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

Attached files

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EX-32.2 - EXHIBIT 32.2 - VII Peaks Co-Optivist Income BDC II, Inc.	v467226_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - VII Peaks Co-Optivist Income BDC II, Inc.	v467226_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - VII Peaks Co-Optivist Income BDC II, Inc.	v467226_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - VII Peaks Co-Optivist Income BDC II, Inc.	v467226_ex31-1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q/A

(Amendment No. 1)

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

For the quarterly period ended June 30, 2016

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 Co-Optivist Income BDC II, Inc.

(Exact name of Registrant as specified in its charter)

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

4 Orinda Way, Suite 125-A

Orinda, CA 94563

(Address of principal executive offices)

(855) 889-1778

(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 ¨ No x

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 x 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”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

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 17, 2016 was 6,275,853.

Explanatory Note

This Amendment No. 1 on Form 10-Q/A to the Quarterly Report on Form 10-Q of VII Peaks Co-Optivist Income BDC II, Inc. (the “Fund”) for the six months ended June 30, 2016 (the “Quarterly Period”), as originally filed with the Securities and Exchange Commission (the “SEC”) on August 17, 2016 (the “Original Report”), is being filed to amend Items 1, 2 and 4 of the Original Report to restate the Fund’s previously issued financial statements for the Quarterly Period and to revise related disclosures, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the Quarterly Period and management’s assessment of its internal controls and procedures.

As more fully described in Note 3 to the accompanying financial statements, the restatement corrects an error in accounting for certain warrants received in connection with direct loans made by the Fund. The restatement reflects an assignment of a cost to the warrants based upon their fair value on the date of receipt to the total fair value of the debt and warrants received. The difference between the face amount of the debt and its recorded cost resulting from the assignment of value to the warrants is to be treated as original issue discount and accreted into interest income over the life of the loan.

VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2016

TABLE OF CONTENTS

		Page

PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Statements of Assets and Liabilities as of June 30, 2016 (unaudited) and December 31, 2015	3
	Statements of Operations for the three and six months ended June 30, 2016 (unaudited) and 2015 (unaudited)	4
	Statements of Changes in Net Assets for the six months ended June 30, 2016 (unaudited) and 2015 (unaudited)	5
	Statements of Cash Flows for the six months ended June 30, 2016 (unaudited) and 2015 (unaudited)	6
	Schedule of Investments as of June 30, 2016 (unaudited)	7
	Schedule of Investments as of December 31, 2015	8
	Notes to Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
Item 4.	Controls and Procedures	44
PART II.	OTHER INFORMATION	46
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	47
Signatures		48

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share and per share data)

	As of
	June 30, 2016			December 31, 2015
	(unaudited)
ASSETS

Investments, at fair value
Non-controlled/non-affiliate investments (cost of $35,167 and $46,210, respectively)	$	29,583		$	22,620
Affiliate investments (cost of $4,000 and $2,000, respectively)		6,102			4,102
Investments, money market at fair value (cost of $1,736 and $6,210, respectively)		1,736			6,210
Total investments, at fair value		37,421			32,932
Interest receivable		442			529
Prepaid expenses		19			12
Origination fee receivable		60			63
Due from related party, net		257			153
Total assets	$	38,199		$	33,689

LIABILITIES
Priority credit line -Wells Fargo	$	5,130		$	4,531
Interest payable		2			1
Deferred loan fee		161			50
Prepaid interest from investments (includes prepaid interest of $217 from Nima, LLC, $249 from GeoCommerce Inc. and $167 from Ansgar Media, LLC)		633			-
Accounts payable and accrued liabilities		92			267
Stockholder distributions payable		-			350
Total liabilities	$	6,018		$	5,199

NET ASSETS
Common stock, par value, $.001 per share, 200,000,000 authorized; 6,263,323 and 6,181,515 shares issued and outstanding, respectively		6			6
Paid-in capital in excess of par value		59,567			58,860
Treasury stock at cost, 301,413 and 301,413 shares, respectively		(2,891	)		(2,891	)
Accumulated distribution in excess of net investment income and net realized gain (loss) on investments		(21,019	)		(5,997	)
Net unrealized depreciation on investments		(3,482	)		(21,488	)
Total net assets		32,181			28,490
Total liabilities and net assets	$	38,199		$	33,689

Net asset value per share	$	5.14		$	4.61

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

VII PEAKS 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,
	2016			2015			2016			2015

Investment income:
Interest from investments
Non-controlled/non-affiliate investments	$	605		$	854			1,109			1,768
Affiliate investments		120			-			233			-
Fee income
Non-controlled/non-affiliate investments		-			545			-			545
Affiliate investments		14			-			34			-
Other income
Non-controlled/non-affiliate investments		-			13			-			13
Total investment income	$	739		$	1,412		$	1,376		$	2,326

Operating expenses:
Professional fees		294			134			472			230
Directors fees		11			12			19			30
Insurance		29			24			56			48
Interest expense		52			-			127			-
Management fees - related parties		161			229			303			444
Administrative services - related parties		54			54			108			108
General and administrative (includes $30, $30, $60 and $60 of CFO salary (accounting) and $8, $28, $20 and $57 of related party travel expenses, respectively)		104			167			222			419
Transfer agent fees		38			47			66			93
Offering expense		-			40			-			96
Total operating expenses		743			707			1,373			1,468

Net investment income (loss)		(4	)		705			3			858

Realized and unrealized gain (loss) on investments:
Net realized gain (loss) from investments		(12,603	)		163			(13,303	)		215
Net unrealized appreciation (depreciation) on investments		16,735			(526	)		18,006			(550	)
Net realized and unrealized gain (loss) on investments		4,132			(363	)		4,703			(335	)

Net increase in net assets resulting from operations	$	4,128		$	342		$	4,706		$	523

Per share information - basic and diluted:
Net investment income (loss)	$	-		$	0.11		$	-		$	0.14
Net increase in net assets resulting from operations	$	0.66		$	0.06		$	0.76		$	0.09
Weighted average common shares outstanding	$	6,237,728		$	6,199,493		$	6,217,239		$	5,965,660

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

VII PEAKS 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, 2016			For the Six Months Ended June 30, 2015

Operations:
Net investment income	$	3		$	858
Net realized gain (loss) from investments		(13,303	)		215
Net unrealized appreciation (depreciation) on investments		18,006			(550	)
Net increase in net assets from operations		4,706			523
Stockholder distributions:
Distributions from net investment income		(8	)		(858	)
Distributions from net realized gain on investments		-			(215	)
Distributions from paid in capital		(1,714	)		(1,067	)
Net decrease in net assets from stockholder distributions		(1,722	)		(2,140	)
Capital share transactions:
Issuance of common stock, net of issuance costs		-			6,072
Reinvestment of stockholder distributions		707			766
Treasury capital/redemptions		-			(59	)
Net increase in net assets from capital share transactions		707			6,779

