NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
The following condensed consolidated interim financial statements as of March 31, 2013 have not been audited, and the condensed consolidated financial statements as of December 31, 2012 have been derived from audited consolidated financial statements. These financial statements have been prepared by Southern Trust Securities Holding Corp. and Subsidiaries (collectively, the “Company”) in accordance with accounting principles generally accepted in the Unites States (“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 the Company as of March 31, 2013 and December 31, 2012, and the related consolidated interim statements of operations and comprehensive loss for the three months ended March 31, 2013 and 2012, cash flows for the three months ended March 31, 2013 and 2012 and the consolidated interim statements of changes in stockholders equity for the three months ended March 31, 2013. 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 audited Consolidated Financial Statements and related notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 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 months ended March 31, 2013 are not necessarily indicative of results that may be expected for the fiscal year ending December 31, 2013.
Southern Trust Securities Holding Corp.
(the "Holding Corp..”) owns
Southern Trust Securities, Inc.
("STS"), Southern Trust Metals, Inc. (“STM”),
Southern Trust Securities Asset Management, Inc.
("STSAM"), Loreley Overseas Corporation (“LOR”), and Kiernan Investment Corp. (“KIC”).
The Holding Corp. contributed $105,653 in cash to form a 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. IPWM Spain operates offices in the cities of Barcelona, Spain, San Sebastian, Spain and Marbella, Spain. IPWM Spain had limited operations for the three months ended March 31, 2013 and the year ended December 31, 2012.
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, was 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. KIC is an international business company in Belize but has had very limited operations since inception.
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
3.
|
Summary of significant accounting policies
|
Basis of Presentation and Principles of Consolidation
The consolidated interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
The accompanying consolidated interim financial statements include the accounts of the Holding Corp. 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 interim financial statements as a noncontrolling interest. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated interim 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 interim 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.
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 three months ended March 31, 2013 and 2012.
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
3.
|
Summary of significant accounting policies (continued)
|
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.
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.
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
3.
|
Summary of significant accounting policies (continued)
|
Fair Value of Financial Instruments – Definition and Hierarchy (continued)
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.
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 March 31, 2013, all of the Company’s investments classified as securities owned on the consolidated statements of financial condition are classified as Level 1 investments on the fair value hierarchy table in Note 5, Fair value measurements. The Company’s investment in A/R Growth’s common stock is classified as Level 3.
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 interim statements of operations. D
erivative 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 March 31, 2013 and December 31, 2012, the Company offset cash collateral receivables of approximately $7,500 and $8,300 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.
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
3.
|
Summary of significant accounting policies (continued)
|
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 and Clearing Costs
Commissions and related clearing expenses are recorded on a trade-date basis as securities transactions occur. 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.
Give Up Income
Give up income arises from STS’ execution of orders that are given by a customer to a member firm on whose books the customer does not have an account.
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. 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.
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. (“Nexo”), is reflected in the caption ‘‘Equity in loss of NEXO Emprendimientos S.A.” 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.
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
3.
|
Summary of significant accounting policies (continued)
|
Investments-Equity Method to Cost Method (continued)
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 three months of 2011 through retrospective application of the equity method.
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%. On May 10, 2012, the Company began recording its investment in Nexo under the cost method of accounting.
On September 28, 2012, Nexo converted debt to equity thereby reducing the Company’s interest from 19.42% to 14.90%.
The fair value of our cost method investment is not estimated if there are no identified events or changes in circumstances that may have an 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 March 31, 2013 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.
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 assets and liabilities are computed for the 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 interim 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.
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
3.
|
Summary of significant accounting policies (continued)
|
Income Taxes (continued)
The U.S. Federal jurisdiction, Florida and Illinois are the major tax jurisdictions where the Company files income tax returns. Generally, the tax filings are no longer subject to income tax examinations by major taxing authorities for years before 2009. 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 three month periods ended March 31, 2013 and 2012 and the year ended December 31, 2012.
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) gain of ($6,650) and $6,277 for the three months ended March 31, 2013 and 2012, respectively.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations as incurred.
Comprehensive 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 March 31, 2013 and December 31,2012 was $833,000 and $839,000, 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 March 31, 2013 and December 31, 2012.
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
3.
|
Summary of significant accounting policies (continued)
|
Loss Per Common Share
The Company complies with the accounting and disclosure requirements of FASB ASC 260, “Earnings Per Share.” Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. The calculation of diluted net loss per share excludes zero and 4,500 warrants and 2,080,000 shares of common stock issuable upon the conversion of the Series C 8% convertible preferred stock as of March 31, 2013 and 2012, respectively, since their effect is 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, the Company records 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 other income on the consolidated statements of operations.
