VII Peaks Co-Optivist Income BDC II, Inc. - FORM 10-Q/A

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q/A

Amendment No. 1

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

For the quarterly period ended September 30, 2012

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

For the transition period from to

Commission File No. 0-54615

VII Peaks-KBR Co-Optivist Income BDC II, Inc.

(Exact name of Registrant as specified in its charter)

Maryland	45-2918121
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

255 Shoreline Drive, Suite 428

Redwood City, California 94065

(Address of principal executive offices)

(877) 700-0527

(Registrant’s telephone number, including area code)

Not applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer x	Smaller reporting company ¨
		(Do not check if a smaller reporting company)

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

The number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding as of November 5, 2012 was 680,240.

Explanatory Note

VII Peaks-KBR Co-Optivist Income BDC II, Inc. (the “Company”) is filing this Amendment No. 1 (the “Amendment”) to its Quarterly Report on Form 10-Q for the period ended September 30, 2012 filed with the Securities and Exchange Commission on November 13, 2012 for the purpose of restating its financial statements to comply with the investment advisory agreement between the Company and the Company’s investment manager, VII Peaks-KBR BDC Advisor II, LLC (the “Manager”). Specifically, the restatement is resulting from a correction of a misinterpretation of the investment advisory agreement between the Company and the Manager, regarding organization and offering expenses. The Company is not obligated to reimburse the Manager to the extent of amounts greater than 1.5% of offering proceeds. Previously, the Company (i) expensed all organization expenses in the period incurred, (ii) capitalized all offering expenses incurred prior to the date the Company commenced operations (July 12, 2012) and amortized such amount over 12 months from such date, and (iii) expensed all offering expenses incurred after the Company commenced operations. The Company has restated its financial statements to reflect changes in its organization and offering expenses so that it expenses such amounts as 1.5% of offering proceeds are payable to the Manager. In addition to the changes described above, the change also resulted in changes to “Note 2. Significant Accounting Policies,” “Note 3. Organization and Offering Expenses” (renamed “Note 3. Restatement of previously issued financial statements”), and “Note 5. Related Party Transactions.” “Note 9. Subsequent Events,” has been updated as well.

VII PEAKS-KBR CO-OPTIVIST INCOME BDC II, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2012

TABLE OF CONTENTS

		Page

PART I	FINANCIAL INFORMATION	1

Item 1	Financial Statements	1

	Statements of Assets and Liabilities as of September 30, 2012 (unaudited) and December 31, 2011	1

	Statements of Operations for the Three and Nine Months Ended September 30, 2012 and for the Period from August 3, 2011 (Date of Inception) to September 30, 2011 (unaudited)	2

	Statements of Changes in Net Assets for the Nine Months Ended September 30, 2012 and for the Period from August 3, 2011 (Date of Inception) to September 30, 2011 (unaudited)	3

	Statements of Cash Flows for the Nine Months Ended September 30, 2012 and for the Period from August 3, 2011 (Date of Inception) to September 30, 2011 (unaudited)	4

	Schedule of Investments as of September 30, 2012 (unaudited)	5

	Notes to Financial Statements (unaudited)	6

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3	Quantitative and Qualitative Disclosures About Market Risk	21

Item 4	Controls and Procedures	21

PART II	OTHER INFORMATION	22

Item 1	Legal Proceedings	22

Item 1A	Risk Factors	22

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	22

Item 3	Defaults upon Senior Securities	22

Item 4	Mine Safety Disclosures	22

Item 5	Other Information	22

Item 6	Exhibits	22

Signatures		23

PART I – FINANCIAL INFORMATION

Item 1. Financial Statement

VII PEAKS-KBR CO-OPTIVIST INCOME BDC II, INC.

STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share and per share data)

	As of
	September 30, 2012			December 31, 2011 (1)
	(Unaudited)
ASSETS

Investments, at fair value (amortized cost of $2,420 and $0)	$	2,348		$	-
Investments – money market		1,215			201
Interest receivable		66			-
Prepaid expenses		13			-
Due from related party		324			-
Receivable for common stock purchased		713			-
Receivable for unsettled trades		103			-
Total assets	$	4,782		$	201

LIABILITIES
Payable for unsettled trades	$	429		$	-
Management and incentive fees payable		14			-
Accounts payable and accrued liabilities		54			4
Stockholder distributions payable		25			-
Total liabilities	$	522		$	4

NET ASSETS
Preferred stock, par value, $.001 per share, 50,000,000 authorized, none issued and outstanding		-			-
Common stock, par value, $.001 per share, 200,000,000 authorized; 483,234 and 22,333 shares issued and outstanding, respectively		1			-
Paid-in capital in excess of par value		4,349			201
Accumulated distribution in excess of net investment income		(18	)		(4	)
Net unrealized depreciation on investments		(72	)		-
Total net assets		4,260			197
Total liabilities and net assets	$	4,782		$	201

Net asset value per share	$	8.82		$	8.82

(1) Derived from the audited statement of assets and liabilities as of December 31, 2011.

The accompanying notes are an integral part of these financial statements.

VII PEAKS-KBR CO-OPTIVIST INCOME BDC II, INC.

STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(Unaudited)

	For the Three Months Ended September 30,			For the Nine Months Ended September 30,			For the Period from August 3 (Date of Inception) to September 30,
	2012			2012			2011

Investment income:
Interest from investments	$	32		$	32		$	-
Total investment income		32			32			-

Operating expenses:
Professional fees		37			67			-
Directors fees		11			20			-
Insurance		13			35			-
Management fees		19			19			-
General and administrative		44			75			4
Organizational and offering expense		62			62			-
Expenses before expense reimbursements		186			278			4
Expense reimbursement		(282	)		(282	)		-
Total expenses net of expense reimbursements		(96	)		(4	)		4

Net investment income (loss)		128			36			(4	)

Realized and unrealized gain (loss) on investments:
Net realized gain from investments		-			-			-
Net unrealized depreciation on investments		(72	)		(72	)		-
Net realized and unrealized loss on investments		(72	)		(72	)		-

Net increase (decrease) in net assets resulting from operations	$	56		$	(36	)	$	(4	)

Per share information - basic and diluted:
Net investment income (loss)	$	0.52		$	0.37		$	(70.18	)
Net increase (decrease) in net assets resulting from operations	$	0.23		$	(0.37	)	$	(70.18	)
Weighted average common shares outstanding		243,985			96,756			57

The accompanying notes are an integral part of these financial statements.

VII PEAKS-KBR CO-OPTIVIST INCOME BDC II, INC.