Total increase in net assets		3,691			5,162
Net assets at beginning of period		28,490			40,688
Net assets at end of period	$	32,181		$	45,850

Net asset value per common share	$	5.14		$	7.26
Common shares outstanding at end of period	$	6,263,323			6,313,300

Accumulated distribution in excess of net investment income and net realized gain on investments	$	(21,019	)	$	(3,829	)

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

VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	For the Six Months Ended June 30, 2016			For the Six Months Ended June 30, 2015

Operating activities:
Net increase in net assets from operations	$	4,706		$	523
Adjustments to reconcile net increase (decrease) in net assets from operations to net cash provided by (used in) operating activities:
Net accretion of discounts and amortization of premiums		(88	)		49
Repayments of investments		19,146			12,295
Purchase of investments		(23,318	)		(14,892	)
Repayments of investments - money market		20,711			15,310
Purchase of investments - money market		(16,237	)		(17,473	)
Net realized (gain) loss from investments		13,303			(215	)
Net unrealized (appreciation) depreciation on investments		(18,006	)		550
Proceeds from loan fees received		135			-
Accretion of deferred loan fees		(24	)		-
(Increase) decrease in operating assets:
Interest receivable		86			160
Prepaid expenses		(7	)		(24	)
Due from related party, net		(104	)		158
Origination fee receivable		3			(263	)
Receivable for common stock purchased		-			614
Increase (decrease) in operating liabilities:
Payable for unsettled trades		-			(1,340	)
Management fees payable		-			(7	)
Prepaid interest from investments		633			-
Accounts payable and accrued liabilities		(175	)		(109	)
Interest payable		1			-
Net cash provided by (used in) operating activities		765			(4,664	)

Financing activities:
Proceeds from issuance of shares of common stock, net		-			6,072
Stockholder distributions		(1,364	)		(1,349	)
Treasury stock, net of redemption of common stock		-			(59	)
Borrowings - priority credit line		7,493			-
Repayments - priority credit line		(6,894	)		-
Net cash provided by (used in) financing activities		(765	)		4,664

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

Supplemental non-cash information:
Distribution reinvestment plan distribution payable	$	-		$	66
Cash distribution payable	$	-		$	122
Distribution reinvestment plan distribution paid	$	707		$	766

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

VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

SCHEDULE OF INVESTMENTS

(dollars and shares in thousands)

(unaudited)

June 30, 2016

Portfolio Company	Industry	Investment Coupon Rate, Maturity Date	Principal / No. of Shares		Amortized Cost		Fair Value		% of Net Assets
Senior Secured First Lien Debt - 43.4% (b)
American Media, Inc.	Media: Advertising, Printing & Publishing	11.50%, 12/15/2017	$	1,320	$	1,353	$	1,366		4.3	%
Ansgar Media, LLC ^(e)	Media: Broadcasting & Subscription	12.00%, 1/11/2018		2,000		2,000		2,000		6.2	%
Ansgar Media, LLC ^(e)	Media: Broadcasting & Subscription	12.00%, 9/8/2017		2,000		2,000		2,000		6.2	%
APX Group, Inc.	Services: Consumer	6.38%, 12/1/2019		825		825		812		2.5	%
GeoCommerce Inc.	Technology	12.00%, 5/15/2018		1,000		676		1,000		3.1	%
GeoCommerce Inc.	Technology	12.00%, 4/27/2018		1,500		767		1,500		4.7	%
Nima LLC	Consumer Goods	12.00%, 5/20/2018		2,000		1,028		2,000		6.2	%
Goodman Networks, Inc.	Telecommunications	12.13%, 7/1/2018		800		830		406		1.3	%
Kratos Defense & Security Solutions, Inc.	Aerospace and Defense	7.00%, 5/15/2019		1,112		998		862		2.7	%
Titan International Inc.	Automobile	6.88%, 10/1/2020		1,500		1,400		1,290		4.0	%
Toys R Us Property Co II LLC	Retail	8.50%, 12/1/2017		725		731		722		2.2	%
Sub Total Senior Secured First Lien Debt			$	14,782	$	12,608	$	13,958		43.4	%

Senior Secured Second Lien Debt - 2.3% (b)
Nuverra Environmental Solutions, Inc.	Environmental Industries	12.50%, 4/15/2022	$	1,325	$	1,366	$	480		1.5	%
Claire's Stores, Inc.	Retail	8.88%, 3/15/2019		825		811		169		0.5	%
Logan's Roadhouse, Inc.^(g)	Beverage, Food & Tobacco	10.75%, 10/15/2017		770		722		85		0.3	%
Saratoga Resources, Inc. ^(c)	Energy: Oil & Gas	12.50%, 7/1/2016		885		912		1		0.0	%
Sub Total Senior Secured Second Lien Debt			$	3,805	$	3,811	$	735		2.3	%

Senior Unsecured Debt - 20.7% (b)
APX Group, Inc.	Services: Consumer	8.75%, 12/1/2020	$	575	$	557	$	529		1.6	%
Caesar's Entertainment Corp. ^(a)(c)(f)	Hotel, Gaming & Leisure	10.75%, 2/1/2016		495		451		297		0.9	%
Clear Channel Communications	Media: Broadcasting & Subscription	10.00%, 1/15/2018		1,400		1,364		707		2.2	%
Colt Defense LLC	Aerospace and Defense	8.00%, 7/21/2021		132		1,031		132		0.4	%
DynCorp International Inc.	Aerospace and Defense	11.88%, 11/30/2020		1,012		1,026		845		2.6	%
Gymboree Corp.	Retail	9.13%, 12/1/2018		810		779		496		1.5	%
Ryerson Inc./Joseph T Ryerson & Son, Inc.	Metals & Mining	11.25%, 10/15/2018		1,500		1,523		1,402		4.4	%
Seitel, Inc.	Energy: Oil & Gas	9.50%, 4/15/2019		1,575		1,575		1,079		3.4	%
Toys R Us Inc.	Retail	10.38%, 8/15/2017		860		821		849		2.7	%
UCI International Inc ^(c)	Automobile	8.63%, 2/15/2019		1,400		1,354		329		1.0	%
Sub Total Senior Unsecured Debt			$	9,759	$	10,481	$	6,665		20.7	%

Senior Subordinated Debt - 4.3% (b)
Claires Stores, Inc.	Retail	10.50%, 6/1/2017	$	715	$	713	$	390		1.2	%
DJO Finance, LLC.	Healthcare & Pharmaceuticals	10.75%, 4/15/2020		1,265		1,317		1,013		3.1	%
Sub Total Senior Subordinated Debt			$	1,980	$	2,030	$	1,403		4.3	%

Senior Unsecured Convertible Debt - 0.8% (b)
Aspect Software, Inc.	Telecommunications	3.00%, 5/23/2023	$	244	$	244	$	244		0.8	%
Sub Total Senior Unsecured Convertible Debt			$	244	$	244	$	244		0.8	%