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 loss.
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 months ended March 31, 2013, the Company recorded approximately $59,000 and $57,000, respectively, as compensation expense under FASB ASC 718.
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
3.
|
Summary of significant accounting policies (continued)
|
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 $0 and $4,600 for the three months ended March 31, 2013 and 2012, respectively, related to consulting services. The nonemployee awards were forfeited during 2012.
Recently Adopted Accounting Pronouncements
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
In May 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update which works to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). 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. Early application is permitted for interim periods beginning after December 15, 2011. The adoption of this update did not have an impact on the Company’s consolidated financial statements.
Presentation of Comprehensive Income
In June 2011, the FASB issued an accounting standards update aimed at increasing the prominence of other comprehensive income in financial statements by requiring comprehensive income to be reported in either a single statement or in two consecutive statements reporting net income and other comprehensive income. The amendments do not change what items are reported in other comprehensive income or the requirement to report reclassification of items from other comprehensive income to net income. The update requires retrospective application, and is effective for fiscal years ending after December 15, 2012 and interim and annual periods thereafter. The Company adopted this accounting standard update on December 31, 2012; refer to the accompanying Consolidated Statements of Operations and Comprehensive Loss.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued an accounting standard update to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. The update requires entities to provide additional information about reclassifications out of accumulated other comprehensive income. Early application is effective for periods beginning after December 15, 2013. The Company does not believe the accounting standard will have a material impact on the consolidated financial statements.
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM 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. The Company maintains a deposit with one of the clearing brokers in the amount of $50,000. A termination fee may apply if the Company were to terminate its relationship with the respective clearing broker. No other deposits are required.
STS does not carry accounts for customers or perform custodial functions related to customers’ securities. STS introduces all of its customer transactions, which are not reflected in these financial statements to its primary clearing broker, which maintains the customers’ accounts and clears such transactions. These activities may expose us to off-balance sheet risk in the event that customers do not fulfill their obligations with the primary clearing broker, as we have agreed to indemnify our primary clearing broker for any resulting losses. We continually assess risk associated with each customer who is on margin credit and record an estimated loss when we believe collection from the customer is unlikely. Our losses incurred from these arrangements were not significant for the three months ended March 31, 2013 and 2012.
As further discussed in Note 18, on May 2, 2013, the primary clearing broker notified STS that it intends to exercise its right to cancel its clearing agreement within 30 days.
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 interim 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.
|
|
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Fair Value
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Hierarchy
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage payable at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.28% due 2020
|
Level 3
|
|
$
|
624,155
|
|
|
$
|
833,000
|
|
|
$
|
645,454
|
|
|
$
|
839,000
|
|
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 INTERIM FINANCIAL STATEMENTS
|
5.
|
Fair value measurements (continued)
|
The tables shown below present information about the Company’s assets and liabilities measured at fair value as of March 31, 2013 and December 31, 2012.
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
Balance
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Collateral
|
|
|
as of
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Held
|
|
|
March 31,
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
at Broker
|
|
|
2013
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and futures
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,802
|
|
|
$
|
16,802
|
|
|
Corporate bonds
|
|
|
792,774
|
|
|
|
97,055
|
|
|
|
-
|
|
|
|
-
|
|
|
|
889,829
|
|
|
Equity securities
|
|
|
570,961
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
570,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,363,735
|
|
|
$
|
97,055
|
|
|
$
|
-
|
|
|
$
|
16,802
|
|
|
$
|
1,477,592
|
|
|
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
|
|
|
2012
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and futures
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,826
|
|
|
$
|
11,826
|
|
|
Corporate bonds
|
|
|
727,727
|
|
|
|
98,285
|
|
|
|
-
|
|
|
|
-
|
|
|
|
826,012
|
|
|
Equity securities
|
|
|
490,303
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
490,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,218,030
|
|
|
$
|
98,285
|
|
|
$
|
-
|
|
|
$
|
11,826
|
|
|
$
|
1,328,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in A/R Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,370
|
|
|
$
|
-
|
|
|
$
|
22,370
|
|
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM 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 March 31, 2013, there are no futures contracts held. At December 31, 2012, there is one futures contract held and is classified by currency risk. The fair value of this open contract amounted to approximately $550 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 INTERIM FINANCIAL STATEMENTS
|
6.