STATEMENTS OF CHANGES IN NET ASSETS

(in thousands, except share and per share data)

(Unaudited)

	For the Nine Months Ended September 30, 2012			For the Period from August 3, 2011 (Date of Inception) to September 30, 2011

Operations:
Net investment income (loss)	$	36		$	(4	)
Net realized gain from investments		-			-
Net unrealized depreciation on investments		(72	)		-
Net increase (decrease) in net assets from operations		(36	)		(4	)
Stockholder distributions:
Distributions from net investment income		(32	)		-
Distributions from paid in capital		(18	)		-
Net decrease in net assets from stockholder distributions		(50	)		-
Capital share transactions:
Issuance of common stock, net of issuance costs		4,149			1
Net increase in net assets from capital share transactions		4,149

Total increase (decrease) in net assets		4,063			(3	)
Net assets at beginning of period		197			-
Net assets at end of period	$	4,260		$	(3	)

Net asset value per common share	$	8.82		$	(27.03	)
Common shares outstanding at end of period		483,234			111

Accumulated distribution in excess of net investment income	$	(18	)	$	(4	)

The accompanying notes are an integral part of these financial statements.

VII PEAKS-KBR CO-OPTIVIST INCOME BDC II, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	For the Nine Months Ended September 30, 2012			For the Period from August 3, 2011 (Date of Inception) to September 30, 2011

Operating activities:
Net decrease in net assets from operations	$	(36	)	$	(4	)
Adjustments to reconcile net decrease in net assets from operations to net cash used in operating activities:

Net accretion of discount on investments		(9	)		-
Repayments of investments		101			-
Purchase of investments		(2,512	)		-
Purchase of money market investments		(1,014	)		(1	)
Net unrealized depreciation on investments		72			-
(Increase) decrease in operating assets:
Interest receivable		(66	)		-
Prepaid expenses		(13	)		-

Receivable for unsettled trades		(103	)		-
Due from related party		(324	)
Increase (decrease) in operating liabilities:
Payable for unsettled trades		429			-
Management and incentive fees payable		14			-
Accounts payable and accrued liabilities		50			4
Net cash used in operating activities		(3,411	)		(1	)

Financing activities:
Proceeds from issuance of shares of common stock, net		3,428			1
Stockholder distributions		(17	)		-
Net cash provided by financing activities		3,411			1

Net increase in cash		-			-
Cash, beginning of period		-			-
Cash, end of period	$	-		$	-

Supplemental non-cash information:
DRIP distribution payable	$	9		$	-
Cash distribution payable	$	16		$	-
DRIP distribution paid	$	8		$	-

The accompanying notes are an integral part of these financial statements.

VII PEAKS-KBR CO-OPTIVIST INCOME BDC II, INC.

SCHEDULE OF INVESTMENTS

(dollars in thousands)

September 30, 2012

(Unaudited)

Portfolio Company (a)	Industry	Investment Coupon Rate, Maturity Date	Principal		Amortized Cost		Fair Value		% of Net Assets

Senior Secured First Lien Debt - 18.4% (b)

Apria Healthcare Group, Inc.	Healthcare & Pharmaceuticals	11.25%, 11/01/2014	$	100	$	104	$	102		2.5	%
GXS Worldwide, Inc.	Services: Business	9.75%, 6/15/2015	$	250		262		258		6.1	%
McClatchy Co.	Media: Advertising, Printing & Publishing	11.5%, 2/15/2017	$	200		214		215		5.0	%
Ryerson, Inc.	Metals & Mining	12.00%, 11/01/2015	$	200		207		207		4.8	%
Sub Total Senior Secured First Lien Debt						787		782		18.4	%

Senior Secured Second Lien Debt - 7.1% (b)

Apria Healthcare Group, Inc.	Healthcare & Pharmaceuticals	12.375%, 11/1/2014	$	100	$	100	$	98		2.3	%
Aspect Software, Inc.	Telecommunications	10.625%, 5/15/2017	$	200		215		205		4.8	%
Sub Total Senior Secured Second Lien Debt						315		303		7.1	%

Senior Unsecured Debt - 20.0% (b)

Alliance HealthCare Services, Inc.	Healthcare & Pharmaceuticals	8.00%, 12/1/2016	$	100	$	83	$	86		2.0	%
Alliance One International, Inc.	Beverage, Food & Tobacco	10.00%, 7/15/2016	$	150		157		155		3.6	%
Education Management LLC	Services: Consumer	8.75%, 6/1/2014	$	200		175		158		3.7	%
First Data Corp.	Banking, Finance, Insurance & Real Estate	10.55%, 9/24/2015	$	100		104		102		2.4	%
First Data Corp.	Banking, Finance, Insurance & Real Estate	9.875%, 9/24/2015	$	100		103		102		2.4	%
Seitel, Inc.	High Tech Industries	9.75%, 2/15/2014	$	200		203		201		4.7	%
Suntech Power Holdings Company, Ltd. (c)	Environmental Industries	3.00%, 3/15/2013	$	100		79		50		1.2	%
Sub Total Senior Unsecured Debt						904		854		20.0	%

Senior Subordinated Debt -9.6% (b)

Serena Software, Inc.	High Tech Industries	10.375%, 3/15/2016	$	200	$	207	$	204		4.8	%
Sungard Data Systems, Inc.	High Tech Industries	10.25%, 8/15/2015	$	200		207		205		4.8	%
Sub Total Senior Subordinated Debt						414		409		9.6	%

U.S. Bank Money Market 5 - CT	Money Market Investments	0.04% demand	$	1,215	$	1,215	$	1,215		28.5	%
Money Market Investments – 28.5% (b)					$	1,215	$	1,215		28.5	%

TOTAL INVESTMENTS - 55.1% (b)					$	3,635		$ 3,563		83.7	%

(a) All of our investments are issued by eligible U.S. portfolio companies, as defined in the Investment Company Act of 1940, except for Alliance One International, Inc., Education Management LLC and Suntech Power Holdings Company, Ltd.

(b) Percentages are based on net assets of $4,260 as of September 30, 2012.

The accompanying notes are an integral part of these financial statements.

VII PEAKS-KBR CO-OPTIVIST INCOME BDC II, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

Note 1. Nature of Operations

VII Peaks-KBR Co-Optivist Income BDC II, Inc. (the “Fund”), a Maryland corporation formed on August 3, 2011, is an externally managed, non-diversified closed-end management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund intends to elect to be treated for federal income tax purposes as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to invest in discounted corporate debt and equity-linked debt securities of public and private companies whose securities trade on the secondary loan market for institutional investors.

