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

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - VII Peaks Co-Optivist Income BDC II, Inc.	v351849_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - VII Peaks Co-Optivist Income BDC II, Inc.	v351849_ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - VII Peaks Co-Optivist Income BDC II, Inc.	v351849_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - VII Peaks Co-Optivist Income BDC II, Inc.	v351849_ex32-1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 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 o	Accelerated filer o	Non-accelerated filer x	Smaller reporting company o
		(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 August 7, 2013 was 2,005,184.

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

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2013

TABLE OF CONTENTS

		Page

PART I.	FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1

	Statements of Assets and Liabilities as of June 30, 2013 (unaudited) and December 31, 2012	1

	Statements of Operations for the three and six months ended June 30, 2013 and 2012 (unaudited)	2

	Statements of Changes in Net Assets for the six months ended June 30, 2013 and 2012 (unaudited)	3

	Statements of Cash Flows for the six months ended June 30, 2013 and 2012 (unaudited)	4

	Schedule of Investments as of June 30, 2013 (unaudited)	5

	Schedule of Investments as of December 31, 2012	6

	Notes to Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	26

PART II.	OTHER INFORMATION	27

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults upon Senior Securities	27

Item 4.	Mine Safety Disclosures	27

Item 5.	Other Information	27

Item 6.	Exhibits	27

Signatures		28

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)

(Unaudited)

	As of
	June 30, 2013			December 31, 2012
				(1)
ASSETS

Investments, at fair value (amortized cost of $16,140 and $5,942)	$	15,901		$	5,823
Investments, money market at fair value (cost of $518 and $1,304)		518			1,304
Total investments, at fair value	$	16,419		$	7,127
Interest receivable		423			132
Prepaid expenses		4			5
Due from related party		1,130			555
Receivable for common stock purchased		-			729
Total assets	$	17,976		$	8,548

LIABILITIES
Payable for unsettled trades	$	72		$	-
Management and incentive fees payable		27			21
Accounts payable and accrued liabilities		154			71
Stockholder distributions payable		62			120
Total liabilities	$	315		$	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; 2,000,185 and 950,733 shares issued and outstanding, respectively		2			1
Paid-in capital in excess of par value		18,104			8,558
Accumulated distribution in excess of net investment income		(296	)		(104	)
Accumulated undistributed net realized gain from investments		90			-
Net unrealized depreciation on investments		(239	)		(119	)
Total net assets		17,661			8,336
Total liabilities and net assets	$	17,976		$	8,548

Net asset value per share	$	8.83		$	8.77

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

(1) Derived from the Company’s audited Financial Statements as of December 31, 2012.

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 June 30,			For the Three Months Ended June 30,			For the Six Months Ended June 30,			For the Six Months Ended June 30,
	2013			2012			2013			2012
				(Restated)						(Restated)
Investment income:
Interest from investments	$	401		$	-		$	644		$	-
Other income		-			-			1			-
Total investment income	$	401		$	-		$	645		$	-

Operating expenses:
Professional fees		128			-			189			-
Directors fees		9			-			20			-
Insurance		21			-			40			-
Management fees		88			-			163			-
Incentive fees		(23	)		-			-			-
General and administrative		83			56			131			91
Organizational and offering expense		43			-			195			-
Operating expenses before expense reimbursements		349			56			738			91
Expense reimbursement		(285	)		-			(575	)		-
Total operating expenses net of expense reimbursements		64			56			163			91

Net investment income (loss)		337			(56	)		482			(91	)

Realized and unrealized gain (loss) on investments:
Net realized gain from investments		44			-			90			-
Net unrealized depreciation on investments		(310	)		-			(120	)		-
Net realized and unrealized loss on investments		(266	)		-			(30	)		-

Net increase (decrease) in net assets resulting from operations	$	71		$	(56	)	$	452		$	(91	)

