ICH Investors Capital Holdings, Ltd.

ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

  Management's Discussion and Analysis reviews our consolidated financial condition as of June 30, 2013 and March 31, 2013, the consolidated results of operations for the three months ended June 30, 2013 and 2012 and, as appropriate, factors that may affect future financial performance. The discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q.  Unless context requires otherwise, as used in this Management’s Discussion and Analysis (i) the “current period” means the three months ended June 30, 2013, (ii) the “prior period” means the three months ended June 30, 2012, (iii) an increase or decrease compares the current period to the prior period, and (iv) non-comparative amounts refer to the current period.

FORWARD-LOOKING STATEMENTS

  This report contains certain “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Exchange Act. Forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events, trends and other matters that are not historical facts and may include words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "will," "should," "may," and other similar expressions. These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and changes in circumstances that might cause future events, achievements or results to differ materially from those expressed or implied by the forward-looking statements. Readers are directed to discussions of risks and uncertainties that may be found in this report and other documents filed by the Company with the SEC. We specifically disclaim any obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.

Overview

  We are a financial services holding company that, through our subsidiaries, provides brokerage, investment advisory, insurance and related services. We operate in a highly regulated and competitive industry that is influenced by numerous external factors such as economic conditions, marketplace liquidity and volatility, monetary policy, global and national political events, regulatory developments, competition and investor preferences. Our revenues and net earnings may be either enhanced or diminished from period to period by these and other external factors.

OUR BUSINESS

    Broker-Dealer Services

  We provide broker-dealer services in support of trading and investment by our representatives’ customers in securities, including corporate equity and debt securities, U.S. Government securities, municipal securities, mutual funds, limited partnerships and other alternative investments, variable annuities and variable life insurance.  We also provide related services such as market information, Internet brokerage, portfolio tracking facilities and records management.

Investment Advisory Services

  We provide investment advisory services, including asset allocation and portfolio rebalancing, with our various programs.  These services, for the most part, are conducted through our online brokerage platform.

Other allocation services are performed directly by fund companies. ICA offers several advisory wrap programs that provide managed advisory accounts for our advisors’ clients, as follows:

A-MAP Suite of Advisory Wrap Programs- Rep-As-Portfolio Manager Program

ICA’s suite of A-MAP Program, including A-MAP, A-MAP AT, & A-MAP FT, enables the advisor to assist a client in creating a personalized investment portfolio. The advisor acts as the portfolio manager, with full investment discretion. A-MAP and A-MAP AT are programs where a platform fee is charged by ICA for its services as a registered investment advisor (“RIA”). A-MAP- FT is a program where ICA charges a flat fee in lieu of a platform fee for its services as an RIA. 

Fund Select Advisory Wrap Program- Rep-As-Portfolio Manager Program

Fund Select is an advisory program where the advisor creates and manages a customized portfolio constructed primarily of mutual funds.

F-MAP Advisory Wrap Program – Firm managed ETF and Mutual Fund Wrap Program

F-MAP program utilizes a model portfolio established ICA which creates, manages, rebalances, reallocates, and reports on portfolios that consist of but are not limited to: no-load or load-waived mutual funds, ETF's, and/or variable annuities.

S-MAP Advisory Wrap Program – Separate Account Wrap Program

S-MAP is an advisory program where ICA has entered into agreements with Sub-Advisors who are selected by the representatives to provide advisory services to their clients. The S-MAP portfolios are not managed by ICA; rather they are managed by the Sub-Advisor on a discretionary basis.

Recruitment and Support of Representatives

  A key component of our business strategy is to recruit well-established, productive representatives who provide superior service to their clients.  Additionally, we assist our representatives in developing and expanding their business by providing a variety of support services and a diversified range of investment products for their clients.  We focus on providing substantial added value to our representatives’ practices, enabling them to be more productive, particularly in high margin lines such as advisory services and brokerage. 

  Support provided to assist representatives in pursuing consistent, profitable sales growth takes many forms, including automated trading systems, targeted financial assistance and a network of communication links with investment product companies.  Regional and national conventions provide forums for interaction to improve product knowledge, sales and client satisfaction.  In addition, we provide our representatives with programs and tools to grow their businesses both through new client acquisition and advancement of existing client relationships.  These programs enhance our ability to attract and retain productive representatives.