Equity Securities - 23.8% (b)
Affinion Group, Inc. ^(c)	Media: Advertising, Printing & Publishing			13	$	689	$	816		2.5	%
Aspire Holdings ^(c)	Energy: Oil & Gas			5		551		525		1.6	%
Education Management LLC ^(c)	Services: Consumer			2,530		4		64		0.2	%
NII Holdings, Inc. ^(a)(c)	Telecommunications			17		768		53		0.2	%
Total Common Stock						2,012		1,458		4.5	%

Ansgar Media, LLC- Class B Units ^(c)(d)(e)	Media: Broadcasting & Subscription			-		-		2,102		6.5	%
Total Preferred Stock						-		2,102		6.5	%

GeoCommerce Inc. ^(c)	Technology			500		1,114		2,105		6.5	%
Nuverra Environmental Solutions Inc. ^(c)	Environmental Industries			61		-		1		0.0	%
Nima LLC ^(c)	Consumer Electronics			2,000		1,000		2,000		6.3	%
Education Management LLC^(c)	Services: Consumer			1,554		876		-		0.0	%
Total Warrants						2,990		4,106		12.8	%

Sub Total Equity Securities					$	5,002	$	7,666		23.8	%

U.S. Government Securities - 15.6% (b)
U.S. Treasury Bill		0.75%, 04/15/18	$	5,000	$	4,991	$	5,014		15.6	%
Sub Total U.S. Government Securities			$	5,000	$	4,991	$	5,014		15.6	%

Investments - Money Market - 5.4% (b)
Investments - U.S. Bank Money Market		0.10%	$	190	$	190	$	190		0.6	%
Investments - Wells Fargo Money Market		0.01%		1,546		1,546		1,546		4.8	%
Sub Total Investments - Money Market			$	1,736	$	1,736	$	1,736		5.4	%

TOTAL INVESTMENTS - 116.3% (b)					$	40,903	$	37,421		116.3	%

(a)

Represents a non-qualifying investment as defined under Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying investments represent 0.9% of the Company's portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.

(b)

Percentages are based on net assets of $32,181 as of June 30, 2016.

(c)

Non-income producing as of June 30, 2016.

(d)

2,500 Class B Units, which are not entitled to an allocation of profits or losses until the earlier to occur of 9/30/2020 or a change of control of Ansgar.

(e)

As defined in the 1940 Act, Affiliated Investments are defined as those Non-Control Investments in companies in which we own between 5.0% and 25.0% of the voting securities.

(f)

In maturity default.

(g)

Non-income producing as of June 30, 2016. On August 8, 2016, filed for bankruptcy in Delaware. The company is initial stages of its restructuring process.

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

VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

SCHEDULE OF INVESTMENTS

(dollars and shares in thousands)

December 31, 2015

Portfolio Company	Industry	Investment Coupon Rate, Maturity Date	Principal / No. of Shares		Amortized Cost		Fair Value		% of Net Assets
Senior Secured First Lien Debt - 31.6% (b)
American Media, Inc.	Media: Advertising, Printing & Publishing	11.50%, 12/15/2017	$	1,320	$	1,363	$	1,300		4.6	%
Ansgar Media, LLC ^(f)	Media: Broadcasting & Subscription	12.00%, 9/8/2017		2,000		2,000		2,000		7.0	%
APX Group, Inc.	Services: Consumer	6.38%, 12/1/2019		825		825		796		2.8	%
Caesar’s Entertainment Operating Co., Inc. ^(a)(d)	Hotel, Gaming & Leisure	11.25%, 6/1/2017		860		751		639		2.2	%
EarthLink Holdings Corp.	Telecommunications	7.38%, 6/1/2020		40		41		41		0.1	%
Endeavour International Corp. ^(d)	Energy: Oil & Gas	12.00%, 3/1/2018		525		551		525		1.8	%
Goodman Networks, Inc.	Telecommunications	12.13%, 7/1/2018		800		837		216		0.8	%
Kratos Defense & Security Solutions, Inc.	Aerospace and Defense	7.00%, 5/15/2019		1,112		981		758		2.7	%
Ryerson Inc./Joseph T Ryerson & Son, Inc.	Metals & Mining	9.00%, 10/15/2017		1,315		1,355		1,018		3.6	%
Titan International, Inc.	Automoile	6.88%, 10/1/2020		1,500		1,390		1,095		3.8	%
Toys R Us Property Co II LLC	Retail	8.50%, 12/1/2017		725		732		620		2.2	%
Sub Total Senior Secured First Lien Debt			$	11,022	$	10,826	$	9,008		31.6	%

Senior Secured Second Lien Debt - 6.3% (b)
Aspect Software, Inc.	Telecommunications	10.63%, 5/15/2017	$	1,302	$	1,314	$	1,016		3.5	%
Claire’s Stores, Inc.	Retail	8.88%, 3/15/2019		825		809		190		0.7	%
Endeavour International Corp. ^(d)	Energy: Oil & Gas	12.00%, 6/1/2018		725		708		8		0.0	%
Logan’s Roadhouse, Inc.	Beverage, Food & Tobacco	10.75%, 10/15/2017		770		748		531		1.9	%
Saratoga Resources, Inc. ^(d)	Energy: Oil & Gas	12.50%, 7/1/2016		885		912		44		0.2	%
Sub Total Senior Secured Second Lien Debt			$	4,507	$	4,491	$	1,789		6.3	%

Senior Unsecured Debt - 22.0% (b)
APX Group, Inc.	Services: Consumer	8.75%, 12/1/2020	$	575	$	556	$	472		1.6	%
Caesar’s Entertainment Corp. ^(a)(d)	Hotel, Gaming & Leisure	10.75%, 2/1/2016		495		451		126		0.4	%
Clear Channel Communications	Media: Broadcasting & Subscription	10.00%, 1/15/2018		1,400		1,354		539		1.9	%
Colt Defense, LLC ^(d)	Aerospace and Defense	8.75%, 11/15/2017		1,253		1,029		132		0.5	%
DynCorp International, Inc.	Aerospace and Defense	10.38%, 7/1/2017		1,135		1,143		846		3.0	%
EarthLink Holdings Corp.	Telecommunications	8.88%, 5/15/2019		279		274		284		1.0	%
Gymboree Corp.	Retail	9.13%, 12/1/2018		810		774		182		0.6	%
Nuverra Environmental Solutions, Inc.	Environmental Industries	9.88%, 4/15/2018		1,325		1,351		457		1.6	%
Ryerson Inc./Joseph T Ryerson & Son, Inc.	Metals & Mining	11.25%, 10/15/2018		1,500		1,528		1,117		3.9	%
Seitel, Inc.	Energy: Oil & Gas	9.50%, 4/15/2019		1,575		1,574		1,016		3.6	%
Suntech Power Holdings Company, Ltd. ^(a)(c)(d)	Environmental Industries	3.00%, 5/15/2013		100		109		-		0.0	%
Toys R Us, Inc.	Retail	10.38%, 8/15/2017		860		820		619		2.2	%
UCI International, Inc.	Automobile	8.63%, 2/15/2019		1,400		1,367		483		1.7	%
Sub Total Senior Unsecured Debt			$	12,707	$	12,330	$	6,273		22.0	%

