of a decrease in futures commissions and metals commissions during the period.

Our trading revenues increased $73,053, or 8%, to $970,063 for the six months ended June 30, 2012 from $897,010 reported for the six months ended June 30, 2011. Trading profits are generated mainly from fixed income products sold to our customers on a riskless trading principal basis. Even though the markets and the

economy have been struggling for the last few quarters, we have continued to acquire new customers interested

in investing in fixed income products. Our ability to increase our trading revenues will depend mostly on future economic conditions and our ability to generate more customer accounts. The increase in trading revenue is primarily attributable to an increase in trading volume and customer accounts from the comparable period.

We had no material investment banking fees revenue for the six month periods ended June 30, 2012 and 2011. Investment banking fees are generally determined as a percentage of the size of the deal or contract and are recognized when the transaction is completed and closed. Market conditions for private securities transactions have been weak; however, we remain committed to this aspect of our business, as a full service boutique broker-dealer.

Managed account fees increased $8,885 (23%) to $47,627 for the six months ended June 30, 2012 from $38,742 reported for the six months ended June 30, 2011. 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 primary reason for the increase is related to the overall increase in assets under management by the Company.

For the six months ended June 30, 2012, we reported interest and dividend income of $47,375, a $25,083 increase (113%) from the $22,292 reported for the six months ended June 30, 2011. This increase may be attributed to an increase in margin interest income earned by STM and interest and dividend income earned from our new futures trading activity located in Chicago in 2012.

For the six months ended June 30, 2012, we reported a gain on exercise of put option of $750,242 compared to $-0- for the six months ended June 30, 2011. This increase is due to the Company’s sale of 2,184,250 shares of Nexo to ProBenefit, S.A. during the quarter.

For the six months ended June 30, 2012, we reported other income of $196,167, a $121,167 increase from the $75,000 reported for the six months ended June 30, 2011. This increase is primarily attributable to other fees of $173,846 related to storage, transportation, insurance and platform fees on customer accounts managed by STM.

Expenses

We reported commissions and clearing fees expenses of $769,012 and $853,971 for the six month periods ended June 30, 2012 and 2011, respectively, a decrease of $84,959 (10%). The decrease is primarily due to the decrease in commission revenue reported by STS, partially offset by an increase in trading revenue reported by STS and STM. 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 finder, 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. Commissions paid registered representatives represent 50% and 49% of total compensable revenues for the six month periods ended June 30, 2012 and 2011, respectively. 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, according to the mix of products and volume generated.

Employee compensation and benefits increased $56,494 (15%) to $430,066 for the six months ended June 30, 2012 from $373,572 reported for the six months ended June 30, 2011. This increase is primarily attributable to an increase in staffing for the Company’s Chicago office as well as higher equity compensation expenses relating to options awarded to certain key employees. For the six month periods ended June 30, 2012 and 2011, we recorded approximately $128,000 and $96,000, respectively, an increase of $32,000. The vesting period for the equity compensation awards range from twelve to 120 months.

Occupancy costs increased $88 (0.2%) to $33,397 for the six months ended June 30, 2012 from $33,309 reported for the six months ended June 30, 2011. Major expenses included under occupancy costs are property taxes, depreciation, and common repair and maintenance of our office building.

Communications and market data expenses represent mostly charges on our terminals used to monitor and analyze real-time financial market data movements, telephone expenses, licenses and registration expenses associated with our broker-dealer operations. Communications and market data expenses increased $41,389 (52%) to $121,648 for the six months ended June 30, 2012 from $80,259 reported for the six months ended June 30, 2011. This increase is primarily attributable to higher phone, quote data and research costs from the opening of the Chicago office.

Professional fees increased $46,937 (21%) for the six months ended June 30, 2012 to $271,546 from $224,609 for the six months ended June 30, 2011, due to higher audit, legal and other professional fees. As of June 30, 2012, there are no material legal disputes that may have an adverse impact on our consolidated financial statements.

Travel and entertainment expenses increased $1,605 (5%) for the six months ended June 30, 2012 to $33,144 from $31,539 for the six months ended June 30, 2011.

