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)

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

For the quarterly period ended March 31, 2013

¨	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 May 14, 2013 was 1,990,515.

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 March 31, 2013, filed with the Securities and Exchange Commission on May 15, 2013 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 Manager is entitled to receive reimbursement of organization and offering costs of up to 1.5% of the gross proceeds raised until all organization and offering costs have been reimbursed. 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 only when they are payable to the Manager. The Company added “Note 3. Restatement of previously issued financial statements,” and renumbered all subsequent notes. In addition to the changes to the financial statements resulting from the adoption of a different accounting method for organization and offering expenses, the change also resulted in changes to “Note 2. Significant Accounting Policies,” “Note 5. Related Party Transactions,” “Note 6. Earnings per Share,” “Note 8. Distributions,” and “Note 9. Financial Highlights.” The Company also revised its disclosure of related party transactions in Note 5. Related Party Transactions” and updated its disclosure of subsequent events in “Note 11. Subsequent Events.”

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

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2013

TABLE OF CONTENTS

		Page

PART I.	FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1

	Statements of Assets and Liabilities as of March 31, 2013 (unaudited) and December 31, 2012	1

	Statements of Operations for the three months ended March 31, 2013 and 2012 (unaudited)	2

	Statements of Changes in Net Assets for the three months ended March 31, 2013 and 2012 (unaudited)	3

	Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited)	4

	Schedule of Investments as of March 31, 2013 (unaudited)	5

	Schedule of Investments as of December 31, 2012

	Notes to Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

PART II.	OTHER INFORMATION	25

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 3.	Defaults upon Senior Securities	25

Item 4.	Mine Safety Disclosures	25

Item 5.	Other Information	25

Item 6.	Exhibits	25

Signatures		26

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

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

STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share and per share data)

	As of
	March 31, 2013			December 31, 2012
	(Unaudited)
ASSETS

Investments, at fair value (amortized cost of $11,182 and $5,942)	$	11,252		$	5,823
Investments, money market at fair value		1,801			1,304
Interest receivable		326			132
Prepaid expenses		18			5
Due from related party		846			555
Receivable for common stock purchased		1,241			729
Total assets	$	15,484		$	8,548

LIABILITIES
Management and incentive fees payable	$	66		$	21
Accounts payable and accrued liabilities		119			71
Stockholder distributions payable		102			120
Total liabilities		287			212

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; 1,705,761 and 950,733 shares issued and outstanding, respectively		2			1
Paid-in capital in excess of par value		15,407			8,558
Accumulated distribution in excess of net investment income		(282	)		(104	)
Net unrealized appreciation (depreciation) on investments		70			(119	)
Total net assets		15,197			8,336
Total liabilities and net assets	$	15,484		$	8,548

Net asset value per share	$	8.91		$	8.77

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 March 31, 2013			For the Three Months Ended March 31, 2012

Investment income:
Interest from investments	$	244		$	-
Total investment income		244			-

Operating expenses:
Professional fees		61			-
Directors fees		11			-
Insurance		19			-
Management fees		75			-
Incentive fees		24			-
General and administrative		47			35
Organizational expense		111			-
Operating expenses before expense reimbursements		348			35
Expense reimbursement		(249	)		-
Total operating expenses net of expense reimbursements		99			35

Net investment income (loss)		145			(35	)

Realized and unrealized gain on investments:
Net realized gain from investments		47			-
Net unrealized appreciation on investments		189			-
Net realized and unrealized gain on investments		236			-

Net increase (decrease) in net assets resulting from operations	$	381		$	(35	)

Per share information - basic and diluted:
Net investment income (loss)	$	0.11		$	(1.57	)
Net increase (decrease) in net assets resulting from operations	$	0.29		$	(1.57	)
Weighted average common shares outstanding		1,292,508			22,333

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 Three Months Ended March 31, 2013			For the Three Months Ended March 31, 2012

Operations:
Net investment income (loss)	$	145		$	(35	)
Net realized gain from investments		47			-
Net unrealized appreciation on investments		189			-
Net increase (decrease) in net assets from operations		381			(35	)
Stockholder distributions:
Distributions from net investment income		(145	)
Distributions from realized gains		(47	)
Distributions from capital		(178	)		-
Net decrease in net assets from stockholder distributions		(370	)		-
Capital share transactions:
Issuance of common stock, net of issuance costs		6,696			-
Reinvestment of stockholder distributions		154
Net increase in net assets from capital share transactions		6,850			-