Senior Subordinated Debt - 5.2% (b)
Claire's Stores, Inc.	Retail	10.50%, 6/1/2017	$	715	$	713	$	357		1.2	%
DJO Finance, LLC.	Healthcare & Pharmaceuticals	10.75%, 4/15/2020		1,265		1,322		1,139		4.0	%
QuickSilver Resources, Inc. (d)	Energy: Oil & Gas	7.13%, 4/1/2016		890		843		-		0.0	%
Sub Total Senior Subordinated Debt			$	2,870	$	2,878	$	1,496		5.2	%

Equity Securities - 11.3% (b)
Affinion Group, Inc. ^(d)	Media: Advertising, Printing & Publishing		$	13	$	689	$	816		2.9	%
Ansgar Media, LLC ^(d)(f)	Media: Broadcasting & Subscription			-		-		2,102		7.4	%
Education Management, LLC ^(d)	Services: Consumer			2,530		5		177		0.6	%
NII Holdings, Inc. ^(a)(d)	Telecommunications			17		768		84		0.3	%
Total Common Stock						1,462		3,179		11.2	%

Relativity Media, LLC ^(d)(e)	Media: Broadcasting & Subscription			855		10,400		-		0.0	%
Total Preferred Stock						10,400		-		0.0	%

Education Management, LLC ^(d)	Services: Consumer			1,554		876		31		0.1	%
Total Warrants						876		31		0.1	%

Sub Total Equity Securities					$	12,738	$	3,210		11.3	%

U.S. Government Securities -17.4% (b)
U.S. Treasury Bill		0.18%, 4/28/2016	$	4,950	$	4,947	$	4,946		17.4	%
Sub Total U.S. Government Securities			$	4,950	$	4,947	$	4,946		17.4	%

Investments - Money Market - 21.8% (b)
Investments - Morgan Stanley Money Market		0.01%	$	3,191	$	3,191	$	3,191		11.2	%
Investments - U.S. Bank Money Market		0.02%		-		-		-		0.0	%
Investments - Wells Fargo Money Market		0.01%		3,019		3,019		3,019		10.6	%
Sub Total Investments - Money Market			$	6,210	$	6,210	$	6,210		21.8	%

TOTAL INVESTMENTS - 115.6% (b)					$	54,420	$	32,932		115.6	%

(a)	Represents a non-qualifying investment as defined under Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying investments represent 2.6% of the Fund’s portfolio at fair value. As a Business Development Company (“BDC”), the Fund can only invest 30% of its portfolio in non-qualifying assets.
(b)	Percentages are based on net assets of $28,490 as of December 31, 2015.
(c)	Non-U.S. company. The principal place of business for Suntech Power Holdings Company, Ltd. is China.
(d)	Non-income producing as of December 31, 2015.
(e)	The Class E Units are entitled to PIK dividends at the rate of 12.5% per annum, payable in additional Class E Units. The PIK dividends accrue quarterly in advance on the first day of each quarter, but are only issuable immediately prior to the mandatory redemption of the Class E Units, and are not issuable upon a conversion of the Class E Units to other equity interests of the issuer. We stopped accruing dividends starting July 30, 2015 when Relativity Media, LLC and certain of its subsidiaries filed voluntarily petitions under Chapter 11 of the United States Bankruptcy Code.
(f)	As defined in the 1940 Act, Affiliated Investments are defined as those Non-Control Investments in companies in which we own between 5.0% and 25.0% of the voting securities.

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

VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

NOTES TO FINANCIAL STATEMENTS

June 30, 2016

(unaudited)

Note 1. Nature of Operations

VII Peaks Co-Optivist ^TM Income BDC II, Inc. (the “Fund”, “our” or “we”), a Maryland corporation formed in 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 or (“1940 Act”). In addition, we have elected to be treated for federal income tax purpose, and intend to qualify annually, as a regulated investment company, or (“RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended, or (the “Code”).

We invest in discounted corporate debt, senior secured term loan and equity-linked debt securities of public and private companies that trade on the secondary loan market for institutional investors and provide distributions to investors. The debt is generally high-yield and non-investment grade. 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”) 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. Co-Optivist^TM is a registered trademark of VII Peaks Capital, LLC, or (“VII Peaks” or the “Manager”), and is being used with their permission. Our strategy is not dependent on restructuring to generate distributions. Capital appreciation on securities is generally not realized evenly over the holding period. In some instances market prices for securities may continue to reflect a discount until a relatively short time period prior to a redemption event. The potential capital gain typically occurs during the end of the holding period of a bond in our portfolio when securities are either called by the company or exchanged to new securities during refinance. We have tendered certain debt securities well above the market-traded deep discount. In addition, we also provide direct loans with equity warrant coverage to portfolio companies to help facilitate corporate expansion.

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 shareholders.

Our proprietary “Co-Optivist” ^TM 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 our offering. However, assuming we raise the maximum offering amount of $750.0 million, we expect to hold at least 50 investments, and we anticipate that the minimum investment size will be approximately $250,000. 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 invest in debt and equity-linked debt of target companies with a minimum enterprise value of $200.0 million and whose debt and equity-linked debt is actively traded in the secondary loan market. We also make senior secured direct loan investments in companies with a minimum enterprise value of $5.0 million. For such senior secured direct loan investments, we may receive equity securities to boost overall returns. We expect our portfolio to be predominantly composed of fixed-rate high-yield, senior secured term loan 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 shareholders 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 making distributions on a monthly basis to our shareholders.

Between 2001 and 2008, corporate debt levels and the supply of leverage offered by banks and other investors began a steady increase. Since then, corporate debt has continued to increase, with the financing sources less available. We believe a significant amount of this debt will be subject to a redemption event prior to 2021. 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.

We are managed by VII Peaks Capital, LLC, which is registered as an investment adviser with the Securities and Exchange Commission, or (“SEC”). Our Manager is responsible for sourcing potential investments, analyzing investment opportunities, structuring our investments, and monitoring our investments and portfolio companies on an ongoing basis.