Other operational expenses include miscellaneous expenses and insurance premiums. Other operational expenses increased $16,598 (16%), to $117,831 for the six months ended June 30, 2012 from $101,233 reported for the six months ended June 30, 2011. The increase is primarily attributable to higher insurance costs in the current year.

Interest expense decreased $2,307 (8%) to $25,618 for the six months ended June 30, 2012 from $27,925 incurred for the six months ended June 30, 2011. The decrease is primarily attributable to a lower principal balance on the note payable.

Depreciation and amortization expenses increased $420, (1%), to $32,047 for the six months ended June 30, 2012 from $31,627 for the six months ended June 30, 2011, due to asset purchases related to the Chicago office.

Liquidity and Capital Resources

The following sets forth a summary of financial condition data:

	As of		As of
	June 30,		December 31,					% of
	2012		2011		Change			Change
Financial condition data:

Cash and cash equilvalents	$	298,779	$	339,445	$	(40,666	)		(12	%)

Marketing securities owned
at fair value		1,006,642		957,953		48,689			5	%

Total assets		11,576,373		9,213,316		2,363,057			26	%

Notes payable		671,032		700,739		(29,707	)		(4	%)

Stockholders' equity		4,394,865		3,506,206		888,659			25	%

As of June 30, 2012, liquid assets consisted primarily of cash and cash equivalents of $298,779 and securities owned of $1,006,642 for a total of $1,305,421, which is $8,023 higher than the $1,297,398 in liquid assets as of December 31, 2011. 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 decreased $40,666 to $298,779 at June 30, 2012, as compared to $339,445 at December 31, 2011, which results from the following:

Net income	$	758,059
Adjustments to reconcile net income to net cash
used in operating activities		(791,825	)
Changes in operating assets and liabilities	$	(41,675	)
Net cash used by operating activities	$	(75,441	)

Investing activities	$	70,859

Financing activities	$	(29,707	)

Effect of foreign exchange rate changes
on cash and cash equivalents	$	(6,377	)

Net decrease in cash and cash equivalents	$	(40,666	)

Cash used by our operating activities for the six months ended June 30, 2012 was $75,441, comprised of net income of $758,059, noncash reconciling adjustments of $791,825, and changes in operating assets and liabilities of $41,675. Noncash reconciling adjustments include stock-based compensation charges of $136,977, depreciation and amortization of $32,047, gain in equity of affiliate of $210,607 and gain on sale of equity investment of $750,242.

The $41,675 change in operating assets and liabilities is primarily attributable to a decrease of $1,486,471 in due from clearing broker, a decrease of $48,689 in securities owned and a decrease of $10,412 in other assets, offset by an increase of $1,362,198 in payable to customers and an increase of $141,907 in accounts payable and accrued expenses. 100% of the $1,362,198 increase in payable to customers and $1,467,395 (99%) of the $1,486,471 decrease in due from clearing brokers is attributable to payables associated with our metals trading subsidiary and receivables due from clearing brokers processing transactions on behalf of our metals trading subsidiary, respectively. The increases in payable to customers and due from clearing broker is the direct result of the growth in trading activity, customers, and total assets under management as reported by our subsidiary company, STM, formed in the fourth quarter of 2009 to capitalize on investor interest in trading precious metals such as gold, silver, platinum, and palladium. Due to the ongoing volatility in the traditional equity markets, many investors have moved into the trading of precious metals, which has driven our growth since the fourth quarter of 2009. For the six months ended June 30, 2012 and 2011, we reported gross trading revenue of approximately $970,000 and $897,000, respectively, an increase of approximately $73,000, or 8%.

Since January 2010, assets under management have grown significantly, as a result of the growth in trading volume and in customer accounts managed by STM, which has resulted in the large increase in amounts payable to customers and due from clearing broker.

Cash provided by investing activities was $70,859 and cash used in investing activities was $1,000,000 for the six month periods ended June 30, 2012 and 2011, respectively. The $70,859 was primarily due to the proceeds from the sale of equity investment of $100,000 offset by equipment purchases of $29,141. Cash used in our financing activities was $29,707, which represents principal payments on notes payable during the six months ended June 30, 2012

In response to the current economic environment, we have implemented changes to our capital management practices to ensure we will be able to continue to meet our obligations. Specifically certain employee salaries and payout percentages were reduced in July 2009 and continue to be reduced to match current business levels and recent employee resignations will not be immediately filled. We have also undertaken the task of reviewing the other general expenses incurred with the objective cost reductions.