Total increase (decrease) in net assets		6,861			(35	)
Net assets at beginning of period		8,336			197
Net assets at end of period	$	15,197		$	162

Net asset value per common share	$	8.91		$	4.57
Common shares outstanding at end of period		1,705,761			22,333

Accumulated distribution in excess of net investment income	$	(282	)	$	-

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, except share and per share data)

(Unaudited)

	For the Three Months Ended March 31, 2013			For the Three Months Ended March 31, 2012

Operating activities:
Net increase (decrease) in net assets from operations	$	381		$	(35	)
Adjustments to reconcile net increase (decrease) in net assets from operations to net cash used in operating activities:
Net accretion of discount on investments		(18	)		-
Repayments of investments		2,006			-
Purchase of investments		(7,181	)		-
Repayments of investments - money market		7,786			49
Purchase of investments - money market		(8,283	)		-
Net realized gain from investments		(47	)		-
Net unrealized appreciation on investments		(189	)		-
(Increase) decrease in operating assets:
Interest receivable		(194	)		-
		(13	)		(10	)
Receivable for common stock
Due from related party		(291	)		(5	)
Increase (decrease) in operating liabilities:
Management and incentive fees payable		45			-
Stockholder distributions payable		(18	)
Accounts payable and accrued liabilities		48			1
Net cash used in operating activities		(5,968	)		-

Financing activities:
Proceeds from issuance of shares of common stock, net		6,336			-
Stockholder distributions		(370	)		-
Net cash provided by financing activities		5,968			-

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

Supplemental non-cash information:
DRIP distribution payable	$	41		$	-
Cash distribution payable	$	61		$	-
DRIP distribution paid	$	154		$	-

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)

March 31, 2013

(Unaudited)

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

Senior Secured First Lien Debt - 10.0% (b)

Apria Healthcare Group Inc.	Healthcare & Pharmaceuticals	11.25%, 11/01/2014	$	335	$	347	$	345		2.3	%
GXS Worldwide, Inc.	Services: Business	9.75%, 6/15/2015		585		608		607		4.0	%
Rotech Healthcare, Inc.	Healthcare & Pharmaceuticals	10.75%, 10/15/2015		569		571		569		3.7	%
Sub Total Senior Secured First Lien Debt				1,489		1,526		1,521		10.0	%

Senior Secured Second Lien Debt - 18.9% (b)

Apria Healthcare Group Inc.	Healthcare & Pharmaceuticals	12.375%, 11/1/2014		335		335		342		2.1	%
Aspect Software Inc.	Telecommunications	10.625%, 5/15/2017		585		586		585		3.9	%
Bon-ton Department Stores, Inc.	Retail	10.625%, 7/15/2017		300		300		300		2.0	%
Caesar's Entertainment Corp.	Hotel, Gaming & Leisure	10.00%, 12/15/2015		300		283		278		1.8	%
Logan's Roadhouse, Inc.	Beverage, Food & Tobacco	10.75%, 10/15/2017		610		577		570		3.8	%
Radiation Therapy Services, Inc.	Healthcare & Pharmaceuticals	8.875%, 1/15/2017		600		594		585		3.9	%
Saratoga Resources, Inc.	Energy: Oil & Gas	12.50%, 7/1/2016		200		211		206		1.4	%
Sub Total Senior Secured Second Lien Debt				2,930		2,886		2,866		18.9	%

Senior Unsecured Debt - 34.6% (b)