On August 9, 2011, we filed a registration statement on Form N-2 to sell up to 75,000,000 shares of common stock, $0.001 par value per share, at an initial public offering price of $10.00 per share. The registration statement was declared effective by the SEC on March 1, 2012. We commenced operations when we raised gross offering proceeds of over $1.0 million, all of which was from persons who were not affiliated with us or our 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 our subscribers, pending release to us. We achieved the minimum offering requirement on July 10, 2012 and commenced operations on such date. As of June 30, 2016, we issued 6.6 million shares of common stock, including 0.4 million shares under our distribution reinvestment plan (“DRIP”), less 0.3 million shares redeemed under our tender offer. Gross proceeds from our common stock issuances total $64.9 million, including $4.1 million under our DRIP less $2.9 million paid to redeem shares in our quarterly tender offers.

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 ("U.S. 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 U.S. 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, 2015, which was filed with the SEC on April 14, 2016. 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, 2016.

Use of Estimates in the Preparation of Financial Statements

The preparation of the accompanying financial statements in conformity with U.S. 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.

Investment Classification

The Fund classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies in which we own more than 25.0% of the voting securities or maintain greater than 50.0% of the board representation. Under the 1940 Act, “Affiliated Investments” are defined as those non-control investments in companies in which we own between 5.0% and 25.0% of the voting securities. Under the 1940 Act, “Non-affiliated Investments” are defined as investments that are neither Control Investments nor Affiliated Investments.

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 initial cost of the organizational and offering expenses, but the Fund is obligated to reimburse the Manager for such costs to the extent of 1.5% of the gross offering proceeds in our continuous offering. The Fund also agreed to reimburse the Manager for organization and offering expenses incurred by a prior manager in consideration for the Manager’s agreement to pay $1.3 million owed to the Fund by the prior manager under an expense reimbursement agreement, which amount the Manager has paid in full. 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.

The Fund has evaluated the implications of Accounting Standards Codification (“ASC”) Topic 740, Accounting for Income Taxes, (“ASC Topic 740”) for all open tax years and in all major tax jurisdictions, and determined that there is no material impact on the financial statements. The Fund continues to remain subject to examination by U.S. federal and state authorities for the years 2011 through 2015.

Revenue Recognition

We generate investment income in the form of interest, dividend and fees earned on senior secured loans, senior secured notes, subordinated debt, senior unsecured debt, senior unsecured convertible debt and collateralized securities in our portfolio. The level of income we receive is directly related to the balance of collectible income producing investments multiplied by the coupon rate of our investments. Coupon interest income is adjusted for the amortization of premiums and accretion of discounts. We record interest income on an accrual basis to the extent that we expect to collect such amounts. The Fund stops accruing when the invested company defaults in payment and has passed the 30-day grace period, files for bankruptcy or goes through reorganization converting bonds to equity. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases.

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 when we receive such amounts.

Our total investment income was $0.7 million and $1.4 million for the three and six months ended June 30, 2016, as compared to $1.4 million and $2.3 million for the three and six months ended June 30, 2015, respectively. The decrease in 2016 as compared to 2015 was attributable to an increase in debt investments placed on non-accrual status, restructuring of certain debt investments into equity investments as well as a reallocation of portfolio investments from debt investments to equity investments. At June 30, 2016, the weighted average coupon yield was 8.6%, as compared to 9.5% as of June 30, 2015. Based on current and prior three quarter’s net assets, average net assets as of June 30, 2016 were $32.0 million, as compared to $42.1 million as of June 30, 2015.

For the six months ended June 30, 2016, thirteen of the investments in the portfolio did not accrue interest as either the investment is an equity security or the issuers were in default of the coupon payment for more than the thirty-day grace period. Interest income was accrued through the date of the last coupon payment received for the debt investments.

These instruments do not accrue or pay interest or dividends. The following table presents those thirteen investments:

Portfolio Company	Asset Type	Investment Coupon Rate			Maturity Date
Affinion Group, Inc.	Equity – Common Stock		-		-
Ansgar Media, LLC - Class B Units	Equity – Preferred Stock		-		-
Aspire Holdings ⁽¹⁾	Equity – Common Stock		-		-
Caesar's Entertainment Corp.	Senior Unsecured Debt		10.75	%	February 1, 2016
Education Management, LLC	Equity – Common Stock		-		-
Education Management, LLC	Warrant		-		-
GeoCommerce, Inc.	Warrant		-		-
Logan's Roadhouse, Inc. ⁽²⁾	Senior Secured Second Lien Debt		10.75	%	October 15, 2017
NII Holdings, Inc.	Equity – Common Stock		-		-
Nima, LLC	Warrant		-		-
Nuverra Environmental Solutions, Inc.	Warrant		-		-
Saratoga Resources, Inc.	Senior Secured Second Lien Debt		12.50	%	July 1, 2016
UCI International, Inc.	Senior Unsecured Debt		8.63	%	February 15, 2019

(1)

Converted from exchange of 12.00% Endeavour International Corp First Lien Bonds.

(2)

On August 8, 2016, filed for bankruptcy in Delaware. The company is in the initial stages of its restructuring process.

The following table presents four investments that were completely written off during the three months ended June 30, 2016:

Portfolio Company	Asset Type	Investment Coupon Rate			Maturity Date
Aspect Software, Inc.	Senior Secured Second Lien Debt		10.63	%	May 15, 2017
Suntech Power Holdings Company, Ltd.	Senior Unsecured Debt		3.00	%	May 15, 2013
QuickSilver Resources, Inc.	Senior Subordinated Debt		7.13	%	April 1, 2016
Relativity Media, LLC - Class E Units	Equity – Preferred Stock		-		-

Note 3. Restatement of previously issued financial statements

We determined that we had incorrectly accounted for certain warrants received in connection with direct loans that we made. Specifically, we did not assign a cost to the warrants based upon their fair value on the date of receipt relative to the total fair value of the debt and warrants received. The difference between the face amount of the debt and its recorded cost resulting from the assignment of value to the warrants is to be treated as original issue discount, and accreted into interest income over the life of the loan. For the quarter ended June 30, 2016, compared to what was previously reported, our restated net investment income increased by $85,065 and our unrealized appreciation decreased by the same amount. There was no effect on our net asset value per share (NAV) for the period.

We have restated our financial statements and related footnotes for the three and six months ended June 30, 2016. The following tables reconcile the amounts as previously reported in the applicable financial statement to the corresponding restated amounts included in this Quarterly Report on Form 10-Q/A (in thousands, except per share data).

	As of June 30, 2016
	As previously reported			As restated
Statement of Assets and Liabilities
Accumulated distribution in excess of net investment income and net realized gain (loss) on investments	$	(21,104	)	$	(21,019	)
Net unrealized depreciation on investments		(3,397	)		(3,482	)

	For the Three Months Ended June 30, 2016
	As previously reported			As restated
Statement of Operations
Interest from investments	$	640		$	725
Net unrealized appreciation on investments		16,820			16,735
Net investment loss		(90	)		(4	)

	For the Six Months Ended June 30, 2016
	As previously reported			As restated
Statement of Operations
Interest from investments	$	1,257		$	1,342
Net unrealized appreciation on investments		18,091			18,006
Net investment income (loss)		(82	)		3

Note 4. Valuation of Portfolio Investments

The Fund has adopted FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”), which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP 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 3: Unobservable inputs for the asset or liability.