On August 9, 2011, the Fund filed a registration statement on Form N-2 to sell up to 75.0 million shares of common stock at an initial public offering price of $10.00 per share. The registration statement was declared effective by the Securities Exchange Commission (the “SEC”) on March 1, 2012. The Fund commenced operations when it raised gross offering proceeds of over $1.0 million, all of which was from persons who were not affiliated with the Fund or VII Peaks-KBR BDC Advisor II, LLC (the “Manager”) by one year from the date the registration statement was declared effective by the SEC. Prior to the successful satisfaction of that condition, all subscription payments were placed in an account held by the escrow agent, UMB Bank, N.A., in trust for the benefit of the Fund’s subscribers, pending release to the Fund. The Fund achieved the minimum offering requirement on July 10, 2012 and commenced operations on such date. As of September 30, 2012, the Fund issued 0.5 million shares of common stock for gross proceeds of $4.8 million.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The financial statements of the Fund included herein were prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments and accruals, necessary for a fair presentation of the results for the interim period. These financial statements should be read in conjunction with the audited financial statements and notes thereto as of December 31, 2011 and for the year then ended, which are included in the Fund’s final prospectus, as amended or supplemented, filed pursuant to Rule 497 of the Securities Act of 1933, as amended, filed with the SEC on March 12, 2012.

Use of Estimates in the Preparation of Financial Statements

The preparation of the accompanying financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and income, gains (losses) and expenses during the period reported. Actual results could differ materially from those estimates.

Investments – money market

The Fund has classified its money market investments as investments carried at fair value.

Revenue Recognition

We record interest income on an accrual basis to the extent that we expect the collect such amounts. For loans and debt securities with contractual payment-in-kind (“PIK”) interest, which represents contractual interest accrued and added to the principal balance, we generally will not accrue PIK interest for accounting purposes if the portfolio company valuation indicates that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities for accounting purposes if we have reason to doubt our ability to collect such interest. Original issue discounts, market discounts or premiums are accreted or amortized using the effective interest method as interest income. We record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, is recognized on an accrual basis to the extent that we expect to collect such amount.

U.S. Federal Income Taxes

The Fund intends to elect to be treated for federal income tax purposes as a RIC under subchapter M of the Code and to operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Fund is required to annually distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code. So long as the Fund maintains its status as a RIC, it generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as distributions. Rather, any tax liability related to income earned by the Fund represents obligations of the Fund’s investors and will not be reflected in the financial statements of the Fund. The Fund will also be subject to nondeductible federal excise taxes if it does not distribute at least 98% of net ordinary income, 98.2% of capital gain net income, if any, and any recognized and undistributed income from prior years for which it paid no federal income taxes.

New Accounting Pronouncements

In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” that will require a company to present components of net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2011. ASU 2011-05 did not have a material effect on the Fund’s financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and IFRSs (“ASU 2011-04”), which amends GAAP to conform it with fair value measurement and disclosure requirements in International Financial Reporting Standards (“IFRS”). The amendments in ASU 2011-04 change the wording used to describe the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in ASU 2011-04 are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. As such, the Fund has adopted this ASU and there were no related impacts on its financial position or results of operations.

Organizational and Offering Costs

The Fund is a closed-end fund with a continuous offering period. Under the investment advisory agreement between the Fund and the Manager, our Manager fronts the cost of the organization and offering expenses which are reimbursable by the Fund with up to 1.5% of the gross offering proceeds. The Fund expenses organizational and offering costs as they become payable under the investment advisory agreement.

Note 3. Restatement of previously issued financial statements.

As discussed in Note 2, during the second quarter of fiscal 2013, the Fund restated its financial statements for organization and offering expenses in order to comply with the terms of the investment advisory agreements between the Fund and the Manager. Previously, the Fund expensed all organization costs as they were incurred by the Manager. Previously, the Fund capitalized all offering expenses incurred prior to the date of commencement of operations (July 12, 2012) as deferred offering costs and amortized that amount over 12 months from the date of commencement of operations, and expensed all offering costs incurred by the Manager after the commencement of operations as they were incurred by the Manager. However, because the Fund is only obligated to reimburse the Manager to the extent of 1.5% of gross offering proceeds, the Fund is restating its financial statements to reflect the expense and obligation to the Manager only as they are payable to the Manager at 1.5% of offering proceeds. The following table summarizes the effects of the restatement on the specific items presented in the Company’s balance sheet as of September 30, 2012 and its statement of operations for the nine months ended September 30, 2012, as previously reported in its Form 10-Q for the period ending September 30, 2012.

	As previously reported			As restated
Statement of Assets and Liabilities
Due from related party	$	-		$	324
Deferred offering costs		666			-
Total assets		5,124			4,782
Management and incentive fee payable		55			14
Due to related party		301			-

Statement of Operations
Organizational and offering expense		440			62
Incentive fee		41			-
Expenses before expense reimbursement		697			278
Expense reimbursement		(802	)		(282	)
Expenses after expense reimbursement		(105	)		(4	)
Net investment income		137			36
Net increase (decrease) in net assets resulting from operations	$	65		$	(36	)

Per share information - basic and diluted
Net investment income	$	1.42		$	0.37
Net increase (decrease) in net assets resulting from operations	$	0.67		$	(0.37	)
Net asset value per share	$	8.81		$	8.82

Note 4. Valuation of Portfolio Investments

The Fund determines the net asset value of its investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by the board of directors. In connection with that determination, the Manager will prepare portfolio company valuations using relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, the most recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.

With respect to investments for which market quotations are not readily available, the Fund will undertake a multi-step valuation process each quarter, as described below:

•

the quarterly valuation process begins with each portfolio company or investment being initially valued by members of the investment committee, with such valuation taking into account information received from an independent valuation firm, if applicable;

•

preliminary valuation conclusions are then documented and discussed with the members of the board of directors; and

•

the board of directors discusses valuations and determines the fair value of each investment in the portfolio in good faith based on various statistical and other factors, including the input and recommendation of members of the investment committee and any third-party valuation firm, if applicable.

Investments are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted) calculated based on an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, mergers and acquisition comparables, the principal market and enterprise values, among other factors.

The Fund has adopted FASB ASC Topic 820, Fair Value Measurements and Disclosures (formerly Statement of Financial Accounting Standards No. 157, Fair Value Measurements), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements.

ASC Topic 820 clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of market participants. ASC Topic 820 provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. In addition, ASC Topic 820 provides a framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of valuation hierarchy established by ASC Topic 820 are defined as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Fund at the measurement date.