|
Property and equipment, net
|
Property and equipment, net consisted of the following at:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Building and improvements
|
|
$
|
1,075,942
|
|
|
$
|
1,075,942
|
|
|
Land
|
|
|
725,000
|
|
|
|
725,000
|
|
|
Furniture and fixtures
|
|
|
76,134
|
|
|
|
76,134
|
|
|
Office equipment
|
|
|
109,207
|
|
|
|
109,207
|
|
|
|
|
|
1,986,283
|
|
|
|
1,986,283
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(468,061
|
)
|
|
|
(451,798
|
)
|
|
|
|
$
|
1,518,222
|
|
|
$
|
1,534,485
|
|
Depreciation and amortization expense for the three months ended March 31, 2013 and 2012 was $16,263 and $14,959, respectively.
7. Notes Payable
Notes payable consisted of the following at March 31, 2013:
|
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.
|
|
$
|
624,155
|
|
|
|
|
|
|
|
|
Maturities of notes payable are approximately
|
|
|
|
|
|
as follows at March 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
49,000
|
|
|
2014
|
|
|
70,000
|
|
|
2015
|
|
|
76,000
|
|
|
2016
|
|
|
81,000
|
|
|
2017
|
|
|
88,000
|
|
|
Thereafter
|
|
|
260,000
|
|
|
|
|
$
|
624,000
|
|
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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.
At December 31, 2012, the Company had approximately $5.1 million of net operating losses (“NOL”) carry-forwards for federal and state income tax purposes. These losses are available for future years and expire through 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 March 31, 2013 and December 31, 2012, respectively, due to the uncertainty of realizing the future tax benefits.
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.
No Series C preferred stock was sold during the three months ended March 31, 2013 and 2012. 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.
On January 8, 2013, the Company made a dividend payment to its non-cumulative Series C preferred shareholders of $104,000 based on a price per share of $0.20.
The Company accounts for its stock option awards under FASB ASC Topic 718 “Compensation—Stock compensation.” The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. The Company did not grant any stock options for the three months ended March 31, 2013
.
Options vest ratably between one and ten years and are
exercisable
over ten years.
During the three months ended March 31, 2013 and 2012, the Company recognized stock-based compensation expense of approximately $59,000 and $57,000, respectively.
This expense is reported within employee compensation and benefits in the accompanying consolidated statements of operations.
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
11.
|
Stock options (continued)
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Weighted
|
|
|
Exercisable
|
|
|
Weighted
|
|
|
|
|
|
at
|
|
|
Remaining
|
|
|
Average
|
|
|
at
|
|
|
Average
|
|
|
Exercise
|
|
|
March 31,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
March 31,
|
|
|
Exercise
|
|
|
Price
|
|
|
2013
|
|
|
Life
|
|
|
Price
|
|
|
2013
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.25
|
|
|
|
4,250,000
|
|
|
|
7.5
|
|
|
$
|
0.25
|
|
|
|
1,499,583
|
|
|
$
|
0.25
|
|
|
|
0.35
|
|
|
|
3,500,000
|
|
|
|
9.0
|
|
|
|
0.35
|
|
|
|
37,500
|
|
|
|
0.35
|
|
|
|
0.50
|
|
|
|
200,000
|
|
|
|
3.8
|
|
|
|
0.50
|
|
|
|
200,000
|
|
|
|
0.50
|
|
|
|
0.75
|
|
|
|
100,000
|
|
|
|
5.7
|
|
|
|
0.75
|
|
|
|
85,000
|
|
|
|
0.75
|
|
|
|
1.00
|
|
|
|
400,000
|
|
|
|
4.0
|
|
|
|
1.00
|
|
|
|
400,000
|
|
|
|
1.00
|
|
|
|
1.50
|
|
|
|
60,000
|
|
|
|
5.5
|
|
|
|
1.50
|
|
|
|
55,500
|
|
|
|
1.50
|
|
|
|
|
|
|
|
8,510,000
|
|
|
|
7.8
|
|
|
$
|
0.35
|
|
|
|
2,277,583
|
|
|
$
|
0.45
|
|
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
11.