The investment portfolio is recorded on a trade date basis. 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. Twenty-five of the forty investments were valued using the closing market price at period end June 30, 2016.

The following table presents investments that were not valued using the closing market price, as of June 30, 2016:

Portfolio Company	Asset Type	Investment Coupon Rate			Maturity Date
Affinion Group, Inc.	Equity – Common Stock		-		-
Ansgar Media, LLC - Class B Units	Equity – Preferred Stock		-		-
Ansgar Media, LLC	Senior Secured First Lien Debt		12.00	%	September 8, 2017
Ansgar Media, LLC	Senior Secured First Lien Debt		12.00	%	January 11, 2018
Aspire Holdings ⁽¹⁾	Equity – Common Stock		-		-
Aspect Software, Inc. ⁽²⁾	Senior Unsecured Convertible Debt		3.00	%	May 23, 2023
Colt Defense, LLC	Senior Unsecured Debt		8.00	%	July 12, 2021
Education Management, LLC	Equity – Common Stock		-		-
Education Management, LLC	Warrant		-		-
GeoCommerce, Inc.	Senior Secured First Lien Debt		12.00	%	April 27, 2018
GeoCommerce, Inc.	Senior Secured First Lien Debt		12.00	%	May 15, 2018
GeoCommerce, Inc.	Warrant		-		-
Nima, LLC	Warrant		-		-
Nima, LLC	Senior Secured First Lien Debt		12.00	%	May 20, 2018
Nuverra Environmental Solutions, Inc.	Warrant		-		-

(1)

Converted from exchange of 12.00% Endeavour International Corp, senior secured first lien debt.

(2)

The original 10.63% senior secured second lien notes due on May 15, 2017 defaulted. As part of Aspect’s bankruptcy and planned reorganization process, the Fund participated in a rights offering to purchase a new 3.0% PIK senior unsecured convertible note maturing on May 23, 2023 in an effort to facilitate recovery of its previous investment in the senior secured lien notes in Aspect.

Relativity Media, LLC, the entity in which the Fund made its original investment, was dissolved as part of the Relativity Media reorganization process during the quarter. The investment was removed from the Schedule of Investments and the loss was realized. The company has now emerged out of bankruptcy as a new operating company.

Securities that are not publicly-traded are valued at fair value as determined in good faith by the Board of Directors, or a committee thereof. 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 undertakes 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, or committee thereof; and

the Board of Directors, or committee thereof, 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.

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.

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, 2016 according to the fair value hierarchy (dollars in thousands):

	Level 1		Level 2		Level 3		Total
Investments – Money Market	$	1,736	$	—	$	—	$	1,736
Senior Secured First Lien Debt		—		5,458		8,500		13,958
Senior Secured Second Lien Debt		—		735		—		735
Senior Unsecured Debt		—		6,533		132		6,665
Senior Subordinated Debt		—		1,403		—		1,403
Senior Unsecured Convertible Debt		—		—		244		244
U.S. Government Securities		—		5,014		—		5,014
Equity Securities		—		53		7,613		7,666
Total	$	1,736	$	19,196	$	16,489	$	37,421

The following table presents fair value measurements of investments, by major class, as of December 31, 2015 according to the fair value hierarchy (dollars in thousands):

	Level 1		Level 2		Level 3		Total
Investments – Money Market	$	6,210	$	—	$	—	$	6,210
Senior Secured First Lien Debt		—		6,483		2,525		9,008
Senior Secured Second Lien Debt		—		1,781		8		1,789
Senior Unsecured Debt		—		6,141		132		6,273
Senior Subordinated Debt		—		1,496		—		1,496
U.S. Government Securities		—		4,946		—		4,946
Equity Securities		—		84		3,126		3,210
Total	$	6,210	$	20,931	$	5,791	$	32,932

There were no transfers between levels for the six months ended June 30, 2016.

There were two transfers between levels for the year ended December 31, 2015. One transfer was Affinion Group, Inc.’s, 13.5% notes due August 15, 2018, which were restructured by the company to a non-interest bearing private equity holding and hence transferred to Level 3. The other transfer was Colt Defense, LLC’s 8.75% senior unsecured notes, due November 15, 2017, which were exchanged for 8.00% senior unsecured notes due July 12, 2021 at $105.08 for every $1,000 of old notes. Although the restructuring process completed after December 31, 2015, the plan for reorganization was already proposed prior to year end.

During the year ended December 31, 2015, the following were the transfers in or out of levels (dollars in thousands):

	Level 1		Level 2			Level 3		Total
Senior Unsecured Debt	$	—	$	(132	)	$	132	$	—
Senior Subordinated Debt		—		(816	)		—		(816	)
Equity Securities		—		—			816		816
Total	$	—	$	(948	)	$	948	$	—

The following table presents additional information about Level 3 assets measured at fair value. Both observable and unobservable inputs may be used to determine the fair value of positions that the Fund has classified within the Level 3 category. As a result, the net unrealized gains and losses for assets within the Level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.

Changes in Level 3 assets measured at fair value for the six months ended June 30, 2016 are as follows (dollars in thousands):

	Fair Value at December 31, 2015		Reclassification			Purchases (Sales and Settlement)⁽¹⁾			Amortization and Accretion of Fixed Income Premiums and Discounts		Realized and Unrealized Gains (Losses)			Fair Value at June 30, 2016		Change in Unrealized Appreciation (Depreciation) for Investments held as of June 30, 2016
Senior Secured First Lien Debt	$	2,525	$	(525	)	$	4,386		$	85	$	2,029		$	8,500	$	2,029
Senior Secured Second Lien Debt		8		-			(8	)		-		-			-		-
Senior Unsecured Debt		132		-			-			2		(2	)		132		(2	)
Senior Unsecured Convertible Debt		-		-			244			-		-			244		-
Equity Securities		3,126		525			2,114			-		1,848			7,613		1,848
Total	$	5,791	$	-		$	6,736		$	87	$	3,875		$	16,489	$	3,875

(1) Includes purchases of new investments, effects of refinancing and restructurings, premium and discount accretion and amortization, PIK interest, net proceeds from investments sold and principal payments received.

Realized and unrealized gains and losses are included in net realized gain (loss) from investments and net unrealized appreciation (depreciation) on investments in the statements of operations. The change in unrealized appreciation for Level 3 investments still held as of June 30, 2016 of $3.9 million is included in net unrealized appreciation (depreciation) on investments in the statements of operations for the six months ended June 30, 2016.