Alliance HealthCare Services, Inc.	Healthcare & Pharmaceuticals	8.00%, 12/01/2016		585		537		565		3.7	%
Alliance One International, Inc.	Beverage, Food & Tobacco	10.00%, 7/15/2016		585		613		618		4.1	%
Avaya, Inc.	Telecommunications	9.75%, 11/01/2015		225		200		224		1.5	%
Avaya, Inc.	Telecommunications	10.125%, 11/01/2015		225		200		224		1.5	%
Bon-ton Department Stores, Inc.	Retail	10.25%, 3/15/2014		249		251		250		1.6	%
Caesar's Entertainment Corp.	Hotel, Gaming & Leisure	10.75%, 2/01/2016		300		278		273		1.8	%
Education Management LLC	Services: Consumer	15.00%, 7/01/2018 (c)		270		228		278		1.8	%
First Data Corp.	Banking, Finance, Insurance & Real Estate	9.875%, 9/24/2015		360		370		371		2.4	%
Harland Clarke Corp.	Banking, Finance, Insurance & Real Estate	9.50%, 5/15/2015		600		600		592		3.9	%
Quicksilver Resources, Inc.	Energy: Oil & Gas	8.25%, 8/01/2015		285		278		280		1.8	%
Quicksilver Resources, Inc.	Energy: Oil & Gas	11.75%, 1/01/2016		300		306		306		2.0	%
Seitel, Inc.	High Tech Industries	9.75%, 2/15/2014		450		455		452		3.0	%
Suntech Power Holdings Company, Ltd. (d)	Environmental Industries	3.00%, 5/15/2013		100		95		29		0.2	%
Travelport LLC	Services: Consumer	9.875%, 9/01/2014		585		532		588		3.9	%
YCC Holdings LLC	Consumer goods: Non-durable	10.25%, 2/15/2016 (e)		200		208		206		1.4	%
Sub Total Senior Unsecured Debt				5,319		5,151		5,256		34.6	%

Senior Subordinated Debt -10.6% (b)

First Data Corp.	Banking, Finance, Insurance & Real Estate	11.25%, 3/31/2016		300		299		302		1.9	%
Sealy Mattress Co.	Consumer goods: Durable	8.25%, 6/15/2014		600		605		602		4.0	%
Serena Software, Inc.	High Tech Industries	10.375%, 3/15/2016		490		506		497		3.3	%
The Yankee Candle Company, Inc.	Consumer goods: Non-durable	9.75%, 2/15/2017		200		209		208		1.4	%
Sub Total Senior Subordinated Debt				1,590		1,619		1,609		10.6	%

U.S. Bank Money Market 5 - CT	Investments – Money Market	0.04% demand		1,801		1,801		1,801		11.8	%
Total Investments - Money Market – 11.8%				1,801		1,801		1,801		11.8	%

TOTAL INVESTMENTS - 85.9% (b)					$	12,983	$	13,053		85.9	%

(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., Bon-ton Department Stores, Inc., Caesar's Entertainment Corp., Education Management LLC, Quicksilver Resources, Inc. and Suntech Power Holdings Company, Ltd.

(b) Percentages are based on net assets of $15,197 as of March 31, 2013.

(d) Non-U.S. company. The principal place of business for Suntech Power Holdings Company, Ltd. Is China.

(e) The issuer has the option of paying interest in additional notes, in which event the interest rate is 11%.

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

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

NOTES TO FINANCIAL STATEMENTS

March 31, 2013

(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 was to commence 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 March 31, 2013, the Fund had issued 1.7 million shares of common stock for gross proceeds of $17.0 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. This Form 10-Q should be read in conjunction with the Fund’s annual report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on February 19, 2013. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2013. Certain prior period amounts have been reclassified to conform with the current period presentation.

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.

Note 2. Summary of Significant Accounting Policies (continued)

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.

U.S. Federal Income Taxes

The Fund has elected 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 January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 did not have a material impact on our financial position or results of operations.

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which requires entities to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The guidance is effective for fiscal years and interim periods beginning on or after January 1, 2013 with retrospective application for all comparative periods presented. The adoption of this guidance, which is related to disclosure only, did not have a material impact on the Fund’s financial position, results of operations or cash flows.

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.

Expense Reimbursement Agreement

Separate from the investment advisory agreement described under “Organizational and Offering Costs,” the Manager has agreed to reimburse the Fund for certain operating expenses. Such reimbursed amounts are not subject to recoupment. See “Note 5 – Related Party Transactions.

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 terns of the investment advisory agreement 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 March 31, 2013 and its statement of operations for the three months ended March 31, 2013, as previously reported in its Form 10-Q for the period ending March 31, 2013.