|
Stock options (continued)
|
The following is a summary of all option activity through March 31, 2013:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Shares
|
|
|
Average
|
|
|
Term
|
|
|
Instrinsic
|
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
(in years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outsanding at December 31, 2012
|
|
|
8,510,000
|
|
|
$
|
0.35
|
|
|
|
8.1
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted in 2013
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeited in 2013
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2013
|
|
|
8,510,000
|
|
|
$
|
0.35
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2013
|
|
|
2,277,583
|
|
|
$
|
0.45
|
|
|
|
6.5
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Average Remaining
|
|
|
Aggregate
|
|
|
|
|
Stock
|
|
|
Grant Date
|
|
|
Contract term
|
|
|
Intrinsic
|
|
|
|
|
Options
|
|
|
Fair Value
|
|
|
(in years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options unvested, December 31, 2012
|
|
|
6,347,250
|
|
|
$
|
0.17
|
|
|
|
|
|
$
|
-
|
|
|
Options granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Options vested
|
|
|
(114,833
|
)
|
|
$
|
0.23
|
|
|
|
7.2
|
|
|
|
-
|
|
|
Options unvested, March 31, 2013
|
|
|
6,232,417
|
|
|
$
|
0.17
|
|
|
|
7.2
|
|
|
$
|
-
|
|
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
11.
|
Stock options (continued)
|
No options were exercised during the years ended March 31, 2013 and 2012. The total compensation cost not yet recognized is $926,514.
Cash flows resulting from excess tax benefits are to be 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 three months ended March 31, 2013 and 2012; therefore, the Company did not receive any cash payments or recognize any tax benefits from options exercised during the three month periods ended March 31, 2013 and 2012.
|
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 March 31, 2013, STS’s net capital was approximately $843,000 which was approximately $743,000 in excess of its minimum requirement of $100,000. STS’s ratio of aggregate indebtedness to net capital was 0.45 to 1 as of March 31, 2013.
|
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 INTERIM 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 the 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.
On May 2, 2013, Pershing, LLC notified the Company that it intended to terminate all clearing relationships within 30 days. The Company is in the process of selecting a new firm to handle its clearing activity.
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 December 31, 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:
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.
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
15.
|
Commitments and contingencies (continued)
|
Legal Claims (continued)
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. The Company filed its Answers and Affirmative Defenses and Counterclaims to the Second Amended complaint in the spring of 2012. The Company is seeking $1 million for alleged overpayments. The Plaintiff filed his Answers and Affirmative Defenses in the summer of 2012, denying our counterclaims. The case is currently set for trial in the summer of 2013. Management does not believe there is any merit to the plaintiff’s claims.
In November 2008, STS initiated legal action against two individuals and their related company. One of the individuals named in the suit is also an individual who has brought legal action against STS, as discussed in the preceding paragraph. STS’s actions seek to recover compensation owed to it for work performed in connection with extensive financial and investment advice work, 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). The Company does not believe that motion has any merit. The Company has served process on the second individual defendant. In addition, a written agreement has been discovered which the Company believes 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.
Employment Agreements
On January 4, 2007, the Company entered into employment agreements with several of its key executives. The agreements are for a two to three-year duration and renew automatically for one year unless either party provides notice of non-renewal 30 days prior to the anniversary date of the agreement or the agreement is terminated earlier in accordance with its terms. Two of the agreements are for a two-year duration with total compensation of $247,000 per year. The third agreement is for a three-year duration with total compensation of $150,000 per year. In July 2009, two of the Company’s 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 which was 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 of shares after 500,000 were vested and issued in December 2009. Also, as part of the employment agreements, the Company granted 922,389 shares vesting equally over eighteen months to another executive and 200,000 options to the third executive exercisable on December 31, 2007 for a period of ten years.
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
15.
|
Commitments and contingencies (continued)
|
Employment Agreements (continued)
One of the key executive’s agreement provides for a lump-sum payment of $5 million and the repurchase of all shares based on their fair market value if his employment is terminated as a result of a change of control. Should the executive’s employment be terminated for any other reason, the Company would have to pay him $2 million and repurchase all of his shares based on their fair market value. Lastly, another agreement provides for a lump-sum payment of $1 million to one of the executives if his employment is terminated due to a change of control.
|
16.
|
Investment in AR Growth Finance Corp. and Nexo Emprendimientos, S.A.
|
During the first quarter of 2007, the Company entered into an agreement to work in concert with two Argentine companies, Inversora Castellanos, S.A. (“ICSA”), a company comprised of executives from SanCor, the largest dairy cooperative in Argentina, and Administración de Carteras S.A. (“ACSA”), whereas the Company purchased a controlling interest in AR Growth Finance Corp. (“AR Growth”). The Company, together with ICSA and ACSA, intend to implement an acquisition plan to acquire finance related companies in Argentina through AR Growth.