Changes in Level 3 assets measured at fair value for the year ended December 31, 2015 are as follows (dollars in thousands):

	Fair Value at December 31, 2014		Transfers in/(out)		Purchases (Sales and Settlement) ⁽¹⁾		Amortization and Accretion of Fixed Income Premiums and Discounts			Realized and Unrealized Gains (Losses)			Fair Value at December 31, 2015		Change in Unrealized Appreciation (Depreciation) for Investments held as of December 31, 2015
Senior Secured First Lien Debt	$	578	$	—	$	2,000	$	—		$	(53	)	$	2,525	$	(53	)
Senior Secured Second Lien Debt		239		—		—		—			(231	)		8		(231	)
Senior Unsecured Debt		—		132		—		(43	)		43			132		43
Equity Securities		874		816		10,400		(18	)		(8,946	)		3,126		(8,946	)
Total	$	1,691	$	948	$	12,400	$	(61	)	$	(9,187	)	$	5,791	$	(9,187	)

Realized and unrealized gains and losses are included in net realized gain (loss) from investments and net unrealized appreciation (depreciation) on investments in the statements of operations. The change in unrealized depreciation for Level 3 investments still held as of December 31, 2015 of $9.2 million is included in net unrealized appreciation (depreciation) on investments in the statements of operations for the year ended December 31, 2015.

The following table provides quantitative information regarding Level 3 fair value measurements as of June 30, 2016 (dollars in thousands):

							Range
	Fair Value		Valuation Technique	Unobservable Input	Mean		Minimum		Maximum
Senior Secured First Lien Debt	$	8,500	Liquidation	Transaction Value	$	8,500	$	8,500	$	8,500
Senior Unsecured Debt		132	Liquidation	Transaction Value		132		132		132
Senior Unsecured Convertible Debt		244	Liquidation	Transaction Value		244		244		244
Equity Securities		7,613	Liquidation	Transaction Value / Discounted Cash Flows		11,562		7,613		15,511
Total	$	16,489

The following table provides quantitative information regarding Level 3 fair value measurements as of December 31, 2015 (dollars in thousands):

							Range
	Fair Value		Valuation Technique	Unobservable Input	Mean		Minimum		Maximum
Senior Secured First Lien Debt	$	2,525	Liquidation	Transaction Value	$	2,525	$	2,525	$	2,525
Senior Secured Second Lien Debt		8	Liquidation	Transaction Value		8		8		8
Senior Unsecured Debt		132	Liquidation	Transaction Value		132		132		132
Equity Securities		3,126	Liquidation	Transaction Value / Discounted Cash Flows		9,155		3,126		15,184
Total	$	5,791

The primary significant unobservable inputs used in the fair value measurement of the Fund’s equity securities are the fair value estimates of the issuer’s equity securities received in exchange of the bonds held earlier (Affinion Group, Inc., Aspire Holdings, LLC and Education Management, LLC) and management’s estimates of fair value of equity investments in Ansgar Media, LLC, GeoCommerce, Inc., Nima, LLC and Nuverra Environmental Solutions, Inc. Significant increases or decreases in the fair value of the issuer’s equity securities would result in a significantly lower or higher fair value measurement. The five senior secured first lien notes (two Ansgar Media, LLC, two GeoCommerce, Inc. and a Nima, LLC) are being held at par since we expect full payment for senior secured first lien type bonds, as compared to senior secured second lien or unsecured bonds. The primary significant unobservable inputs used in the fair value measurement of the Fund’s senior secured second lien debt and senior unsecured debt were the fair value of the exchanged bonds offered by the issuer (Colt Defense, LLC and Aspect Software, Inc.).

The composition of the Fund’s investments as of June 30, 2016, 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	$	1,736	$	1,736		4.6	%
Senior Secured First Lien Debt		12,608		13,958		37.3
Senior Secured Second Lien Debt		3,811		735		2.0
Senior Unsecured Debt		10,481		6,665		17.8
Senior Subordinated Debt		2,030		1,403		3.7
Senior Unsecured Convertible Debt		244		244		0.7
U.S. Government Securities		4,991		5,014		13.4
Equity Securities		5,002		7,666		20.5
Total	$	40,903	$	37,421		100.0	%

The composition of the Fund’s investments as of December 31, 2015, 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	$	6,210	$	6,210		18.9	%
Senior Secured First Lien Debt		10,826		9,008		27.4
Senior Secured Second Lien Debt		4,491		1,789		5.4
Senior Unsecured Debt		12,330		6,273		19.0
Senior Subordinated Debt		2,878		1,496		4.5
U.S. Government Securities		4,947		4,946		15.0
Equity Securities		12,738		3,210		9.8
Total	$	54,420	$	32,932		100.0	%

Note 5. Related Party Transactions

We have entered into agreements with the Manager, whereby we pay it certain fees and reimbursements. These include payments to our Manager for reimbursement of organization and offering costs, as well as 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.

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 relief 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.

Due from related party consists of $77,000 of true up for management fees from writing down certain portfolio investments at the end of a quarter in prior quarters, allocating $67,000 in Blue Sky state filing fee to our Manager, instead of the Fund for offering costs, $28,000 in allocation of the Directors and Officers insurance policy costs to our Manager, and $85,000 in expenses related to legal and other operational costs allocated to Manager instead of the Fund.

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, or a committee thereof. 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. The initial investment advisory agreement was signed on August 20, 2013 and was effective for two years. The agreement must be re-approved annually thereafter by a majority of the non-interested members of the Board of Directors. On August 17, 2015, the non-interested members of the Board of Directors re-approved the agreement between the Manager and the Fund under the agreement’s existing terms.

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 $100.0 million; 1.75% of net assets between $100.0 million and $250.0 million; and 1.5% of net assets over $250.0 million. For the three and six months ended June 30, 2016, the Fund incurred $0.2 million and $0.3 million of base management fees, respectively. For the three and six months ended June 30, 2015, the Fund incurred $0.2 million and $0.4 million of base management fees, respectively.

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 and incentive fees. For the three and six months ended June 30, 2016 and 2015, the Fund did not incur any incentive fees related to net investment income or capital gains.

Under U.S. 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. U.S. 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. From each sale of common stock, the Fund pays 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. The Fund expenses organizational and offering costs as they become payable to the Manager under the investment advisory agreement.