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable inputs for the asset or liability.

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement.

The following table presents fair value measurements of investments, by major class, as of September 30, 2012 according to the fair value hierarchy (dollars in thousands). There were no investments as of December 31, 2011.

	Level 1		Level 2		Total
Investments – Money Market	$	1,215	$	—	$	1,215
Senior Secured First Lien Debt		—		782		782
Senior Secured Second Lien Debt		—		303		303
Senior Unsecured Debt		—		854		854
Senior Subordinated Debt		—		409		409
Total	$	1,215	$	2,348	$	3,563

The composition of the Fund’s investments as of September 30, 2012, at amortized cost and fair value were as follows (dollars in thousands). There were no investments as of December 31, 2011.

	Investments at Amortized Cost		Investments at Fair Value		Fair Value Percentage of Total Portfolio
Investments – Money Market	$	1,215	$	1,215		33.4	%
Senior Secured First Lien Debt		787		782		21.7	%
Senior Secured Second Lien Debt		315		303		8.7	%
Senior Unsecured Debt		904		854		24.9	%
Senior Subordinated Debt		414		409		11.4	%
Total	$	3,635	$	3,563		100.0	%

Note 5. Related Party Transactions

The Fund is managed by the Manager. The Manager is wholly-owned by VII Peaks-KBR, LLC which is a joint venture between VII Peaks Capital, LLC (“VII Peaks”), and KBR Capital Advisors, LLC (“KBR”).

Investment Advisory Agreement

The Fund has entered into an investment advisory agreement with the Manager to manage the Fund’s investment activities. Pursuant to the investment advisory agreement, the Manager implements the Fund’s business strategy on a day-to-day basis and performs certain services for us, subject to oversight by our board of directors. The Manager is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties. Under the investment advisory agreement, the Manager is entitled to a base management and incentive fee as outlined in the Investment Advisory Agreement with the Fund. The base management fee is 2% of net assets below $100 million; 1.75% of net assets between $100 million and $250 million; and 1.5% of net assets over $250 million. For the nine months ended September 30, 2012, the Fund did not incur any base management fees.

The incentive fee has two parts. The first part, the subordinated incentive fee on income, is calculated and payable quarterly in arrears based upon the Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter. The subordinated incentive fee on income is 20% of pre-incentive net investment income subject to a quarterly return to investors, expressed as a rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 2.0% (8.0% annualized). The second part of the incentive fee, the incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated investments from the portfolio and is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement). This fee equals 20% of the Fund’s incentive fee capital gains, which will equal the Fund’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. For the nine months ended September 30, 2012, the Fund did not incur any incentive fees related to net investment income or capital gains.

Under US GAAP, the Fund calculates capital gains incentive fees as if the Fund had realized all assets at their fair values and liabilities at their settlement amounts as of the reporting date. GAAP requires that the capital gains incentive fee accrual assume the cumulative aggregate unrealized capital appreciation is realized, even though such unrealized capital appreciation is not payable under the investment advisory agreement. Accordingly, the Fund accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. There can be no assurance that such unrealized capital appreciation will be realized in the future and that the provisional capital gains incentive fee will become payable.

Under the investment advisory agreement, the Manager bears all offering and organizational expenses. Pursuant to the terms of the investment advisory agreement, the Fund has agreed to reimburse the Manager for any such organizational and offering expenses incurred by the Manager not to exceed 1.5% of the gross subscriptions raised by the Fund over the course of the offering period, which is currently scheduled to terminate two years from the initial offering date, unless extended. From each sale of common stock, the Fund will pay the Manager the lesser of 1.5% of the gross offering proceeds or the amount of unreimbursed offering and organizational expenses incurred by the Manager.

For the nine months ended September 30, 2012 and for the period from August 4, 2011 (inception) through December 31, 2011, the Manager incurred organizational and offering costs of $752,000 and $454,000, respectively. Of the total $1,206,000 organizational and offering costs incurred from inception through September 30, 2012, $62,000 was reimbursed to the Manager during the three and nine months ended September 30, 2012. The Fund expects that the Manager will continue to incur organizational and offering costs as the Fund’s offering continues, and such additional organizational and offering costs will increase the amount to which the Manager will be entitled to reimbursement from gross offering proceeds. The unreimbursed amount will be eligible for reimbursement to the extent the Fund receives subscriptions until March 1, 2014, which is the currently scheduled date that the offering period ends, unless it is extended. Organizational and offering expenses paid for by the Manager and reimbursed by the Fund are expensed on the Fund’s statement of operations as they are payable to the Manager.

From time to time, the Fund has paid directly certain expenses that were classified as organization or offering expenses that should have been borne by the Manager and for which the Manager is obligated to reimburse the Fund. As of December 31, 2012, the unreimbursed amount of organization and offering expenses was $42,000 which amount is included in “Due from related party” on the Fund’s balance sheet as of that date.

Expense Reimbursement Agreement

On November 9, 2012, the Fund entered into an expense reimbursement agreement with the Manager, under which the Manager agreed to reimburse the Fund for all U.S. GAAP compliant expenses recognized on the quarterly financial statements of the Fund for 2012, retroactive to the date of formation of the Fund on August 3, 2011. In 2013, the expense reimbursement agreement was modified to exclude management fees and incentive fees payable to the Manager effective as of January 1, 2013. The Fund recognizes a receivable on its books for the amount due from the Manager under the expense reimbursement agreement, and the Manager recognizes a liability on its books in the same amount. The expense reimbursement agreement allows the Manager and the Fund to offset the receivable in favor of the Fund created under the expense reimbursement agreement against the contingent payable owed by the Fund to the Manager under the investment advisory agreement, resulting in a net receivable or payable position. As of September 30, 2012, the Manager was indebted to the Fund for $282,000 of expense reimbursements under the expense reimbursement agreement.

The expense reimbursement agreement expires on the earlier of August 3, 2014 or the start of the quarter in which the Fund reaches $75 million in net assets. Amounts reimbursed by the Manager under the expense reimbursement agreement are not subject to recoupment by the Manager at a later date.

Administration Agreement

The Fund has also entered into an administration agreement with the Manager under which the Manager provides the Fund with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities and provides or oversees the performance of, the Fund’s required administrative services, which include, among other things, being responsible for the financial records which the Fund is required to maintain and preparing reports to its stockholders. The Manager is reimbursed amounts based on allocable portion of overhead costs under this agreement. During the nine months ended September 30, 2012, the Fund reimbursed the Manager for $12,000 in administration expenses under the administration agreement.