Presently AR Growth has no operations and minimal assets and liabilities. Currently, the Company owns 869,506 shares of AR Growth, which is approximately 9.94% of the total outstanding shares.
Robert Escobio is the CEO and a director of Southern Trust Securities Holding Corp. (“STSHC”) and also the President and a director of AR Growth, and Kevin Fitzgerald is the President and a director of STSHC and also the CEO and a director of AR Growth.
During 2007 and 2008 the Company invested $2,500,000 in Series A preferred stock of AR Growth. These funds were used by AR Growth to purchase interests in ProBenefit, S.A. ("ProBenefit"), an Argentine financial services holding company. As a result of the changes in the operations of ProBenefit, the Company recorded an other-than-temporary impairment charge of $1,250,000 against its preferred stock investment in AR Growth of $2,500,000 in December 2008.
On August 4, 2009, the Company restructured its investment in AR Growth. In summary, the Company exchanged its $2.5 million Preferred Stock investment in AR Growth for a 22% (subsequently reduced to 17.3%) common stock interest in Nexo Emprendimientos S.A. (“Nexo”). Nexo is a fast growing
consumer credit card company based in Sunchales, Argentina.
ProBenefit and the Company are the major shareholders of Nexo. As part of the terms of the restructuring, the Company has a put option on the shares of Nexo it now owns whereby ProBenefit will be required to buy back from the Company its Nexo shares at the request of the Company at any time either (i) commencing one year from the date of the agreement and for a period of two years thereafter; or (ii) upon a change of control of Nexo by any person other than the Company. Total payments under the first put option totaled $1.2 million in 2012, including accrued interest. Should the Company exercise the second put option, ProBenefit will be obligated to pay the Company the remaining $1.9 million, which includes accrued interest.
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
16.
|
Investment in AR Growth Finance Corp. and Nexo Emprendimientos S.A. (continued)
|
On May 26, 2011, the Company entered into a Stock Purchase Agreement (“Agreement’) with Rentier Fideicomiso Financiero (“Rentier”) to purchase an additional 12.2% equity interest in Nexo pursuant to the terms of Letter of Intent (“LOI”) dated April 18, 2011. Rentier had acquired its Nexo shares from ProBenefit in 2011. Under the terms of the Agreement, the Company purchased a total of 2,763,246 shares of the voting common stock of Nexo in consideration of a $1.0 million cash payment and the issuance by the Company to Rentier of 1,864,857 newly issued restricted shares of the common stock of the Company, which represents 9.72% of its common shares currently outstanding. The 1,864,857 shares were valued at $0.23 per share. After the acquisition, the Company had owned 29.5% of Nexo.
The financing for the acquisition of the 2,763,246 shares was obtained through a private placement of 2,979,591 newly issued restricted shares of the Company, which generated $1,042,857 in cash proceeds. Rentier invested $42,857 in the private placement.
As a result of the acquisition of the additional 12.2% interest in Nexo, thereby increasing its holdings to 29.5%, the Company changed its method of accounting for this investment from the cost method to the equity method. Under the cost method, the investment was recorded at cost and dividends were treated as income when received. Under the equity method, the Company records its proportionate share of the earnings or losses of Nexo. The effect of the change was to increase net loss for the year ended December 31, 2011 by $911,931 and decrease net loss for the year ended December 31, 2010 by $253,623, which resulted in the Company reporting net income of $14,280 for the year ended December 31, 2010. Due to the application of the equity method of accounting, a retrospective adjustment was made to accumulated deficit for $3,131 for the Nexo investment.
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 which required ProBenefit, S.A., an Argentine financial services holding company, to repurchase 2,184,250 shares of its 9,621,582 shares of Nexo Emprendimientos S.A. for $1,200,000 which resulted in a gain on those shares of approximately $750,000. At September 10, 2012, the final payment of $500,000 was received as the final payment of the $1,200,000. The Company has a second exercise option to sell to ProBenefit, S.A. the 3,458,396 Nexo shares ("Second Exercise Group") held by the Company for a purchase price of $1,900,000. The Second Exercise Group may be exercised at any time during the period beginning September 1, 2014 through September 1, 2015. This transaction reduced its ownership
to 19.42%.
On May 10, 2012, the Company began recording its investment in Nexo under the cost method of accounting.
On September 28, 2012, Nexo converted debt to equity thereby reducing the Company’s interest from 19.42% to 14.90%.