CRITICAL ACCOUNTING POLICIES

In General  

  Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The Company believes that of its significant accounting policies and litigation and regulatory matters to the Company’s condensed consolidated financial statements contained herein), those dealing with revenue recognition, allowance for doubtful accounts receivable, taxes and accrual of legal expenses involve a particularly high degree of judgment and complexity. Our accounting policies require estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the condensed consolidated financial statements. By their nature, estimates involve judgment based upon available information. Actual results or amounts can and do differ from estimates and the differences can have a material effect on the condensed consolidated financial statements. Therefore, understanding these policies is important to understanding the reported results of operations and the financial position of the Company.

Off Balance Sheet Risk

   We execute securities transactions on behalf of our customers on a fully-disclosed basis. If either the customer or a counter-party fails to perform, we, by agreement with our clearing broker, may be required to discharge the obligations of the non-performing party. In such circumstances, we may sustain a loss if the market value of the security is different from the contract value of the transaction. We seek to control off-balance sheet risk by monitoring the market value of securities held or given as collateral in compliance with regulatory and internal guidelines. Pursuant to such guidelines, our clearing company requires that we reduce positions when necessary.   We also complete credit evaluations where there is thought to be credit risk.

Reserves

   We record reserves related to legal proceedings in “accrued expenses” in the condensed consolidated balance sheet. The determination of these reserve amounts requires significant judgment on the part of management. Management considers many factors including, but not limited to: the amount of the claim; the amount of the loss in the client’s account; the basis and validity of the claim; the possibility of wrongdoing on the part of an employee or representative of the Company; previous results in similar cases; and legal precedents. Each legal proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management. Any change in the reserve amount is recorded in the condensed consolidated financial statements and is recognized as a charge/credit to earnings in that period. The assumptions made by management in determining the estimates of reserves may be incorrect and the actual costs upon settlement of a legal proceeding may be greater or less than the reserved amount.  See “Note 6, Litigation and Regulatory Matters”.

KEY INDICATORS OF FINANCIAL PERFORMANCE FOR MANAGEMENT

  Management periodically reviews and analyzes our financial performance across a number of measurable factors considered to be particularly useful in understanding and managing our business.  Key metrics in this process include productivity and practice diversification of representatives, top line commission and advisory services revenues, operating expenses, legal defense and settlement costs, taxes, earnings per share and adjusted EBITDA.

PRODUCTIVITY OF REPRESENTATIVES

  Management believes that improving the overall quality of our independent representatives is a key to achieving growth in revenues and earnings.  We believe that upgrading the business practices of our representatives not only grows revenue, but assists in limiting the cost of overhead functions and representative noncompliance.  We strive to continually improve the overall quality of our force of representatives by:

  A key metric that we use to assess the average quality of our producing (non-staff) representatives is per capita rep-generated revenue based on a rolling 12-month period.  Data for the 12-months ended June 30, 2013 and 2012 are presented below:

  The continued growth in the per capita rep-generated revenue is a direct result of attracting and recruiting new advisors, favorable market conditions and a focused practice management program. 

ADJUSTED EBITDA

    Earnings before interest, taxes, depreciation and amortization (“EBITDA”), as adjusted by eliminating other non-cash expense, gains or losses on sales of assets, and various non-recurring items (“adjusted EBITDA”), is a key metric we use in evaluating our financial performance.  Adjusted EBITDA eliminates items that we believe

are not part of our core operations, are non-recurring items of revenue or expense, or do not involve a cash outlay, such as stock-related compensation. We consider adjusted EBITDA important in monitoring and evaluating our financial performance on a consistent basis across multiple time periods. We also use adjusted EBITDA as an important measure, among others, to analyze and evaluate financial and strategic planning decisions.

  Adjusted EBITDA is considered a non-US GAAP financial measure as defined by Regulation G promulgated by the SEC under the Securities Act.  Adjusted EBITDA should be considered in conjunction with, rather than as a substitute for, important US GAAP financial measures including pre-tax income, net income and cash flows from operating activities.  Items excluded from adjusted EBITDA are significant and necessary components to the operations of our business; therefore, adjusted EBITDA should only be used as a supplemental measure of our operating performance.