Statement of Assets and Liabilities	As previously reported			As restated
Due from related party	$	610		$	846
Deferred offering costs		236			-
Accumulated distribution in excess of net investment income		(329	)		(282	)
Accumulated undistributed net realized gain from investments		47			-

Statement of Operations

Organizational and offering expense	$	369		$	111
Expense reimbursement		(507	)		(249	)

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.

Note 4. Valuation of Portfolio Investments (continued)

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 March 31, 2013 according to the fair value hierarchy (dollars in thousands).

	Level 1		Level 2		Total
Investments - money market	$	1,801	$	—	$	1,801
Senior Secured First Lien Debt		—		1,521		1,521
Senior Secured Second Lien Debt		—		2,866		2,866
Senior Unsecured Debt		—		5,256		5,256
Senior Subordinated Debt		—		1,609		1,609
Total	$	1,801	$	11,252	$	13,053

The following table presents fair value measurements of investments, by major class, as of December 31, 2012 according to the fair value hierarchy (dollars in thousands).

	Level 1		Level 2		Total
Investments - money market	$	1,304	$	—	$	1,304
Senior Secured First Lien Debt		—		819		819
Senior Secured Second Lien Debt		—		859		859
Senior Unsecured Debt		—		3,115		3,115
Senior Subordinated Debt		—		1,030		1,030
Total	$	1,304	$	5,823	$	7,127

No transfers between levels have occurred during the periods presented.

Note 4. Valuation of Portfolio Investments (continued)

The composition of the Fund’s investments as of March 31, 2013, at amortized cost and fair value were as follows (dollars in thousands).

	Investments at Amortized Cost		Investments at Fair Value		Fair Value Percentage of Total Portfolio
Senior Secured First Lien Debt	$	1,526	$	1,521		11.6	%
Senior Secured Second Lien Debt		2,886		2,866		22.0
Senior Unsecured Debt		5,151		5,256		40.3
Senior Subordinated Debt		1,619		1,609		12.3
Investments - money market		1,801		1,801		13.8
Total	$	12,983	$	13,053		100.0	%

The composition of the Fund’s investments as of December 31, 2012, at amortized cost and fair value were as follows (dollars in thousands).

	Investments at Amortized Cost		Investments at Fair Value		Fair Value Percentage of Total Portfolio
Senior Secured First Lien Debt	$	820	$	819		11.5	%
Senior Secured Second Lien Debt		911		859		12.1
Senior Unsecured Debt		3,174		3,116		43.7
Senior Subordinated Debt		1,038		1,030		14.4
Investments - money market		1,304		1,304		18.3
Total	$	7,247	$	7,127		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 three months ended March 31, 2013, the Fund incurred $75 of 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 three months ended March 31, 2013, the Fund accrued $24 of incentive fees related to capital gains and none related to invest investment income.

Note 4. Related Party Transactions (continued)

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 three months ended March 31, 2013 and for the period from August 4, 2011 (inception) through December 31, 2012, the Manager incurred organizational and offering costs of $116,000 and $1,429,000, respectively. Of the total $1,545,000 organizational and offering costs incurred from inception through March 31, 2013, $111,000 was reimbursed to the Manager during the three months ended March 31, 2013, and an aggregate of $253,000 had been reimbursed since the Fund commenced operations on July 12, 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 March 31, 2013, the unreimbursed amount of organization and offering expenses was $73,000 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 March 31, 2013, the Manager was indebted to the Fund for $773,000 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 three months ended March 31, 2013, 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.

Note 6. 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 March 31, 2013, the Fund has sold 1.7 million shares of common stock for gross proceeds of $17.0 million including the purchases made by the Manager.

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.

Note 7. 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 months ended March 31, 2013 and 2012 (dollars in thousands except share and per share amounts).

	For the three months ended March 31, 2013		For the three months ended March 31, 2012
Basic and diluted
Net increase (decrease) in net assets resulting from operations	$	381	$	(35	)
Weighted average common shares outstanding		1,292,508		22,333
Net increase (decrease) in net assets resulting from operations per share - basic and diluted	$	0.29	$	(1.57	)

The Fund had no potentially dilutive securities as of March 31, 2013 or March 31, 2012, resulting in the same number of shares for basic and diluted.

Note 8. 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 March 31, 2013, the Fund has accrued $0.1 million in stockholder distributions that were unpaid.