SOUTHERN TRUST SECURITIES HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
17.
|
Investment in Air Temp
|
In 2007, the Company and two of its officers, Robert Escobio and Kevin Fitzgerald, as well as an STS employee, each received 762,460 shares in Air Temp North America, Inc. (“Air Temp”) a Florida corporation engaged in the manufacturing and sale of air conditioning products and components in the automobile
industry. The total number of shares received by these individuals and the Company as compensation for investment banking services were 3,612,301. STSHC held 1,324,920 of these shares but did not record them at any value due to a lack of liquidity of the shares. On December 31, 2012, each of the above
holders of the stock as well as a fourth unrelated shareholder, which held 1,270,767 shares, sold the shares back to the parent company at a price of $0.2191 per share for total proceeds of $1,070,000. After deducting legal fees on the transaction, the net proceeds were $1,056,068 of which the Company received $297,372, which is recorded as a realized gain in trading income for the year ended December 31, 2012. Mr. Escobio, Mr. Fitzgerald, and the estate of the former employee each received net proceeds of $171,148. The unrelated shareholder received $245,252. At December 31, 2012, the amount due from redemption of this investment was $1,070,000 and the amount due to investors from redemption of this investment was $758,696.
On January 3, 2013, the Company received the proceeds from the sale of the Air Temp stock of $1,070,000
.
On January 8, 2013, the amount due to investors from redemption of the investment of $758,696 was paid in accordance with the terms of the agreement as outlined above.
On May 1, 2013, the National Futures Association (NFA) took an Associate Responsibility Action (ARA) against Robert Escobio, the Company’s Chairman and Chief Executive Officer. The NFA alleges that Mr. Escobio caused Southern Trust Metals, Inc. (STM), a subsidiary of the Company, to operate as an unregistered futures commission merchant (FCM) in violation of the Commodity Exchange Act and U.S. Commodity Futures Trading Commission (CFTC) regulations. Pursuant to instructions from the NFA, certain customer assets were transferred to a domestic registered FCM which clears for STS and they are recorded on the books of STS. An order of the NFA prohibits Mr. Escobio from soliciting or accepting funds for margining futures trades. The customer funds are not permitted to be withdrawn from the FCM until an accounting has been submitted to the NFA. Mr. Escobio and STM are cooperating with the NFA in connection with the production of requested information and documents. STM also has received a subpoena from the CFTC requesting documents relating to transactions and its operations. The Company is cooperating with the CFTC in connection with the production of the requested documents. On May 2, 2013, Pershing, LLC provided notification that it was exercising its right to terminate its clearing agreement with another Company subsidiary, Southern Trust Securities, Inc. (STS), a FINRA member and registered broker-dealer. This termination will be effective in June 2013. STS is in the process of obtaining a new clearing firm. Based on proceedings to date, management is currently unable to determine the probability of the outcome of these matters, the extent of materiality, or the range of reasonably possible loss, if any.
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. We may use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” and similar expressions to identify these forward-looking statements. Prospective investors should not place undue reliance on these forward-looking statements, which apply only as of the date of this quarterly report.
All forward-looking statements are based on information available to us on the date of this filing, and we assume no obligation to update such statements. The following discussion should be read in conjunction with the consolidated financial statements and the related notes included in this Quarterly Report on Form 10-Q.
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 (“STM”), 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.
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 interim financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to the valuation of securities owned and deferred tax assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated 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.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined.
Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.
Valuation Techniques
The Company values investments in securities that are freely tradable and are listed on a national securities exchange or reported on the NASDAQ national market at their last sales price as of the last business day of the year. At March 31, 2013, all of the Company’s investments classified as securities owned on the consolidated statements of financial condition are classified as Level 1 investments on the fair value hierarchy table in Note 5, 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 three month periods ended March 31, 2013 and 2012.
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 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 months ended March 31, 2013 and 2012, the Company recorded approximately $59,000 and $57,000, respectively, as compensation expense under FASB ASC 718.
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.
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 assets and liabilities are computed for differences 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 March 31, 2013 and December 31, 2012 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 March 31, 2013, STS’s net capital was approximately $843,000, which was approximately $743,000 in excess of its minimum requirement of $100,000. STS’s ratio of aggregate indebtedness to net capital was 0.45 to 1 as of March 31, 2013.
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 the probable loss. We did not record an accrual for contingencies at either March 31, 2013 or December 31, 2012.
Results of Operations for the three months ended March 31, 2013 and 2012
The following table sets for a summary of financial highlights.