Per share information - basic and diluted:
Net investment income (loss)	$	0.18		$	(2.51	)	$	0.30		$	(4.07	)
Net increase (decrease) in net assets resulting from operations	$	0.04		$	(2.51	)	$	0.28		$	(4.07	)
Weighted average common shares outstanding		1,914,889			22,333			1,605,418			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 Six Months Ended June 30, 2013			For the Six Months Ended June 30, 2012
				(Restated)
Operations:
Net investment income (loss)	$	482		$	(91	)
Net realized gain from investments		90			-
Net unrealized depreciation on investments		(120	)		-
Net increase (decrease) in net assets from operations		452			(91	)
Stockholder distributions:
Distributions from net investment income		(482	)		-
Distributions from capital		(90	)		-
Distributions from net realized gain on investments		(102	)		-
Net decrease in net assets from stockholder distributions		(674	)		-
Capital share transactions:
Issuance of common stock, net of issuance costs		9,258			-
Reinvestment of stockholder distributions		288
Net increase in net assets from capital share transactions		9,546			-

Total increase (decrease) in net assets		9,324			(91	)
Net assets at beginning of period		8,337			197
Net assets at end of period	$	17,661		$	106

Net asset value per common share	$	8.83		$	4.75
Common shares outstanding at end of period		2,000,185			22,333

Accumulated distribution in excess of net investment income	$	(296	)	$	(95	)

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 Six Months Ended June 30, 2013			For the Six Months Ended June 30, 2012
				(Restated)
Operating activities:
Net increase (decrease) in net assets from operations	$	452		$	(91	)
Adjustments to reconcile net increase (decrease) in net assets from operations to net cash used in operating activities:
Net accretion of discount on investments		(38	)		-
Repayments of investments		5,994			-
Purchase of investments		(16,064	)		-
Repayments of investments - money market		16,994			139
Purchase of investments - money market		(16,208	)		-
Net realized gain from investments		(90	)		-
Net unrealized depreciation on investments		120			-
(Increase) decrease in operating assets:
Interest receivable		(291	)		-
Prepaid expenses		-			(14	)
Due from related party		(575	)		(30	)
Receivable for common stock purchased		729			-
Increase (decrease) in operating liabilities:
Payable for unsettled trades		72			-
Management and incentive fees payable		7			-
Accounts payable and accrued liabilities		83			(4	)
Net cash used in operating activities		(8,815	)		-

Financing activities:
Proceeds from issuance of shares of common stock, net		9,258			-
Stockholder distributions		(443	)		-
Net cash provided by financing activities		8,815			-

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

Supplemental non-cash information:
DRIP distribution payable	$	24		$	-
Cash distribution payable	$	38		$	-
DRIP distribution paid	$	288		$	-

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)

June 30, 2013

(Unaudited)

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

Senior Secured First Lien Debt - 7.8% (b)
GXS Worldwide, Inc.	Services: Business	9.75%, 6/15/2015	$	785	$	813	$	800		4.5	%
Rotech Healthcare, Inc.	Healthcare & Pharmaceuticals	10.75%, 10/15/2015		569		570		578		3.3	%
Sub Total Senior Secured First Lien Debt				1,354		1,383		1,378		7.8	%

Senior Secured Second Lien Debt - 20.8% (b)
Apria Healthcare Group Inc.	Healthcare & Pharmaceuticals	12.38%, 11/1/2014	$	571	$	587	$	579		3.3	%
Aspect Software Inc.	Telecommunications	10.63%, 5/15/2017		585		586		586		3.4	%
Bon-ton Department Stores, Inc.	Retail	10.63%, 7/15/2017		40		41		40		0.2	%
Caesar's Entertainment Corp.	Hotel, Gaming & Leisure	10.00%, 12/15/2015		375		354		323		1.8	%
Logan's Roadhouse, Inc.	Beverage, Food & Tobacco	10.75%, 10/15/2017		710		675		659		3.7	%
Radiation Therapy Services, Inc.	Healthcare & Pharmaceuticals	8.88%, 1/15/2017		800		786		752		4.3	%
Saratoga Resources, Inc.	Energy: Oil & Gas	12.50%, 7/1/2016		725		757		732		4.1	%
Sub Total Senior Secured Second Lien Debt				3,806		3,786		3,671		20.8	%