The following table reflects the distributions per share declared and paid or payable in cash or through the distribution reinvestment plan (“DRIP”) on the Fund’s common stock to date (dollars in thousands except per share amounts) through March 31, 2013:

	SOURCE OF DISTRIBUTION
Payment Dates	Net Investment Income		Realized Gain from Investments		Return of Capital		Per Share		Paid in Cash		DRIP		TOTAL

2012
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
November 16, 2012		17		-		-		0.03		11		6		17
November 30, 2012		17		-		-		0.03		11		6		17
December 17, 2012		22		-		-		0.03		12		10		22
December 31, 2012		23		-		-		0.03		13		10		23
2013
January 17, 2013 (1)		35		-		57		0.11		58		36		92
January 31, 2013		0		-		29		0.03		18		11		29
February 14, 2013		35		-		-		0.03		21		14		35
February 28, 2013		38		-		-		0.03		23		15		38
March 14, 2013 (1)		72		47		31		0.11		89		61		150
March 29, 2013		-		-		47		0.03		29		18		47
April 15, 2013		49		-		49		0.03		29		20		49
April 30, 2013		51		-		51		0.03		31		20		51
	$	391	$	47	$	282			$	379	$	243	$	620

(1)

Includes a special distribution of $0.077 per share.

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 March 31, 2013:

	Three Months Ended March 31, 2013
Source of Distribution	Distribution Amount		Percentage
Net investment income⁽¹⁾	$	145		39.2	%
Capital gains proceeds from the sale of assets		47		12.7	%
Distributions on account of preferred and common equity		178		48.1	%
Total	$	370		100	%

Note 9. Financial Highlights

The following is a schedule of financial highlights for the three months ended March 31, 2013:

	For the three months ended March 31, 2013
Per share data:
Net asset value, beginning of period	$	8.77

Results of operations ⁽¹⁾
Net investment income (loss)		0.11
Net realized gain on investments		0.04
Net unrealized gain on investments		0.14
Net increase (decrease) in net assets resulting from operations		0.29

Stockholder distributions ⁽²⁾
Distributions from net investment income		(0.11	)
Distributions from realized gains		(0.04	)
Distributions from capital		(0.14	)
Net decrease in net assets resulting from stockholder distributions		(0.29	)

Capital share transactions
Impact from issuance of common stock ⁽³⁾		0.14
Net increase in net assets resulting from capital share transactions		0.14
Net asset value, end of period	$	8.91
Shares outstanding at end of period		1,705,761
Total return ⁽⁵⁾		4.85	%
Ratio/Supplemental data:
Net assets, end of period (in thousands)	$	15,197
Average net assets (in thousands)	$	15,521
Ratio of net investment income to average net assets ⁽⁴⁾⁽⁷⁾		4.63	%
Ratio of operating expenses to average net assets ⁽⁴⁾⁽⁷⁾		3.16	%
Ratio of expenses reimbursed to average net assets ⁽⁷⁾		(7.95	)%
Portfolio turnover ratio ⁽⁶⁾		34.51	%

(1)

The per share amounts were derived by using the weighted average shares outstanding during the period. Net investment income per share excluding the expense reimbursements would have been ($0.08) for the three months ended March 31, 2013. There was no expense waiver and reimbursement for March 31, 2012.

(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 three months ended March 31, 2013, excluding the expense reimbursement, the ratio of net investment income and operating expenses to average net assets would have been (3.32%) and 11.12%, respectively. For the three months ended March 31, 2012, 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 three months ended March 31, 2013, includes the effect of the expense reimbursement which added 1.66% to the return. For the three months ended March 31 2012, 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 10. 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:

After April 1, 2013, the Fund issued 0.3 million shares of common stock for gross proceeds of $2.9 million. Effective as of April 30, 2013, the Fund ceased issuing shares in its continuous offering pending approval of a post-effective amendment to its Form N-2 registration statement. With the proceeds from the Fund’s continuous offering, the Fund purchased a total of twenty four debt investments with an aggregate face value of $5.2 million for $5.0 million in cash. The Fund had four debt investments fully called with a carrying value of $1.8 million and an aggregate redemption value of $1.8 million and two debt investments partially called with a carrying value of $0.4 million and a redemption value of $0.4 million.