  First q uarter Adjusted EBITDA, was $0.5 million loss , a de crease of 178.2 % from a $0.6 million income   Adjusted EBITDA before interest, taxes, depreciation, amortization, and non-cash compensation in the comparative quarter . This decrease   is primarily due to the operating loss   reported in the current period .

REVENUE

     Revenues increased by $ 2.3 million or by 11.0 % primarily due to an increase in top line revenue from both commissi ons and advisory fees as   the Company is focused on growth, both organically through its practice management  initiatives ,  a s well as through attracting and recruiting new advisors.

   Revenues from commissions increased by 12.8 % or by $ 2.1 million primarily as a result of commissions earned from our direct business , reflecting improved market conditions as well new business from newer representative s . Revenues from advisory services increased also as assets grew, benefiting from a n improved stock market compared to last year at this time.

   Our advisor managed program continues to contribute the majority of advisory fee revenue .  R evenues decreased in the A-MAP and F-MAP program s, offset by an increase in revenues and assets under management in our A-MAP FT program, another advisor managed program which includes a flat fee str ucture. These changes resulted both from new assets as well as from the continued shift of assets by our advisors into fee base programs that meet their clients’ needs.    

  Other fee income, which consists primarily of licensing fees, annual administrative fees, and technology fees , decreased 35.4%, largely due to fee rebates.

  Other revenue, which consists of net marketing revenues and interest income , increas ed primarily from the increase in marketing allowances for product sales offset by a decrease in marketing allowances for sponsorship of events.

EXPENSES

  Total expenses increased by $ 3.4 million, or 16.7 %, principally as a result of increase s in commissions and advisory fees compensated to our independent representatives and in regulator y, legal and professional costs. There were also increases in compensation and benefits, marketing and promotion, technology and communications, and interest expense. Offsetting these increases was a decrease in occupancy and equipment.    

  Commissions and advisory fees paid to our representatives represent a percentage of revenue of our broker-dealer; accordingly, the ratio of commissions and advisor fees payout as a percentage of top line revenue in the current period decreased with that of the prior period; however, because top line revenue increased there was a corresponding increase in commission payouts to our representatives.

    R egulatory, legal and professional expenses more than doubled; this period’s 105% increase was driven principally by related legal costs incurred to litigate and resolve claims concerning investment products sold by our representatives prior to the recent recession, coupled with an i ncrease in the Company’s professional

liability insurance, specifi cally its self - insured   retention on certain specific alternative investment products.

 We will continue to incur legal fees ,   settlement costs and E&O premiums as we operate in a litigious, regulated industry. In addition, from time to time regulatory agencies and self-regulatory organizations institute investigations into industry or firm practices, that also may result in the imposition of financial or other sanctions. We invest significant resources to mitigate litigation and regulatory exposure by promoting sound operational procedures and obtaining comprehensive insurance coverage.

  The increase in compensation and benefits is attributable to the Company’s salaries returning to base pay levels in the current period as compared to salary reductions initiated in January 2012.  In addition, the Company had new strategic hires in the marketing, compliance, and trading and operation s departments.  

 The increase in marketing and promotion is the result of costs incurred for advertisements in financial service sector magazines to promote brand awareness and our recruiting campaigns.  In addition, there was an increase in travel and entertainment for completion of risk-based audits completed by our compliance staff. General marketing increased to further support branding and business development specific to assisting our representatives growing their businesses.

 Technology and communications increased due to raised costs by our vendor for reporting software used by our representatives as a tool to provide consolidated client presentations.  Interest expense increased as a result of a subordinated loan from our clearing firm.

    Costs associated with occupancy and equipment decreased from the relocation of our Home Office to more cost effective space, and the result of a favorable outcome in litigation with our previous landlord pertaining to our former rental property lease of our former Home office Location .   Per judge order, the Company was released from all future lease obligations for that particular property.

 The other expense categories had minimal changes in comparing the current period to the prior period.

 We had an income tax benefit of $0. 3   million for the three months ended June  3 0 , 201 3 as compared to $0. 2 million income tax provision for the prior period. The income tax rates for the 201 3 and 201 2 periods do not bear a customary relationship to effective tax rates primarily as a result of the increase in the permanent differences created by various accruals for each of the periods presented. 