Senior Unsecured Debt - 37.3% (b)
Alliance HealthCare Services, Inc.	Healthcare & Pharmaceuticals	8.00%, 12/01/2016	$	585	$	540	$	589		3.4	%
Alliance One International, Inc.	Beverage, Food & Tobacco	10.00%, 7/15/2016		785		822		803		4.5	%
Avaya, Inc.	Telecommunications	9.75%, 11/01/2015		515		494		510		2.9	%
Avaya, Inc.	Telecommunications	10.13%, 11/01/2015		325		303		322		1.8	%
Caesar's Entertainment Corp.	Hotel, Gaming & Leisure	10.75%, 2/01/2016		375		347		308		1.7	%
Ceridian Corporation	Services: Business	11.25%, 11/15/2015		350		364		355		2.0	%
Ceridian Corporation	Services: Business	12.25%, 11/15/2015		460		478		466		2.6	%
Clear Channel Communications, Inc.	Media: Broadcasting & Subscription	10.75%, 8/1/2016		490		409		425		2.4	%
Clear Channel Communications, Inc.	Media: Broadcasting & Subscription	11.00%, 8/1/2016		388		326		342		1.9	%
Education Management LLC (c)	Services: Consumer	15.00%, 6/01/2014		270		229		280		1.6	%
Freescale Semiconductor, Inc.	High Tech Industries	8.88%, 12/15/2014		14		14		14		0.1	%
Harland Clarke Corp.	Banking, Finance, Insurance & Real Estate	9.50%, 5/15/2015		651		653		644		3.6	%
Hutchinson Technology, Inc.	High Tech Industries	8.50%, 1/15/2026		208		201		195		1.1	%
NII Cap Corp.	Telecommunications	10.00%, 8/15/2016		800		789		776		4.4	%
Suntech Power Holdings Company, Ltd. (d)	Environmental Industries	3.00%, 5/15/2013		100		95		28		0.2	%
Travelport LLC	Services: Consumer	13.88%, 3/01/2016		336		303		344		1.9	%
YCC Holdings LLC (e)	Consumer goods: Non-durable	10.25%, 2/15/2016		200		208		206		1.2	%
Sub Total Senior Unsecured Debt				6,852		6,575		6,607		37.3	%

Senior Subordinated Debt -24.2% (b)
Affinion Group, Inc.	Media: Advertising, Printing, & Publishing	11.50%, 10/15/2015	$	800	$	695	$	616		3.5	%
Claires Stores, Inc.	Retail	10.50%, 6/01/2017		215		220		223		1.3	%
DJO Finance, LLC.	Healthcare & Pharmaceuticals	9.75%, 10/15/2017		760		802		775		4.4	%
First Data Corp.	Banking, Finance, Insurance & Real Estate	11.25%, 3/31/2016		625		632		611		3.5	%
Radio One, Inc.	Media: Broadcasting & Subscription	12.50%, 5/24/2016		775		789		781		4.4	%
Serena Software, Inc.	High Tech Industries	10.38%, 3/15/2016		590		608		581		3.3	%
The Yankee Candle Company, Inc.	Consumer goods: Non-durable	9.75%, 2/15/2017		200		209		207		1.2	%
Travelport LLC	Services: Consumer	11.88%, 9/01/2016		485		441		451		2.6	%
Sub Total Senior Subordinated Debt				4,450		4,396		4,245		24.2	%

Investments - Money Market -2.9%
Investments - Money Market			$	518		518		518		2.9	%
Sub Total Investments - Money Market				518		518		518		2.9	%

TOTAL INVESTMENTS - 93.0% (b)					$	16,658	$	16,419		93.0	%

(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., Clear Channel Communications Inc.,Caesar's Entertainment Corp., Education Management LLC, Freescale Semiconductor, Inc., NII Capital Corp., and Suntech Power Holdings Company, Ltd.

(b) Percentages are based on net assets of $17,661 as of June 30, 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.