Between April 1, 2013 and June 30, 2013, the Fund declared four semi-monthly cash distributions, payable on May 17, May 31, June 14 and June 28, 2013, each in the amount of $0.031084 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 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 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 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.

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

We record interest income on an accrual basis to the extent that we expect to 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.

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.

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.

Organization and Offering Expenses

Federal Income Taxes

We have elected 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 months ended March 31, 2013, we made $7.2 million of investments in new portfolio companies and had $2.0 million in aggregate amount of exits and repayments, resulting in net investments of $5.2 million for the period. We had no investments as of March 31, 2012.

The following table presents our portfolio composition based on fair value at March 31, 2013 and December 31, 2012.

	At March 31, 2013						At December 31, 2012
	Percentage of Total Portfolio			Weighted Average Current Coupon Yield			Percentage of Total Portfolio			Weighted Average Current Coupon Yield
Senior Secured First Lien Debt		11.6	%		10.5	%		11.5	%		10.4	%
Senior Secured Second Lien Debt		22.0			10.6			12.1			11.0
Senior Unsecured Debt		40.3			9.5			43.7			9.5
Senior Subordinated Debt		12.3			9.7			14.4			9.4
Investments - money market		13.8			-			18.3			-
Total		100.0	%		10.0	%		100.0	%		9.8	%

As of March 31, 2013, our investment portfolio had a yield to maturity of 11.20%.

The following table shows the portfolio composition by industry grouping at fair value at March 31, 2013 and December 31, 2012 (dollars in thousands).

	At March 31, 2013					At December 31, 2012
	Investments at Fair Value		Percentage of Total Portfolio			Investments at Fair Value		Percentage of Total Portfolio
Healthcare & Pharmaceuticals	$	2,405		18.4	%	$	830		11.7	%
Investments - money market		1,801		13.8			1,304		18.3
Banking, Finance, Insurance & Real Estate		1,264		9.7			358		5.0
Beverage, Food & Tobacco		1,188		9.1			769		10.8
Telecommunications		1,034		7.9			764		10.7
High Tech Industries		949		7.3			771		10.8
Services: Consumer		866		6.6			541		7.6
Energy: Oil & Gas		792		6.1			—		—
Services: Business		607		4.7			365		5.1
Consumer Goods: Durable		602		4.6			401		5.6
Hotel, Gaming & Leisure		551		4.2			—		—
Retail		551		4.2			564		7.9
Consumer Goods: Non-durable		414		3.2			415		5.8
Environmental Industries		29		0.2			46		0.7
Total	$	13,053		100.0	%	$	7,128		100.0	%

Results of Operations

Operating results for the three months ended March 31, 2013 and 2012 are as follows (dollars in thousands):

	For the three months ended March 31, 2013		For the three months ended March 31, 2012
Total investment income	$	244	$	—
Total expenses, net		99		35
Net investment income (loss)		145		(35	)
Net realized gain		47		—
Net unrealized appreciation		189		—
Net increase (decrease) in net assets resulting from operations	$	381	$	(35	)

Revenues

Since becoming operational in the third quarter of 2012, we generate revenue primarily from the cash interest we 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. Going forward, 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 months ended March 31, 2013 and 2012 was as follows (dollars in thousands):

	For the three months ended March 31, 2013			For the three months ended March 31, 2012
Professional fees	$	61		$	—
Director fees		11			—
Insurance		19			—
Management fees		75			—
Incentive fees		24			—
General and administrative		47			35
Organizational expense		111			—
Operating expenses before expense reimbursements		348			35
Expense reimbursement		(249	)		—
Total operating expenses net of expense reimbursements	$	99		$	35

Net Realized Gains or Losses from Investments

For the three months ended March 31, 2013, we had $2.0 million of principal repayments, resulting in $0.05 million of realized gains. For the three months ended March 31, 2012, we held no investments.

Net Change in Unrealized Appreciation or Depreciation on Investments

For the three months ended March 31, 2013, we had $0.2 million of unrealized appreciation. For the three months ended March 31, 2012, we held no investments.