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
%
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
668,919
|
|
|
$
|
746,871
|
|
|
$
|
(77,952
|
)
|
|
|
-10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
861,269
|
|
|
|
893,961
|
|
|
|
(32,692
|
)
|
|
|
-4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity method loss
|
|
|
-
|
|
|
|
(140,820
|
)
|
|
|
140,820
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(104,000
|
)
|
|
|
-
|
|
|
|
(104,000
|
)
|
|
|
-100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stockholders
|
|
|
(297,522
|
)
|
|
|
(288,504
|
)
|
|
|
(9,018
|
)
|
|
|
-3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
For the three month period ended March 31, 2013, we reported a net loss applicable to common stockholders of $297,522, a decrease in income of $9,018 (3%) from the net loss of $288,504 reported for the three months ended March 31, 2012. This decrease in net income applicable to common stockholders is primarily attributable to a $77,952 decrease in revenue, partially offset by a $32,692 decrease in expenses and no loss due to equity method income.
Revenues
For the three months ended March 31, 2013, commissions increased $43,117 (47%) to $135,104 from $91,987 reported for the three months ended March 31, 2012. 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 an increase in overall transaction volume by STS. IPWM Spain also had an increase in commissions from the comparable quarter.
Our trading income decreased $277,613, or 48%, to $304,964 for the three months ended March 31, 2013 from $582,577 reported for the three months ended March 31, 2012. Trading profits are generated mainly from fixed income products sold to our customers on a riskless trading principal basis. 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 more challenging fixed income environment for trading by STS as well as a significant decline in STM activity in comparison to the prior year.
Our give up income for the three months ended March 31, 2013 was $105,171. There was no comparable income for the three months ended March 31, 2012 since give up activity started in the second quarter of 2012. Give up income arises from STS’ execution of orders on behalf of another member firm and STS began this activity in the second quarter of 2012.
Managed account fees increased $9,777 (43%) to $32,377 for the three months ended March 31, 2013 from $22,600 reported for the three months ended March 31, 2012. 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 March 31, 2013, we reported interest and dividend income of $49,177, a $14,791 increase (43%) from the $34,386 reported for the three months ended March 31, 2012. This increase is attributed to an increase in margin interest income earned by STM.
For the three months ended March 31, 2013, we reported other income of $42,126, a $26,805 increase from the $15,321 reported for the three months ended March 31, 2012. This increase is primarily attributable to Exchange for Physical activity in the current year.
Expenses
We reported commissions and clearing fees expenses of $242,084 and $389,254 for the three month periods ended March 31, 2013 and 2012, respectively, a decrease of $147,170, or 38%. The decrease is primarily due to the decrease in trading income, an increase in give up income. This is 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 “commissions 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 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 to registered representatives represent 50% and 49% of total compensable revenues for the three month periods ended March 31, 2013 and 2012, 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 the mix of products and volume generated.
Employee compensation and benefits increased $113,080 (55%) to $317,519 for the three months ended March 31, 2013 from $204,439 reported for the three months ended March 31, 2012. 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 March 31, 2013 and 2012, we recorded approximately $59,000 and $57,000 in stock based compensation, respectively, an increase of $2,000 (4%). The vesting period for the equity compensation awards range from twelve to 120 months.
Occupancy costs decreased $2,369 (11%) to $19,007 for the three months ended March 31, 2013 from $21,376 reported for the three months ended March 31, 2012. 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 decreased $9,404, or 18% to $41,795 for the three months ended March 31, 2013 from $51,199 reported for the three months ended March 31, 2012. This decrease is primarily attributable to higher initial communications costs incurred during the opening of the Chicago office for the three months ended March 31, 2012.
Professional fees decreased $14,470 (11%) for the three months ended March 31, 2013 to $111,792 from $126,262 for the three months ended March 31, 2012 , due a decrease in lower legal, audit and professional fees. This was partially offset by consulting fees, which increased $46,000.
Travel and entertainment expenses increased $15,705 (104%) for the three months ended March 31, 2013 to $30,789 from $15,084 for the three months ended March 31, 2012, due to an increase in travel activity in the current quarter.
Depreciation and amortization expense increased $1,304 (9%) for the three months ended March 31, 2013 to $16,263 from $14,959 for the three months ended March 31, 2012. This increase is due to fixed asset purchases which were made during 2012, most of which occurred after the first quarter.
Interest expense increased $2,621 (20%) to $15,528 for the three months ended March 31, 2013 from $12,907 incurred for the three months ended March 31, 2012. This increase is due to an additional mortgage payment which was made in the first quarter of 2013.