SCHEDULE OF INVESTMENTS

(dollars in thousands)

December 31, 2012

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	$	150	$	155	$	155		2.0	%
GXS Worldwide, Inc.	Services: Business	9.75%, 6/15/2015		350		364		365		4.4	%
Rotech Healthcare, Inc.	Healthcare & Pharmaceuticals	10.75%, 10/15/2015		300		300		299		3.6	%
Sub Total Senior Secured First Lien Debt				800		819		819		10.0	%

Senior Secured Second Lien Debt - 10.3% (b)
Apria Healthcare Group, Inc.	Healthcare & Pharmaceuticals	12.38%, 11/1/2014	$	150	$	149	$	149		1.8	%
Aspect Software, Inc.	Telecommunications	10.63%, 5/15/2017		400		409		362		4.3	%
Logan's Roadhouse, Inc.	Beverage, Food & Tobacco	10.75%, 10/15/2017		375		353		348		4.2	%
Sub Total Senior Secured Second Lien Debt				925		911		859		10.3	%

Senior Unsecured Debt - 37.3% (b)
Alliance HealthCare Services, Inc.	Healthcare & Pharmaceuticals	8.00%, 12/1/2016	$	250	$	217	$	227		2.7	%
Alliance One International, Inc.	Beverage, Food & Tobacco	10.00%, 7/15/2016		400		418		421		5.1	%
Avaya, Inc.	Telecommunications	9.75%, 11/01/2015		225		198		200		2.4	%
Avaya, Inc.	Telecommunications	10.13%, 11/01/2015		225		198		201		2.4	%
Bon-ton Department Stores, Inc.	Retail	10.25%, 3/15/2014		350		351		347		4.2	%
Claire's Stores, Inc.	Retail	9.63%, 6/01/2015		235		219		217		2.6	%
Education Management LLC	Services: Consumer	8.75%, 6/1/2014		400		343		321		3.9	%
First Data Corp.	Banking, Finance, Insurance & Real Estate	10.55%, 9/24/2015		175		181		179		2.1	%
First Data Corp.	Banking, Finance, Insurance & Real Estate	9.88%, 9/24/2015		175		180		179		2.1	%
Seitel, Inc.	High Tech Industries	9.75%, 2/15/2014		350		355		351		4.2	%
Suntech Power Holdings Company, Ltd. (c)	Environmental Industries	3.00%, 3/15/2013		100		91		46		0.5	%
Travelport LLC	Services: Consumer	9.88%, 9/01/2014		250		216		220		2.6	%
YCC Holdings LLC (d)	Consumer goods: Non-durable	10.25%, 2/15/2016		200		207		206		2.5	%
Sub Total Senior Unsecured Debt				3,335		3,174		3,115		37.3	%

Senior Subordinated Debt -12.3% (b)
Sealy Mattress Co.	Consumer goods: Durable	8.25%, 6/15/2014	$	400	$	404	$	401		4.8	%
Serena Software, Inc.	High Tech Industries	10.38%, 3/15/2016		410		424		420		5.0	%
The Yankee Candle Company, Inc.	Consumer goods: Non-durable	9.75%, 2/15/2017		200		210		209		2.5	%
Sub Total Senior Subordinated Debt				1,010		1,038		1,030		12.3	%

Investments - Money Market -15.6%
Investments - Money Market			$	1,304		1,304		1,304		15.6	%
Sub Total Investments - Money Market				1,304		1,304		1,304		15.6	%

TOTAL INVESTMENTS - 85.5% (b)					$	7,246	$	7,127		85.5	%

(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 $8,336 as of December 31, 2012.

(d) 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

June 30, 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 June 30, 2013, the Fund had issued 2.0 million shares of common stock for gross proceeds of $20.0 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/A for the year ended December 31, 2012, which was filed with the SEC on July 30, 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 organizational 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 June 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-08, Financial Services – Investment Companies (Accounting Standards Codification (“ASC”) Topic 946), which affects the scope, measurement and disclosure requirements for investment companies under GAAP. The amendments (i) change the approach to the investment company assessment in ASC Topic 946, clarify the characteristics of an investment company, and provide comprehensive guidance for assessing whether an entity is an investment company; (ii) require an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than the equity method of accounting; and (iii) require the following additional disclosures (a) the fact that the entity is an investment company and is applying the guidance in ASC Topic 946, (b) information about changes, if any, in an entity’s status as an investment company, and (c) information about financial support provided or contractually required to be provided by an investment company to any of its investees. This guidance is effective for interim an annual reporting periods beginning on or after December 15, 2013. The Fund is currently assessing the impacts ASU 2013-08 will have on its financial statements.