Changes in Net Assets from Operations

For the three months ended March 31, 2013, we recorded a net increase in net assets resulting from operations of $0.4 million. Based on 1,292,508 weighted average common shares outstanding for the three months ended March 31, 2013, our per share net increase and decrease in net assets resulting from operations was $0.29.

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 March 31, 2013, we issued 1.7 million shares of common stock for gross proceeds of $17.0 million. We currently sell our shares on a continuous basis at a current offering price of $10.15; 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 March 31, 2013, we had $1.8 million invested in money market investments pending investment in debt instruments.

For the three months ended March 31, 2013, we experienced a net increase in money market investments of $0.5 million. For the three months ended March 31, 2013, approximately $6.0 million was generated from our financing activities, which primarily consisted of $6.9 million in net offering proceeds received, offset by $370,000 in distributions. We used approximately $0.4 million of cash in our operating activities primarily as a result of increases in receivables for interest, and due from related party totaling $1 million. Also, we received proceeds from the sale of, repayment of and principal payments on portfolio debt investments of $2 million, offset by the purchase of new portfolio debt investments of $7.2 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 Investments. To the extent we have distributable income available we declare and pay distributions on a semi-monthly basis.

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) is 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 (“DRIP”) pursuant to which shareholders may elect to have the full amount of their cash distributions reinvested in additional shares of our common stock. If shareholders wish to receive their distribution in cash, no action will be required on their part to do so. There will be no selling commissions, dealer manager fees or other sales charges to shareholders if, they elect to participate in the DRIP. We will pay the plan administrator’s fees under the plan. Shareholders 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 DRIP will have the same voting rights as our shares of common stock offered pursuant to our prospectus.

Election as a RIC

We elected to be treated as a RIC under Subchapter M of the Code beginning with the taxable year ended December 31, 2012. 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.

Conflicts of interest between us and the various roles, activities and duties of the Manager and its affiliates may occur from time to time. The Manager, its officers and other affiliates may act as a manager or general partner of other private or public entities, some of whom may have the same or a similar investment objective as us. As a result, conflicts of interest between us and the other activities of the Manager and its affiliates may occur from time to time. None of the agreements or arrangements, including those relating to compensation, between us, the Manager or their affiliates, is the result of arm’s-length negotiations. As a result, there may be conflicts between us, on the one hand, and our Manager, including members of its management team, on the other, regarding the allocation of resources to the management of our day-to-day activities.

The compensation we pay to our Manager was not entered into on an arm’s-length basis with unaffiliated third parties. As a result, the form and amount of such compensation may be less favorable to us than they might have been had they been entered into through arm’s-length transactions with unaffiliated parties. See “Contractual Obligations” for a discussion of the investment advisory agreement we have with the Manager.

Further, our officers are involved in other ventures, some of which may compete with us for investment opportunities, including certain affiliated funds or managed accounts, and may be incentivized to offer investment opportunities to such other ventures rather than to us which would make it more difficult to achieve our investment objectives. In addition, the officers of VII Peaks and KBR may also be involved in other ventures, some of which may compete with us for investment opportunities.

As a BDC, we are subject to certain regulatory restrictions in making our investments. For example, we generally are not permitted to co-invest with certain entities affiliated with our Manager in transactions originated by our Manager or its affiliates unless we obtain an exemptive order from the SEC or co-invest alongside our Manager or its affiliates in accordance with existing regulatory guidance and our allocation policy. Under existing regulatory guidance, we are permitted to, and may co-invest in syndicated deals and secondary loan market transactions where price is the only negotiated point.

We may seek exemptive relief from the SEC to engage in co-investment transactions with our Manager and/or its affiliates. However, there can be no assurance that we will obtain such exemptive relief, if requested. Even if we receive exemptive relief, neither our Manager nor its affiliates are obligated to offer us the right to participate in any transactions originated by them. Prior to obtaining exemptive relief, we may co-invest alongside our Manager or its affiliates only in accordance with existing regulatory guidance and our allocation policy.

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.

Assuming that our current balance sheet was to remain constant and no actions were taken to alter our existing interest rate sensitivity, a 100 basis point move in interest rates up or down from their March 31, 2013 levels would result in an increase or decrease in net asset value of $0.1 million or 0.75%.

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 March 31, 2013 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 annual report on Form 10-K for the year ended December 31, 2012.

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

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

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.

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)

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