Dealer Manager Agreement

KBR Capital Markets, LLC (the “Dealer Manager”) is an affiliate of KBR, and is a licensed broker-dealer registered with the Financial Industry Regulatory Authority (“FINRA”) and serves as the Dealer Manager for the Fund’s public offering of shares of common stock. The Dealer Manager receives selling commissions of 7% of gross offering proceeds, all of which is expected to be re-allowed to selected dealers, and a dealer manager fee of up to 3% of gross offering proceeds, all or a portion of which may be re-allowed to selected dealers.

Purchase of Shares

The Manager purchased 111 and 22,222 shares of common stock on August 31, 2011 and December 31, 2011, respectively. These shares were purchased at a price of $9.00 per share, which represents the initial public offering price of $10.00 per share, net of selling commission and dealer manager fees.

Note 5. Common Stock

The Manager purchased 111 and 22,222 shares of common stock on August 31, 2011 and December 31, 2011, respectively. These shares were purchased at a price of $9.00 per share, which represents the initial public offering (“IPO”) price of $10.00 per share, net of selling commissions and dealer manager fees.

On July 10, 2012, the Fund had raised sufficient proceeds to break escrow on its IPO and through September 30, 2012, the Fund has sold 0.5 million shares of common stock for gross proceeds of $4.8 million including the purchases made by the Manager.

Note 6. Earnings Per Share

In accordance with the provisions of FASB ASC 260, “Earnings per Share” (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

The following information sets forth the computation of the weighted average basic and diluted net increase (decrease) in net assets per share from operations for the three and nine months ended September 30, 2012 and for the period from August 3, 2011 (date of inception) to September 30, 2011.

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,			For the Period Ended August 3, 2011 (Date of Inception) to September 30,
	2012		2012			2011
Basic and diluted
Net increase (decrease) in net assets resulting from operations	$	56	$	(36	)	$	(4	)
Weighted average common shares outstanding		243,985		96,756			57
Net increase (decrease) in net assets resulting from operations per share - basic and diluted	$	0.23	$	(0.37	)	$	(70.18	)

The Fund had no potentially dilutive securities as of September 30, 2012 or September 30, 2011, resulting in the same number of shares for basic and diluted.

Note 7. Distributions

The Fund has declared and paid distributions to stockholders on a semi-monthly basis since it commenced operations. From time to time, the Fund may also pay interim distributions at the discretion of its board of directors. The Fund may fund its distributions to stockholders from any sources of funds available to it, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets and non-capital gains proceeds from the sale of assets. The Fund’s distributions may exceed its earnings, especially during the period before the Fund has substantially invested the proceeds from its IPO. As a result, a portion of the distributions may represent a return of capital for tax purposes. As of September 30, 2012, the Fund has accrued $0.02 million in stockholder distributions that were unpaid.

The following table reflects the distributions per share declared and paid or payable in cash or with the reinvestment plan (“DRIP”) on the Fund’s common stock to date (dollars in thousands except share and per share amounts) for the period August 3, 2011 (date of inception) to September 30, 2012:

Payment Dates	Net Investment Income		Realized Gain from Investments		Unrealized Appreciation from Investments		Return of Capital		Per Share		Paid in Cash		DRIP		TOTAL

August 17, 2012	$	4	$	-	$	-	$	-	$	0.03	$	3	$	1	$	4
August 31, 2012		4		-		-		-		0.03		3		1		4
September 14, 2012		9		-		-		-		0.03		6		3		9
September 28, 2012		9		-		-		-		0.03		6		3		9
October 15, 2012		6		-		-		6		0.03		8		4		12
October 31, 2012		-		-		-		12		0.03		8		4		12
	$	32	$	-	$	-	$	18			$	34	$	16	$	50

The following table reflects the sources of the cash distributions on a tax basis that the Company has paid on its common stock during the three months ended December 31, 2012:

	Nine Months Ended September 30, 2012
Source of Distribution	Distribution Amount		Percentage
Net investment income		32		64.0	%
Distributions on account of preferred and common equity		18		32.0
Total	$	50		100.0	%

Note 8. Financial Highlights

The following is a schedule of financial highlights for the nine months ended September 30, 2012:

	For the Nine Months Ended September 30, 2012
Per share data:
Net asset value, beginning of period	$	8.82

Results of operations ⁽¹⁾
Net investment income		0.37
Net realized and unrealized loss on investments		(0.74	)
Net decrease in net assets resulting from operations		(0.37	)

Stockholder distributions ⁽²⁾
Distributions from net investment income		(0.33	)
Distributions from capital		(0.19	)
Net decrease in net assets resulting from stockholder distributions		(0.52	)

Capital share transactions
Impact from issuance of common stock ⁽³⁾		0.89

Net asset value, end of period	$	8.82
Shares outstanding at end of period		483,234
Total return ⁽⁵⁾		5.86	%
Ratio/Supplemental data:
Net assets, end of period (in thousands)	$	4,260
Average net assets (in thousands)		1,018
Ratio of net investment income to average net assets ⁽⁴⁾⁽⁷⁾		7.08	%
Ratio of operating expenses to average net assets ⁽⁴⁾⁽⁷⁾		(0.79	)%
Ratio of expenses reimbursed to average net assets		55.40	%
Portfolio turnover ratio ⁽⁶⁾		4.28	%

(1)

The per share was derived by using the weighted average shares outstanding during the period. Net investment income per share excluding the expense reimbursements equals ($2.54) for the nine months ended September 30, 2012. There was no expense reimbursement for the period from August 3, 2011 (date of inception) to September 30, 2011.

(2)

The per share data for distributions reflects the actual amount of distributions declared per share during the period.

(3)

The issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock in the Fund's continuous offering.

(4)

The ratios are after giving effect to amounts reimbursed by the Manager under an expense reimbursement agreement. See “Note 5 – Related Party Transactions.” For the nine months ended September 30, 2012, excluding the expense reimbursement, the ratio of net investment income and operating expenses to average net assets would have been (48.32)% and 54.62%, respectively. For the period from August 3, 2011 (date of inception) to September 30, 2011, there was no expense reimbursement.

(5)

Total return is calculated assuming a purchase of shares at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the DRIP. The total return based on net asset value for the nine months ended September 30, 2012, includes the effect of the expense reimbursement which added 28.83% to the return. For the period from August 3, 2011 (date of inception) to September 30, 2011, there was no expense reimbursement.

(6)

Portfolio turnover rate is calculated using the year-to-date sales over the average of the invested assets at fair value. Not annualized.

(7)

Ratios are annualized.