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 GAAP and those prepared under International Financial Reporting Standards (“IFRS”). 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 4 – Related Party Transactions.

Note 3. 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 3. 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 June 30, 2013 according to the fair value hierarchy (dollars in thousands).

	Level 1		Level 2		Total
Investments - money market	$	518	$	—	$	518
Senior Secured First Lien Debt		—		1,378		1,378
Senior Secured Second Lien Debt		—		3,671		3,671
Senior Unsecured Debt		—		6,607		6,607
Senior Subordinated Debt		—		4,245		4,245
Total	$	518	$	15,901	$	16,419

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 3. Valuation of Portfolio Investments (continued)

The composition of the Fund’s investments as of June 30, 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
Investments – money market	$	518	$	518		3.2	%
Senior Secured First Lien Debt		1,383		1,378		8.4
Senior Secured Second Lien Debt		3,786		3,671		22.3
Senior Unsecured Debt		6,575		6,607		40.2
Senior Subordinated Debt		4,396		4,245		25.9
Total	$	16,658	$	16,419		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
Investments - money market	$	1,304	$	1,304		18.3	%
Senior Secured First Lien Debt		819		819		11.5
Senior Secured Second Lien Debt		911		859		12.1
Senior Unsecured Debt		3,174		3,115		43.7
Senior Subordinated Debt		1,038		1,030		14.4
Total	$	7,246	$	7,127		100.0	%

Note 4. 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 and six months ended June 30, 2013, the Fund incurred $0.1 million and $0.2 million 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 and six months ended June 30, 2013, the Fund accrued no incentive fees related to capital gains and none related to investment income.

Note 4. Related Party Transactions (continued)

Under 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 six months ended June 30, 2013 and for the period from August 4, 2011 (inception) through December 31, 2012, the Manager incurred organizational and offering costs of $0.1 million and $1.4 million, respectively. Of the total $1.5 million organizational and offering costs incurred from inception through June 30, 2013, $0.2 million was reimbursed to the Manager during the six months ended June 30, 2013, and an aggregate of $0.3 million 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 June 30, 2013, the unreimbursed amount of organization and offering expenses was $0.1 million 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 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 June 30, 2013, the Manager was indebted to the Fund for $1.1 million 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 and six months ended June 30, 2013, the Fund reimbursed the Manager for $0.01 million and $0.02 million in administration expenses under the administration agreement, respectively.

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 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 June 30, 2013, the Fund has sold 2.0 million shares of common stock for gross proceeds of $20.0 million including the purchases made by the Manager.

During the six months ended June 30, 2013, the Fund sold 1,049,452 shares of common stock in its offering for net proceeds of $9.55 million.

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 six months ended June 30, 2013 and 2012 (dollars in thousands except share and per share amounts).

	For the three months ended June 30, 2013		For the three months ended June 30, 2012
Basic and diluted
Net increase (decrease) in net assets resulting from operations	$	71	$	(56	)
Weighted average common shares outstanding		1,914,889		22,333
Net increase (decrease) in net assets resulting from operations per share - basic and diluted	$	0.04	$	(2.51	)

	For the six months ended June 30, 2013		For the six months ended June 30, 2012
Basic and diluted
Net increase (decrease) in net assets resulting from operations	$	452	$	(91	)
Weighted average common shares outstanding		1,605,418		22,333
Net increase (decrease) in net assets resulting from operations per share - basic and diluted	$	0.28	$	(4.07	)

The Fund had no potentially dilutive securities as of June 30, 2013 or June 30, 2012, 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 June 30, 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 June 30, 2013:

		SOURCE OF DISTRIBUTION

Date Declared	Payment Date	Net Investment Income		Realized Gain from Investments		Return of Capital		Per Share		Paid in Cash		DRIP		TOTAL
2012
July 31, 2012	August 17, 2012	$	4	$	-	$	-	$	0.03	$	3	$	1	$	4
July 31, 2012	August 31, 2012		4		-		-		0.03		3		1		4
August 29, 2012	September 14, 2012		9		-		-		0.03		6		3		9
August 29, 2012	September 28, 2012		9		-		-		0.03		6		3		9
September 26, 2012	October 15, 2012		6		-		6		0.03		8		4		12
September 26, 2012	October 31, 2012		-		-		12		0.03		8		4		12
October 29, 2012	November 16, 2012		17		-		-		0.03		11		6		17
October 29, 2012	November 30, 2012		17		-		-		0.03		11		6		17
November 29, 2012	December 17, 2012		22		-		-		0.03		12		10		22
November 29, 2012	December 31, 2012		23		-		-		0.03		13		10		23
December 27, 2012	January 17, 2013 (1)		35		-		57		0.11		57		35		92
December 27, 2012	January 31, 2013		-		-		29		0.03		18		11		29
		$	146		-	$	104			$	156	$	94	$	250
2013
January 30, 2012	February 15, 2013		35		-		-		0.03		21		14		35
January 30, 2012	February 28, 2013		38		-		-		0.03		23		15		38
February 27, 2013	March 15, 2013 (1)		72		47		28		0.11		87		60		147
February 27, 2013	March 29, 2013		-		-		47		0.03		29		18		47
February 27, 2013	April 15, 2013		49		-		-		0.03		29		20		49
February 27, 2013	April 30, 2013		53		-		-		0.03		32		21		53
May 9, 2013	May 17, 2013		56		-		-		0.03		34		22		56
May 9, 2013	May 31, 2013		62		-		-		0.03		38		24		62
May 9, 2013	June 14, 2013		62		-		-		0.03		38		24		62
May 9, 2013	June 28, 2013		55		8		-		0.03		38		25		63
July 9, 2013	July 15, 2013		-		35		27		0.03		38		24		62
		$	482	$	90	$	102			$	407	$	267	$	674

(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 (dollars in thousands) during the six months ended June 30, 2013:

	Six Months Ended June 30, 2013
Source of Distribution	Distribution Amount		Percentage
Net investment income	$	482		71.5	%
Capital gains proceeds from the sale of assets		90		13.4	%
Distributions on account of preferred and common equity		102		15.1	%
Total	$	674		100	%

Note 8. Financial Highlights

The following is a schedule of financial highlights for the six months ended June 30, 2013 and 2012.

	For the six months ended June 30, 2013			For the six months ended June 30, 2012
Per share data:
Net asset value, beginning of period	$	8.77		$	8.82

Results of operations ⁽¹⁾
Net investment income (loss)		0.30			(4.07	)
Net realized gain on investments		0.06			-
Net unrealized loss on investments		(0.08	)		-
Net increase(decrease) in net assets resulting from operations		0.28			(4.07	)

Stockholder distributions ⁽²⁾
Distributions from net investment income		(0.30	)		-
Distributions from realized gains		(0.06	)		-
Distributions from capital		(0.06	)		-
Net decrease in net assets resulting from stockholder distributions		(0.42	)		-

Capital share transactions
Impact from issuance of common stock ⁽³⁾		0.20			-
Net increase in net assets resulting from capital share transactions		0.20			-
Net asset value, end of period	$	8.83		$	4.75
Shares outstanding at end of period		2,000,185			22,333
Total return ⁽⁵⁾		5.15	%		(47.26	)%
Ratio/Supplemental data:
Net assets, end of period (in thousands)	$	17,661		$	106
Average net assets (in thousands)	$	11,223		$	154
Ratio of net investment income to average net assets ⁽⁴⁾⁽⁷⁾		8.66	%		(118.77	)%
Ratio of operating expenses to average net assets ⁽⁴⁾⁽⁷⁾		13.26	%		118.77	%
Ratio of expenses reimbursed to average net assets ⁽⁷⁾		10.33	%		-
Portfolio turnover ratio ⁽⁶⁾		67.93	%		-