Our other operational expenses include miscellaneous expenses and insurance premiums. Other operational expenses increased $8,011 (14%), to $66,492 for the three months ended March 31, 2013 from $58,481 reported for the three months ended March 31, 2012.
Dividends attributable to our preferred stockholders increased because we paid no dividend in the three months ended March 31, 2012, as compared to $104,000 paid for the three months ended March 31, 2013.
Liquidity and Capital Resources
The following sets forth a summary of financial condition data:
|
|
|
As of
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
% of
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial condition data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
714,010
|
|
|
$
|
903,678
|
|
|
$
|
(189,668
|
)
|
|
|
-21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at fair value
|
|
|
1,477,592
|
|
|
|
1,328,141
|
|
|
|
149,451
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
9,885,912
|
|
|
|
11,752,751
|
|
|
|
(1,866,839
|
)
|
|
|
-16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
624,155
|
|
|
|
645,454
|
|
|
|
(21,299
|
)
|
|
|
-3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
4,175,194
|
|
|
|
4,419,640
|
|
|
|
(244,446
|
)
|
|
|
-6
|
%
|
As of March 31, 2013, liquid assets consisted primarily of cash and cash equivalents of approximately $714,010 and securities owned of approximately $1,477,592 for a total of $2,191,602, which is $40,217 lower than the approximately $2,231,819 in liquid assets as of December 31, 2012. 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 approximately $189,668 to $714,010 at March 31, 2013, as compared to $903,678 at December 31, 2012, which results from the following:
|
Net loss
|
|
$
|
(192,350
|
)
|
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
|
provided by operating activities
|
|
|
74,817
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
$
|
59,814
|
|
|
Net cash used in operating activities
|
|
$
|
(57,719
|
)
|
|
|
|
|
|
|
|
Financing activities
|
|
$
|
(125,299
|
)
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes
|
|
|
|
|
|
on cash and cash equivalents
|
|
$
|
(6,650
|
)
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(189,668
|
)
|
Cash used by our operating activities for the three months ended March 31, 2013 was approximately $57,719, comprised of a net loss of $192,350, noncash reconciling adjustments of $74,817, and changes in operating assets and liabilities of $59,814. Noncash reconciling adjustments include stock-based compensation charges of $58,554 and depreciation and amortization of $16,263.
The $59,814 change in operating assets and liabilities is primarily attributable to a decrease in due from redemption of investment of $1,070,000 and a decrease of $766,755 in due from clearing brokers, offset by a decrease of $881,874 in payable to customers, a decrease of $758,696 in due to investors from redemption of investment, an increase of $149,451 in securities owned and a decrease of $18,400 in income taxes payable.
The following is a table summarizing our significant commitments as of March 31, 2013, consisting of debt payments related to our notes payable:
|
Year ending December 31,
|
|
Total
|
|
|
|
|
|
|
|
2013
|
|
$
|
49,000
|
|
|
2014
|
|
|
70,000
|
|
|
2015
|
|
|
76,000
|
|
|
2016
|
|
|
81,000
|
|
|
2017
|
|
|
88,000
|
|
|
Thereafter
|
|
|
260,000
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$
|
624,000
|
|
Not applicable.
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. Mr. Escobio has assessed the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2013 and deemed it to be effective. Both he and management also believe that financial reporting controls are adequate and there are no material inaccuracies or omissions of fact in this quarterly report.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports filed 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.
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.
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 March 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In the ordinary course of business, incidental to our operations, we retain outside counsel to address claims with which we are involved. As of December 31,2012, 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 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 aprivate 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. We filed our Answers and Affirmative Defenses and Counterclaims to the Second
Amended Complaint in the spring of 2012. We are seeking $1 million for alleged overpayments. The Plaintiff filed his Answers and Affirmative Defenses in
the summer of 2012, denying our counterclaims. The case is currently set for trial in the summer of 2013. Management does not believe there is any merit to the plaintiff’s claims.
In November 2008, STS initiated legal action against two individuals and their related company. One of the individuals named in the suit is also an individual
who has brought legal action against STS, as discussed in the preceding paragraph. STS’s actions seek to recover compensation owed to it for work
performed in connection with extensive financial and investment advice work, 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.
Not applicable.
None.
None.
None
.
None.
|
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
|
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.
|
|
|
|
|
|
|
|
May ___, 2013
|
By:
|
/s/ Robert Escobio
|
|
|
|
|
Robert Escobio
|
|
|
|
|
Chief Executive Officer and Chief Financial Officer
(Principal Executive and Accounting Officer)
|
|
|
|
|
|
|
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