Note 9. Subsequent Events

Management of the Fund has evaluated subsequent events in the preparation of the Fund’s financial statements and has determined that no events require recognition or disclosure in the financial statements except for the following:

From October 1, 2012 to December 31, 2012, the Fund issued $0.5 shares of common stock for gross proceeds of $4.7 million. During the three months ended March 31, 2013, the Fund sold 755,028 shares of common stock in its offering for net proceeds of $6.85 million. After April 1, 2013, the Fund issued 0.3 million shares of common stock for gross proceeds of $2.9 million until the Fund suspended its continuous offering pending approval of a post-effective amendment to its financial statements.

For the period from October 1, 2012 to December 31, 2012, the Fund declared distributions of $0.26075 per share. From January 1, 2013 to June 28, 2013, the Fund declared distributions of $0.386922 per share.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the accompanying financial statements of VII Peaks-KBR Co-Optivist Income BDC II, Inc., and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to VII Peaks-KBR Co-Optivist Income BDC II, Inc., a Maryland corporation and, as required by context to VII Peaks-KBR Advisor II, LLC (the “Manager”), which serves as our investment adviser and administrator. We are externally managed by our Manager.

Forward-Looking Statements

This Form 10-Q includes forward-looking statements that reflect our expectations and projections about our future results, performance, prospects and opportunities. We may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” or “may” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control, including, among other things:

•

our ability to invest in discounted corporate debt and equity-linked debt securities of our target companies;

•

our about ability to successfully employ our Co-Optivist ^TM approach in executing our investment strategy;

•

a limited pool of prospective target businesses;

•

our ability to pay distributions on our shares of common stock;

•

an economic downturn which could impair our target companies’ abilities to continue to operate, which could lead to the loss of some or all of our assets; and

•

changes in general economic or business conditions or economic or demographic trends in the United States.

Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by our forward-looking statements. In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. These forward-looking statements are made as of the date of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events or otherwise, except as required by law. The forward-looking statements and projections contained in this Quarterly Report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933.

Overview

We invest in discounted corporate debt and equity-linked debt securities of public and private companies whose securities trade on the secondary loan market for institutional investors and provide distributions to investors. At the same time, we actively work with the target company’s management to restructure the underlying securities and improve the liquidity position of the target company’s balance sheet. We employ a proprietary “Co-Optivist ^TM ” approach (“cooperative activism”, Co-Optivist ^TM is a registered trademark of VII Peaks Capital, LLC, or VII Peaks, and is being used with their permission) in executing our investment strategy, which entails proactively engaging the target company management on average 24 months prior to a redemption event (typically a put or maturity event) to create an opportunity for growth in the investments. Our strategy is not dependent on restructuring to generate distributions.

Our investment objectives are to generate current income and capital appreciation. We meet our investment objectives by: (i) realizing income and capital appreciation through the acquisition, management and orderly liquidation of corporate debt securities, (ii) making distributions of available distributable cash to our shareholders, and (iii) preserving the capital investments of our stockholders.

Our proprietary “Co-Optivist ^TM” (cooperative activism) approach entails investment in the corporate debt and equity-linked debt securities of target companies, or target investments, in conjunction with proactively engaging the target companies’ management. We acquire target investments whose debt securities trade on the over-the-counter market for institutional loans at a discount to their par redemption value, and will be subject to a “redemption event” within (on average) 24 months. We define a “redemption event” as a maturity event or a put event (where investors in the target company’s debt security can have a redemption right at a pre-determined price). We hold such debt an average of 12–18 months, during which time we anticipate working actively with the target company’s management to effect and/or participate in a restructuring or exchange of the invested securities for new securities.

We make investments in target companies that meet our investment criteria. The size of an individual investment will vary based on numerous factors, including the amount of funds raised in this offering. However, assuming we raise the maximum offering amount of $750.0 million, we expect to hold at least 50 investments, and we anticipate that the minimum investment size will be approximately $0.25 million. We do not anticipate being heavily invested in any one industry, and generally, we do not expect to invest in more than two different classes of debt of the same target company. We intend to invest in debt and equity-linked debt of target companies with a minimum enterprise value of $200.0 million and whose debt and equity-linked debt is actively traded in the secondary loan market. We expect our portfolio to be predominantly composed of fixed-rate high-yield and equity-linked corporate debt securities. However, we may also purchase senior secured corporate debt securities which may have variable interest rates. We currently anticipate that the portion of our portfolio composed of variable rate corporate debt securities, if any, will not exceed 20%, but we may increase that to 33% of our aggregate portfolio at the time of any purchase depending on market opportunities.

We offer our stockholders the ability to receive distributions as well as the potential capital appreciation resulting from the restructuring of the debt of our target companies. To the extent we have distributable income available we anticipate declaring and paying distributions on a semi-monthly basis. We declared and paid distributions beginning in August 2012 at $0.0306250 per share each (an annualized rate of 7.35% based on our initial public offering price of $10.00 per share) to stockholders.

Between 2001 and 2008, corporate debt levels and the supply of leverage offered by banks and other investors steadily increased. We believe a significant amount of this debt will be subject to a redemption event prior to 2015. Many of the companies that have outstanding issues of such debt have not, or been unable to proactively refinance, creating a “refinancing wall” that we believe will create a liquidity shortfall for many issuers. The value of the debt securities of these companies as reflected in prices quoted in the secondary loan market, may be at a significant discount to par, and represent a premium yield to maturity reflective of these liquidity concerns, creating the opportunity for us to identify and invest in the debt securities of select companies at attractive current market valuations. We believe that our Co-Optivist ^TM approach can help our target companies achieve results that are beneficial to the long-term value of their businesses, which will in turn, result in capital gains through capital appreciation, or the exchange of invested securities into a current security or cash at a premium to its acquisition price. Our principals collectively have experience in principal investing, debt securities and general capital markets, and we believe we are well-positioned to capitalize on these opportunities.

Our investment activities are managed by our Manager who is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act. Our Manager is responsible for sourcing potential investments, conducting research on prospective investments, analyzing investment opportunities, structuring our investments, and monitoring our investments and portfolio companies on an ongoing basis. Our Manager is led by Gurpreet (Gurprit) S. Chandhoke, who also serves as our Chief Executive Officer, who has extensive experience in underwriting and issuing debt products that include high-yield, bank debt and convertible debt and has acted as financial adviser to private equity funds, venture capital firms and corporations in mergers and acquisitions, recapitalization and corporate finance transactions, and has served as principal investor in private equity and leveraged buyout transactions.