(1)

The per share amounts were derived by using the weighted average shares outstanding during the period. Net investment income (loss) per share excluding the expense reimbursements would have been ($0.10) for the six months ended June 30, 2013. There was no expense waiver and reimbursement for the six months ended June 30, 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 4 – Related Party Transactions.” For the six months ended June 30, 2013, excluding the expense reimbursement, the ratio of net investment income and operating expenses to average net assets would have been (1.67%) and 13.26%, respectively. For the six months ended June 30, 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 six months ended June 30, 2013, includes the effect of the expense reimbursement which added 5.12% to the return. For the six months ended June 30, 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 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:

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. The Fund had two debt investments partially called with a carrying value of $0.2 million and an aggregate redemption value of $0.3 million and one debt investment fully called with a carrying value of $0.8 million and a redemption value of $0.8 million.

On July 9, 2013, the Fund declared four semi-monthly cash distributions, payable on July 15, July 30, August 14 and August 30, 2013, each in the amount of $0.031084 per share.

On July 30, 2013, the Fund restated its financial statements to comply with the investment advisory agreement between the Fund and the Fund’s investment manager, VII Peaks-KBR BDC Advisor II, LLC for the periods March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, and March 31, 2012.

Effective as of August 1, 2013, the Fund resumed issuing shares in its continuous offering following the effectiveness of the post-effective amendment to its form N-2 registration statement.

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 six months ended June 30, 2013, we made $16.1 million of investments in new portfolio companies and had $6.0 million in aggregate amount of exits and repayments, resulting in net investments of $10.1 million for the period. We had no investments as of June 30, 2012.

During the six months ended June 30, 2013, we made $16.2 million of money market investments and had $17.0 million in aggregate amount of exits and repayments, resulting in net exits and repayments of $0.8 million for the period. During the six months ended June 30, 2012, we had $0.1 million in aggregate amount of exits and repayments of money market investments.

The following table presents our portfolio composition based on fair value at June 30, 2013 and December 31, 2012.

	At June 30, 2013						At December 31, 2012
	Percentage of Total Portfolio			Weighted Average Current Coupon Yield			Percentage of Total Portfolio			Weighted Average Current Coupon Yield
Investments - money market		3.2	%		-	%		18.3	%		-	%
Senior Secured First Lien Debt		8.4			10.2			11.5			10.4
Senior Secured Second Lien Debt		22.3			10.8			12.1			11.0
Senior Unsecured Debt		40.2			10.4			43.7			9.5
Senior Subordinated Debt		25.9			11.1			14.4			9.4
Total		100.0	%		10.3	%		100.0	%		9.8	%

As of June 30, 2013, our investment portfolio had a yield to maturity of 11.91%.

The following table shows the portfolio composition by industry grouping at fair value at June 30, 2013 and December 31, 2012 (dollars in thousands).

	At June 30, 2013					At December 31, 2012
	Investments at Fair Value		Percentage of Total Portfolio			Investments at Fair Value		Percentage of Total Portfolio
Healthcare & Pharmaceuticals	$	3,274		19.9	%	$	830		11.7	%
Telecommunications		2,194		13.4			764		10.7
Services: Business		1,620		9.9			365		5.1
Media: Broadcasting & Subscription		1,548		9.4			—		—
Beverage, Food & Tobacco		1,461		8.9			769		10.8
Banking, Finance, Insurance & Real Estate		1,256		7.6			358		5.0
Services: Consumer		1,075		6.5			541		7.6
High Tech Industries		790		4.8			771		10.8
Energy: Oil & Gas		732		4.5			—		—
Hotel, Gaming & Leisure		631		3.8			—		—
Media: Advertising, Printing & Publishing		616		3.8			—		—
Investments – Money Market		518		3.2			1,304		18.3
Consumer Goods: Non-durable		413		2.5			415		5.8
Retail		263		1.6			564		7.9
Environmental Industries		28		0.2			45		0.7
Consumer Goods: Durable		—		—			401		5.6
Total	$	16,419		100.0	%	$	7,127		100.0	%