Since we have primarily financed our operations through cash flows generated by our brokerage operations and proceeds from private placements of preferred stock, we are currently exploring an additional offering of preferred stock. There can be no assurance that we will be able to complete this offering on terms acceptable to us, if at all.

The following is a table which approximately summarizes our significant commitments as of June 30, 2012, consisting of debt payments related to our notes payable:

Year ending December 31,	Total

2012	$	31,000
2013		65,000
2014		70,000
2015		76,000
2016		81,000
Thereafter		348,000

Total commitments	$	671,000

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

As of the end of the period covered by this quarterly report on Form 10-Q, Robert Escobio who is both our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures. Based upon that evaluation, he identified a material weakness in its disclosure controls namely, that the Company lacked appropriate resources in the accounting and finance department, including a lack of personnel that are appropriately qualified in the areas of U.S. GAAP and SEC reporting. While this material weakness did not have an effect on our reported results or any related disclosures, it nevertheless constitutes a deficiency in our controls and led our Chief Executive Officer and Chief Financial Officer to conclude that our disclosure controls and procedures continue to not be effective at the reasonable assurance level as of June 30, 2012. Despite this deficiency, management believes that there are no material inaccuracies or omissions of fact in this quarterly report.

The material weakness will not be considered remediated until the applicable remedial procedures are tested and management has concluded that the procedures are operating effectively. Based on its evaluation, the Company identified a weakness in its disclosure controls namely, that the Company lacked appropriate resources in the accounting and finance department, including a lack of personnel that are appropriately

qualified in the areas of U.S. GAAP and SEC reporting.

On July 9, 2012, the Company hired a Controller to address the Company’s needs with respect to U.S. GAAP, SEC reporting and internal controls. The Company plans for improved internal controls to be implemented. Since the hire took place after the quarter, the previous material weakness condition is applicable. 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 June 30, 2012, 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 June 30, 2012, we are not aware of any legal proceedings, which management has determined to be material to our business operations; however, we have been named in the following three actions which we are vigorously defending and which actions, based on management's assessment in coordination with outside litigation counsel, we believe to be without merit:

Salvatore Frieri, individually and as beneficiary of the Robert J. Escobio and Salvador Frieri-Gallo Trust, Plaintiff v. Robert Escobio, individually and as trustee of the Robert J. Escobio and Salvador Frieri-Gallo Trust, Southern Trust Securities Holding Corporation and Southern Trust Securities, Inc f/k/a Capital Investment Services, Inc., Defendants, in the Circuit Court of the Eleventh Judicial Circuit In and For Miami-Dade County, Florida, Case No. 08-07586 CA 08. The initial complaint in this action was filed on February 12, 2008. An amended complaint was filed on October 14, 2008. The amended complaint attempts to plead various causes of action related to the purchase and sale by the Salvador Frieri-Gallo Trust of STSHC’s stock in a private placement in 2005. The plaintiff sought rescission of the transaction. The plaintiff filed a Second Amended Complaint on January 31, 2012 after the Court’s November 26, 2011 Notice of Failure to Prosecute, which attempts to state allegations of common law fraud using the same allegations as in the previously dismissed claims for violation of Florida Securities Law. Management does not believe there is any merit to plaintiff’s claims and the case is in an early stage.