Our Manager has an investment committee that is responsible for reviewing, discussing and approving each investment opportunity we seek to pursue. We anticipate that our investment committee will meet once a week to discuss new and existing opportunities and developments on current investments. Our investment committee currently consists of Mr. Chandhoke, our Chief Executive Officer, Stephen F. Shea and Bhavin Shah, who also serves on our board of directors.

Critical Accounting Policies

Our financial statements, which are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements will require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ.

Valuation of Portfolio Investments

We determine the net asset value of our investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by our board of directors. In connection with that determination, our Manager prepares portfolio company valuations using relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, the most recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.

With respect to investments for which market quotations are not readily available, we will undertake a multi-step valuation process each quarter, as described below:

our quarterly valuation process begins with each portfolio company or investment being initially valued by members of our investment committee, with such valuation taking into account information received from our independent valuation firm, if applicable;

preliminary valuation conclusions are then documented and discussed with the members of our board of directors; and

the board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of members of our investment committee and any third-party valuation firm, if applicable.

Investments are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted) calculated based on an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the principal market and enterprise values, among other factors.

We have adopted FASB ASC Topic 820, Fair Value Measurements and Disclosures (formerly Statement of Financial Accounting Standards No. 157, Fair Value Measurements), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements.

Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Fund at the measurement date.

Level 3: Unobservable inputs for the asset or liability.

Revenue Recognition

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation

We measure net realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation will reflect the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Organizational and Offering Costs

Payment-in-Kind Interest

We may have investments in our portfolio that contain a PIK interest provision. Any PIK interest will be added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to maintain our status as a registered investment company (“RIC”), substantially all of this income must be paid out to stockholders in the form of distributions, even if we have not collected any cash.

Federal Income Taxes

We intend to elect to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our shareholders from our tax earnings and profits. To obtain and maintain our RIC tax treatment, we must meet, among other things, specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any.

Portfolio and Investment Activity

During the three and nine months ended September 30, 2012, we made $2.5 million of investments in new portfolio companies and had $0.1 million in aggregate amount of exits and repayments, resulting in net investments of $2.4 million for the period. We had no investments as of September 30, 2011.

The following table presents our portfolio composition based on fair value at September 30, 2012. We had no investments as of December 31, 2011.

	At September 30, 2012
	Percentage of Total Portfolio			Weighted Average Current Coupon Yield
Investments Money Market		33.4	%		—	%
Senior Secured First Lien Debt		21.7			11.0
Senior Secured Second Lien Debt		8.7			11.2
Senior Unsecured Debt		24.9			8.8
Senior Subordinated Debt		11.4			10.3
Total		100.0	%		10.0	%

As of November 7, 2012, our investment portfolio had a yield to maturity of 12.31%.

The following table shows the portfolio composition by industry grouping at fair value at September 30, 2012 (dollars in thousands). We had no investments as of December 31, 2011.

	At September 30, 2012
	Investments at Fair Value		Percentage of Total Portfolio
Investments – Money Market	$	1,215		34.1
High Tech Industries		611		17.1	%
Healthcare & Pharmaceuticals		286		8.0
Services: Business		257		7.2
Media: Advertising, Printing & Publishing		215		6.0
Metals & Mining		206		5.8
Telecommunications		206		5.8
Banking, Finance, Insurance & Real Estate		204		5.7
Services: Consumer		158		4.4
Beverage, Food & Tobacco		155		4.4
Environmental Industries		50		1.4
Total	$	3,563		100.0	%

Results of Operations

Operating results for the three and nine months ended September 30, 2012 and for the period from August 3, 2011 (date of inception) to September 30, 2011 are as follows (dollars in thousands):

	For the Three Months Ended September 30,			For the Period Ended August 3, 2011 (Date of Inception) to September 30,
	2012			2011
Total investment income	$	32		$	—
Total expenses, net		(96	)		4
Net investment income (loss)		128			(4	)
Net realized gain		—			—
Net unrealized depreciation		(72	)		—
Net increase (decrease) in net assets resulting from operations	$	56		$	(4	)

	For the Nine Months Ended September 30,			For the Period Ended August 3, 2011 (Date of Inception) to September 30,
	2012			2011
Total investment income	$	32		$	—
Total expenses, net		(4	)		4
Net investment income (loss)		36			(4	)
Net realized gain		—			—
Net unrealized depreciation		(72	)		—
Net increase (decrease) in net assets resulting from operations	$	(36	)	$	(4	)

Revenues

Our activities since inception have largely been organizational activities and those necessary to prepare for our public offering of shares of our common stock. We plan to generate revenue primarily from the cash interest we will collect on our debt investments and, to a lesser extent, from the early termination fees that many of our debt investments require the borrower to pay. Further, we may generate revenue in the form of commitment, origination, structuring or diligence fees. Any such fees will be generated in connection with our investments and recognized as earned.

Expenses

The composition of our operating expenses for the three and nine months ended September 30, 2012 and for the period from August 3, 2011 (date of inception) to September 30, 2011 was as follows (dollars in thousands):

	For the Three Months Ended September 30,			For the Period Ended August 3, 2011 (Date of Inception) to September 30,
	2012			2011
Professional fees	$	37		$	—
Director fees		11			—
Insurance		13			—
Management fees		19			—
General and administrative		44			4
Organizational and offering expense		62			—
Operating expenses before expense reimbursements		186			4
Expense reimbursement		(282	)		—
Total operating expenses net of expense reimbursements	$	(96	)	$	4

	For the Nine Months Ended September 30,			For the Period Ended August 3, 2011 (Date of Inception) to September 30,
	2012			2011
Professional fees	$	67		$	—
Director fees		20			—
Insurance		35			—
Management fees		19			—
General and administrative		75			4
Organizational and offering expense		62			—
Operating expenses before expense reimbursements		278			4
Expense reimbursement		(282	)		—
Total operating expenses, net of expense reimbursements	$	(4	)	$	4

Net Change in Unrealized Appreciation or Depreciation on Investments

For the three and nine months ended September 30, 2012, we had $0.07 million and $0.07 million, respectively, of unrealized depreciation. For the period from August 3, 2011 (date of inception) to September 30, 2011, we held no investments.

Changes in Net Assets from Operations

For the three and nine months ended September 30, 2012, we recorded a net increase (decrease) in net assets resulting from operations of $0.6 million and ($0.4) million, respectively. Based on 243,985 and 96,756 weighted average common shares outstanding for the three and six months ended September 30, 2012, respectively, our per share net increase (decrease) in net assets resulting from operations was $0.23 and ($0.37), respectively.