Results of Operations

Operating results for the three and six months ended June 30, 2013 and 2012 are as follows (dollars in thousands):

	For the three months ended June 30, 2013			For the three months ended June 30, 2012
Total investment income	$	401		$	—
Total expenses, net		64			56
Net investment income (loss)		337			(56	)
Net realized gain		44			—
Net unrealized depreciation		(310	)		—
Net increase (decrease) in net assets resulting from operations	$	71		$	(56	)

	For the six months ended June 30, 2013			For the six months ended June 30, 2012
Total investment income	$	645		$	—
Total expenses, net		163			91
Net investment income (loss)		482			(91	)
Net realized gain		90			—
Net unrealized depreciation		(120	)		—
Net increase (decrease) in net assets resulting from operations	$	452		$	(91	)

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 and six months ended June 30, 2013 and 2012 was as follows (dollars in thousands):

	For the three months ended June 30, 2013			For the three months ended June 30, 2012
Professional fees	$	128		$	—
Director fees		9			—
Insurance		21			—
Management fees		88			—
Incentive fees		(23	)		—
General and administrative		83			56
Organizational & offering expense		43			—
Operating expenses before expense reimbursements		349			56
Expense reimbursement		(285	)		—
Total operating expenses net of expense reimbursements	$	64		$	56

	For the six months ended June 30, 2013			For the six months ended June 30, 2012
Professional fees	$	189		$	—
Director fees		20			—
Insurance		40			—
Management fees		163			—
General and administrative		131			91
Organizational & offering expense		195			—
Operating expenses before expense reimbursements		738			91
Expense reimbursement		(575	)		—
Total operating expenses net of expense reimbursements	$	163		$	91

Net Realized Gains or Losses from Investments

For the three and six months ended June 30, 2013, we had $4.0 million and $6.0 million of principal repayments, resulting in $0.04 million and $0.1 million of realized gains. For the three and six months ended June 30, 2012, we held no investments.

Net Change in Unrealized Appreciation or Depreciation on Investments

For the three and six months ended June 30, 2013, we had $0.3 million and $0.1 million of unrealized depreciation. For the three and six months ended June 30, 2012, we held no investments.

Changes in Net Assets from Operations

For the three and six months ended June 30, 2013, we recorded a net increase in net assets resulting from operations of $0.1 million and $0.5million. Based on 1,914,889 weighted average common shares outstanding for the three months ended June 30, 2013, our per share net increase in net assets resulting from operations was $0.04. Based on 1,605,418 weighted average common shares outstanding for the six months ended June 30, 2013, our per share net increase in net assets resulting from operations was $0.28.

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 June 30, 2013, we issued 2.0 million shares of common stock for gross proceeds of $20.0 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 June 30, 2013, we had $0.5 million invested in money market investments pending investment in debt instruments.

For the six months ended June 30, 2013, we experienced a net decrease in money market investments of $0.8 million. For the six months ended June 30, 2013, approximately $8.8 million was generated from our financing activities, which primarily consisted of $9.2 million in net offering proceeds received, offset by $0.4 million in distributions. We used approximately $8.8 million of cash in our operating activities primarily as a result of increases in receivables for interest and due from related party and a decrease in receivable for sales of common stock. Also, we received proceeds from the sale of, repayment of and principal payments on portfolio debt investments of $6.0 million, offset by the purchase of new portfolio debt investments of $16.1 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 4 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.

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 June 30, 2013 levels would result in an increase or decrease in net asset value of $0.2 million or 0.93%.

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 June 30, 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/A 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: August 7, 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: August 7, 2013	By	/s/ Cecilia Shea
		Cecilia Shea
		Chief Financial Officer,
		Treasurer and Secretary
		(Principal Financial Officer and Principal Accounting Officer)

Attached files

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

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