In November 2008, the STS initiated legal action against two individuals and their related company. One of the individuals named in the suit is also an individual who has brought legal action against STS, as discussed in the preceding paragraph. STS’s actions seek to recover compensation owed to it for work performed in connection with extensive financial and investment advice work, and services provided in preparation of a bid for Defendants regarding the restructuring, financing, investing, and acquisition of an interest in Aerovias Nacionales de Colombia S.A. Avianca (“Avianca S.A.”) and its subsidiaries (“Avianca”) in connection with

Avianca’s bankruptcy reorganization under Chapter 11 of the U.S. Bankruptcy Code. After serving one of the individuals and the related company, STS moved for and obtained defaults against these two Defendants on September 17, 2009. These two Defendants moved to set aside the defaults against them, which the Court set aside on November 2, 2009. On December 11, 2009, these two Defendants filed a Motion to Dismiss based on alleged failure to join an indispensable party, the ACDAC (Pilot Association). We do not believe that motion has any merit. We have served process on the second individual defendant. In addition, a written agreement has been discovered which we believe specifically makes the parties liable for paying the amounts owed, and are in the process of filing an Amended Complaint based upon the newly discovered document. Based on information that is now available, STS claims the Defendants owe it approximately $8.35 million dollars plus prejudgment interest from on or about January 2005. In the opinion of outside counsel, it is too early to predict the ultimate recovery from Defendants.

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

A written settlement agreement was reached with the Respondents, Meuse/Rosewood/BP Capital whereby they agreed to pay STS the settlement amount over a period of months. Based on this, the arbitration was stayed. The Respondents, after making several payments, defaulted. When faced with re-activation of the arbitration, Defendants entered into a written amendment to the Settlement Agreement. The arbitration has been stayed pending payment in accordance to the amended payment plan, payment has been made and the claim was dismissed in April 2012.

On or about December 28, 2010, plaintiffs attempted to serve process on STSCH by serving STS, with an Amended Complaint filed in the United States Federal District Court for the Southern District Court of New York. The trust of the Amended Complaint seems to be that Plaintiffs invested about $12.5 million in a company named Aamaxen Transport Group, Inc. (“AAXT”), pursuant to a Securities Purchase Agreement, dated April 14, 2008, in exchange for AAXT’s Series A Convertible Preferred Stock. AAXT, a publicly traded company, shares are listed on the OTC Bulletin Board. AAXT, a Delaware Company, has its principal place of business in Shanghai, China. AAXT was to ultimately invest in and own a significant beneficial interest in Shanghai Atrip Medical Technology, Co., Ltd. (“SMT”), another Chinese company. Plaintiffs claim the transaction did not take place as agreed and that the Chinese principals in certain of the entities involved continued to maintain control over some entities, when they should not have and AAXT and other Plaintiffs’ invested funds were ultimately embezzled. The investors sued those allegedly involved in the embezzlement, the attorneys involved in the transactions, and those who allegedly provided investment-banking advice. The Amended Complaint includes STSHC along with certain entities controlled by Joseph Meuse and used to provide investment, business, and structuring advice under the names Belmont Partners, LLC (“Belmont”) and Rosewood Securities, LLC (“Rosewood”). The Amended Complaint defines Belmont to include Belmont Partners, Rosewood, or Meuse. STSHC had nothing to do with this matter. STS, which was not named a defendant, had a branch office agreement, whereby Rosewood operated as a branch office of STS managed by Meuse during part of the period involved. As determined so far, STS had no involvement in the transaction and whose only possible connection with the parties was through the Rosewood branch office agreement, which was terminated in December 2009. STSHC retained New York counsel to represent it in this case. Counsel received an order from the Court extending the date for STSHC to respond to the Amended Complaint until March 11, 2011. In November 2011 the motion to dismiss the Amended Complaint was granted and Plaintiffs were given leave to file a Second Amended Complaint if they could set forth specific facts necessary to state a claim. The Second Amended Complaint was filed by Plaintiffs in January 2012 and did not assert any claim against either STS or STSHC, thus ending the case against STS and STSHC.

On May 2, 2012, plaintiffs re-filed the previously dismissed case in the Supreme Court of the State of New York. On July 25, 2012 STSHC responded accordingly and filed a motion to dismiss with the Supreme Court of the State of New York, based upon lack of jurisdiction, failure to state a valid case of action against STSHC and the previous dismissal of the case.

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.

August 20, 2012	By:	/s/ Robert Escobio
		Robert Escobio
		Chief Executive Officer and Chief Financial Officer
		(Principal Executive and Accounting Officer)

Southern Trust Securities Holding Corp - FORM 10-Q - August 20, 2012

Attached files

Southern Trust Securities Holding Corp Reports