OPERATING AND NET INCOME

   While revenues increased, it was outpaced by costs incurred in providing for reserves and settling of legal cases, thus generating an operating loss in the current period.  Legal settlements on product sales largely completed prior to the recent recessions have significantly impacted our operating and net income results for several reporting periods. Management ’s strategy and ultimately success for resolving these cases, along with its sustained organic and recruiting growth initiatives, will be necessary to improve the Company’s operating and net income results going forward.

    The Company’s net loss was $ 0.4 million, or $ 0.05 per basic net loss per share, compared to net income of $ 0.3 million, or $ 0.04 basic and $ 0.04 diluted net income per share, for the prior period.  

  Liquidity and Capital Resources

  Our primary source of liquidity remains cash flows from operations, primarily from our broker-dealer and investment advisory business. Decisions on the allocation of capital include projected profitability and available cash flows, risk management and regulatory capital requirements. A key to this approach is ensuring that industry-standard controls are effective to support our operations and those of our representatives while ensuring sufficient liquidity.

  As of June  3 0 , 201 3 , cash and cash equivalents totaled $ 6.1 million as compared to $ 6.6 million as of March 31, 201 3 . Working capital as of June  3 0 , 201 3 was $ 7.9 million as compared to $ 7.5 million as of March 31, 201 3 . The ratio of current assets to current liabilities was 2.1 to 1 as of June  3 0 , 201 3 , as compared to 1. 9 to 1 as

of March 31, 201 3 .  

  Operations provided $ 0.0 million in cash for the current period, as compared to $ 0.4 million of operating cash provided in the prior period. When comparing the current period cash flow to the prior period cash flow   from operating activities the significant changes were from current period’s net loss versus the prior period’s net income , from account balances held at our clearing firm, and from income taxes due to the income tax benefit in the current period versus an income tax provision in the prior period and from the change in the deferred tax asset.

 For our current level of operating activities, we believe that our operations and current capital resources will be sufficient to fund our working capital needs for the next twelve months. These needs are to grow top line revenues organically through practice management initiatives and by continuing to  recruit advisors to the firm. 

  Net cash flows used in investing activities in the current period represent purchases in equipment ,     contributions on an executive life insurance policy, and proceeds from other investments . Net cash flows used in the prior period also represent purchases in equipment .  

  Cash flows for financing activities in the current period de creased slightly when compared to the prior period as we paid $ 0.5 million and $ 0.7 million in loan payments to finance E&O insurance premiums, respectively, for the periods ended June  3 0 , 201 3 and 201 2 . The Company has a line of credit (“line”) with specific financial covenants with its financial institution. Although there were no borrowings, the Company did achieve the required operating results to meet those covenants. 

REGULATORY NET CAPITAL

  Cash disbursements can have a material impact on our registered broker dealer’s regulatory net capital. ICC is subject to the SEC Uniform Net Capital Rule (Rule 15c3-1) which requires our broker-dealer subsidiary to maintain minimum net capital.  As of March 31, 2011 and going forward, ICC computes net capital requirements under the alternative method, which requires firms to maintain minimum net capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit balances. Repayment or prepayment of subordinated debt, currently $2,000,000 , and withdrawal of equity from retiring partners or officers is subject to net capital not falling below 5% of aggregate debits or 120% of minimum net capital requirement.

   As of June 30, 2013, ICC had net capital of $4.1 3 million (i.e., an excess of $3. 88 million) as compared to net capital of approximately $4.43 million (i.e., an excess of $4.18 million) as of March 31, 2013.  

Commitments and Contingencies

  On October 19, 2012 the Company entered into a lease for 14,045 square feet and began occupying that space on December 1, 2012 in Lynnfield, MA.  This lease, which is for a term of sixteen months, expires March 31, 2014.  Subsequent to March 31, 2013, the Company was released from its commercial lease agreement for its prior home office location at 230 Broadway, Lynnfield, MA.

  The total minimum rental due in future periods under these existing agreements as of June 30, 2013 are as follows:

Total lease expense for office space approximated $0.02 and $0.06 million for the three months ended June 30, 2013 and 2012, respectively. Lease expense was adjusted in the current period due to a favorable litigation releasing all lease obligations to a prior landlord.

  The Company offers loans and transition assistance to representatives mainly for recruiting or retention purposes. These commitments are contingent upon certain events occurring, including, but not limited to, the representatives joining the Company and meeting certain production requirements. As of June 30, 2013 and 2012, there were no such outstanding commitments.