Liquidity and Capital Resources

We generate cash primarily from the net proceeds of our ongoing continuous public offering and from cash flows from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. On July 10, 2012, we satisfied our minimum offering requirement of raising gross offering proceeds in excess of $1.0 million from persons who are not affiliated with us or our Manager, and commenced operations. As of September 30, 2012, we issued 0.5 million shares of common stock for gross proceeds of $4.8 million. We sell our shares on a continuous basis at a current offering price of $10.00; however, to the extent that our net asset value per share increases, we will sell at a price necessary to ensure that our shares are not sold at a price, after deduction of selling commissions and dealer manager fees, that is below our net asset value per share.

Prior to investing in debt securities, we invest the net proceeds from our continuous offering primarily in money market funds that invest in U.S. government securities and high-quality debt instruments maturing in one year or less from the time of investment. As of September 30, 2012, we had $1.2 million invested in money market investments pending investment in debt instruments.

For the three months ended September 30, 2012, we experienced a net increase in money market investments of $1 million. For the three months ended September 30, 2012, approximately $3.4 million was generated from our financing activities, which primarily consisted of $3.4 million in net offering proceeds received, offset by $17,000 in distributions. We used approximately $3.4 million of cash in our operating activities primarily as a result of increases in receivables for interest and due from related party totaling $1.1 million. Also, we received proceeds from the sale of, repayment of and principal payments on portfolio debt investments of $.01 million, offset by the purchase of new portfolio debt investments of $2.5 million.

We do not expect to borrow funds during the following twelve months to make investments. In the future, however, if the market for debt financing presents attractively priced debt financing opportunities, or if our board of directors determines that leveraging our portfolio would be in our best interests and the best interests of our shareholders, we may decide to borrow funds to make investments. We do not currently anticipate issuing any preferred shares.

Distributions

We offer our stockholders the ability to receive distributions as well as the potential capital appreciation resulting from the restructuring of the debt of our target companies. To the extent we have distributable income available we declare and pay distributions on a semi-monthly basis. In August 2012, we began paying distributions at a semi-monthly rate of $0.030625, and during the quarter ending September 30, 2012 we declared six semi-monthly distributions of $0.030625 per share each (an annualized rate of 7.35% based on our initial public offering price of $10.00 per share) to stockholders. The total distributions declared in the quarter ending September 30, 2012 was $0.18375 per share.

Any distributions to our shareholders are declared out of assets legally available for distribution. We expect to continue making distributions unless our results of operations, our general financial condition, general economic conditions, or other factors prohibit us from doing so. There can be no assurance that we will be able to sustain distributions at any particular level.

Each year a statement on Internal Revenue Service Form 1099-DIV (or such successor form) identifying the source of the distributions (i.e., paid from ordinary income, paid from net capital gain on the sale of securities, or a return of capital) will be mailed to our shareholders. Our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from this offering. As a result, a portion of the distributions we make may represent a return of capital for tax purposes. The tax basis of shares must be reduced by the amount of any return of capital distributions, which will result in an increase in the amount of any taxable gain (or a reduction in any deductible loss) on the sale of shares.

Distribution Reinvestment Plan

We have adopted an “opt-in” distribution reinvestment plan pursuant to which you may elect to have the full amount of your cash distributions reinvested in additional shares of our common stock. If you wish to receive your distribution in cash, no action will be required on your part to do so. There will be no selling commissions, dealer manager fees or other sales charges to you if, you elect to participate in the distribution reinvestment plan. We will pay the plan administrator’s fees under the plan. Your distribution amount will purchase shares at 95% of the price that the shares are offered pursuant to the effective registration statement of the public offering. Shares issued pursuant to our distribution reinvestment plan will have the same voting rights as our shares of common stock offered pursuant to this prospectus.

Election as a RIC

We intend to elect to be treated as a RIC under Subchapter M of the Code commencing in the first taxable year in which we meet the minimum offering requirements. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income that we distribute to our stockholders from our tax earnings and profits. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. In addition, in order to obtain RIC tax treatment, we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our net ordinary income plus the excess, if any, of realized net short-term capital gain over realized net long-term capital loss, or the annual distribution requirement. Even if we qualify as a RIC, we generally will be subject to corporate-level U.S. federal income tax on our undistributed taxable income and could be subject to U.S. federal excise, state, local and foreign taxes.

Related-Party Transactions and Agreements

We have entered into agreements with the Manager and the Dealer Manager, whereby we pay certain fees and reimbursements to these entities. These include payments to the Dealer Manager for selling commissions and the Dealer Manager fee and payments to our Manager for reimbursement of organization and offering costs. In addition, we make payments for certain services that include, but are not limited to, the identification, execution, and management of our investments and also the management of our day-to-day operations provided to us by our Manager, pursuant to various agreements that we have entered into. See Note 5 to the financial statements included elsewhere in this quarterly report on Form 10-Q for additional information regarding such contractual obligations.

Contractual Obligations

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to financial market risks, including changes in interest rates. Any investments we make that are denominated in a foreign currency will be subject to risks associated with changes in currency exchange rates. These risks include the possibility of significant fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved.

We may hedge against interest rate and currency exchange rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates.

Item 4. Controls and Procedures

Disclosure Controls

In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and determined that the disclosure controls and procedures are effective.

Change in Internal Control Over Financial Reporting

No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Neither we nor our Manager are currently subject to any material legal proceedings.

Item 1A. Risk Factors

There have been no material changes from the risk factors set forth in our final prospectus on Form 497 filed with the SEC on March 12, 2012, as supplemented or amended.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this Quarterly Report on Form 10-Q.

SIGNATURES

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

	VII Peaks-KBR Co-Optivist Income BDC II, Inc.

Date: July 25, 2013	By	/s/ Gurpreet S. Chandhoke
		Gurpreet S. Chandhoke
		Chairman of the Board of Directors, Chief Executive Officer and President (Principal Executive Officer)

	VII Peaks-KBR Co-Optivist Income BDC II, Inc.

Date: July 25, 2013	By	/s/ Cecilia Shea
		Cecilia Shea Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer)

Item 6. Exhibits

Listed below are the exhibits which are filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):

Exhibit Number		Description of Document

10.1*		Expense Reimbursement Agreement by and between VII Peaks-KBR Co-Optivist Income BDC II, Inc. and VII Peaks-KBR BDC Advisor II, LLC, dated as of November 9, 2012.

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.

32.1*		Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

VII Peaks Co-Optivist Income BDC II, Inc. - FORM 10-Q/A - July 29, 2013

VII Peaks Co-Optivist Income BDC II, Inc. Reports