Administration Agreement

Our Manager serves as our administrator. Pursuant to an administration agreement, our Manager furnishes us with office facilities, equipment, clerical, bookkeeping and record keeping services at such facilities. Under the administration agreement, our Manager also performs, or oversees the performance of our required administrative services, which include, among other things, transfer agency and other service providers supervision and oversight, preparation and supervision of the financial records for which we are required to maintain for SEC reporting, stockholder reporting and other Fund needs, implementation and supervision of a robust compliance program and oversight and administration of the quarterly share repurchase program. In addition, our Manager assists us in activities which include, among other things, performance and supervision of investor relations, the Fund’s Board of Directors communication and reporting, determining and publishing our net asset value, overseeing the preparation and filing of our tax returns, the communication, printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and other events such as distributions, and the performance of administrative and professional services rendered to us by others. Under the administration agreement, we are obligated to reimburse our Manager for our allocable portion of our Manager’s overhead in performing its obligations under the administration agreement, including rent, the fees and expenses associated with overseeing and performing the compliance functions and our allocable portion of the compensation of our chief financial officer, chief compliance officer and any administrative support staff; however, to date, cost of the chief financial officer, fund administration accounting and the chief compliance officer are charged directly to the Fund. Under the administration agreement, our Manager will also provide on our behalf managerial assistance to those portfolio companies that request such assistance. The administration agreement also provides the reimbursement to the Fund by the Manager for the Manager’s share of the Directors and Officers insurance, which is paid by the Fund in full. The administration agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party.

The administration agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, our Manager and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of our Manager’s services under the administration agreement or otherwise as administrator for us.

Note 6. Common Stock

Initially, 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. The Manager sold these shares on June 27, 2014.

On July 10, 2012, the Fund had raised sufficient proceeds to break escrow on its IPO and through June 30, 2016, the Fund has sold 6.6 million shares of common stock for gross proceeds of $64.9 million including the purchases made by the Manager.

During the six months ended June 30, 2016, the Fund did not sell any shares of common stock as its prospectus was not effective. Also, for the six months ended June 30, 2016, there were no treasury shares repurchased.

Note 7. Borrowings

Wells Fargo Credit Facility

On August 4, 2015, the Fund entered into an agreement with Wells Fargo Advisors, LLC for the purpose of obtaining a revolving line of credit. The amount the Fund can borrow is based upon the value of cash deposited in an account at Wells Fargo Advisors, LLC and the treasury notes that Wells Fargo purchases, which serve as collateral for the loan. On August 27, 2015, the Fund initially drew down $2.0 million. As of December 31, 2015, the outstanding balance was $4.5 million. As of June 30, 2016, the outstanding balance under this credit line was $5.1 million. The interest rate on the outstanding balance is currently 3.00%.

Morgan Stanley Credit Facility

On September 10, 2015, the Fund entered into an agreement with Morgan Stanley Private Bank, N.A. The amount the Fund can borrow is based upon the value of cash deposited in an account at Morgan Stanley Private Bank, N.A., which serves as a collateral for the loan. The maximum amount, which the Fund may borrow under the line of credit, is $1.8 million. As of June 30, 2016, there was no outstanding balance under this credit line and the account was closed.

Note 8. Earnings (Loss) 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 in net assets per share from operations for the three and six months ended June 30, 2016 and 2015 (dollars in thousands, except share and per share amounts):

	For the Three Months Ended June 30, 2016		For the Three Months Ended June 30, 2015
Basic and diluted:
Net increase in net assets resulting from operations	$	4,128	$	342
Weighted average common shares outstanding		6,237,728		6,199,493
Net increase in net assets resulting from operations per share	$	0.66	$	0.06

	For the Six Months Ended June 30, 2016		For the Six Months Ended June 30, 2015
Basic and diluted:
Net increase in net assets resulting from operations	$	4,706	$	523
Weighted average common shares outstanding		6,217,239		5,965,660
Net increase in net assets resulting from operations per share	$	0.76	$	0.09

The Fund had no potentially dilutive securities as of June 30, 2016 and June 30, 2015, resulting in the same number of shares for basic and diluted.

Note 9. Tender Offer Program

We do not currently intend to list our shares on any securities exchange and do not expect a public market for them to develop in the foreseeable future. Therefore, shareholders should not expect to be able to sell their shares promptly or at a desired price. Beginning with fourth calendar quarter of 2013, and on a quarterly basis through June 30, 2015, the Board of Directors approved a Tender Offer to repurchase shares of our common stock at a price equal to 90% of our offering price on the date of repurchase. In the third quarter of 2015, the Board of Directors decided to suspend the repurchase program, as the Fund was not raising any new capital. When a tender offer is approved by the Board of Directors, we intend to limit the number of shares to be repurchased during any calendar year to 20% of the weighted average number of shares outstanding in the prior calendar year, or 5.0% in each quarter, though the actual number of shares that we offer to repurchase may be less in light of the limitations noted above. We will offer to repurchase such shares on each date of repurchase at a price equal to 90% of our offering price. For the six months ended June 30, 2016, no tender offer was approved by the Board of Directors.

The following table reflects certain information regarding the tender offers that we have conducted to date:

For the Three Months Ended	Repurchase Date	Shares Repurchased		Percent of Shares Tendered that were Repurchased			Repurchase Price Per Share		Aggregate Consideration For Repurchased Shares (‘000s)*
December 13, 2013	December 12, 2013		548		100	%	$	9.135	$	5
March 31, 2014	March 14, 2014		550		100	%	$	9.135		5
June 30, 2014	June 27, 2014		34,025		100	%	$	9.135		319
September 30, 2014	September 30, 2014		38,482		100	%	$	9.000		346
December 31, 2014	December 30, 2014		6,061		100	%	$	8.775		55
March 31, 2015	March 30, 2015		5,811		100	%	$	8.775		51
June 30, 2015	June 29, 2015		215,935		69	%	$	8.775		1,895
September 30, 2015	September 30, 2015**		—		—			—		—
December 31, 2015	December 31, 2015**		—		—			—		—
March 31, 2016	March 31, 2016**		—		—			—		—
June 30, 2016	June 30, 2016**		—		—			—		—
									$	2,676

* The difference between an increase in treasury capital and aggregate consideration for repurchased shares is allocated to the capital/owners, equity account dealer fees.

**The Board of Directors did not declare a tender offer for the quarters ended September 30, 2015, December 31, 2015, March 31, 2016 and June 30, 2016.

Our quarterly repurchases will be conducted on such terms as may be determined by our Board of Directors, or a committee thereof, in its complete and absolute discretion unless, in the judgment of the independent directors of our Board of Directors, or a committee thereof, such repurchases would not be in the best interests of our stockholders or would violate applicable law. We will conduct such repurchase offers in accordance with the requirements of Rule 13e-4 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the 1940 Act. In the months in which we repurchase shares, we will conduct repurchases on the same date that we hold our first monthly closing for the sale of shares in this offering. Any offer to repurchase shares will be conducted solely through tender offer materials mailed to each stockholder.

Note 10. Distributions

Subject to our Board of Directors’ discretion and applicable legal restrictions, we have historically authorized and declared ordinary cash distributions on a semi-monthly basis and paid such distributions on a semi-monthly basis. However, at the August 17, 2015 Board of Directors meeting, the Board determined that monthly distributions, at the same annual rate, would reduce costs and would be in the best interest of the shareholders. The distribution paid to shareholders on September 30, 2015, with a record date of August 30, 2015, represented the first monthly distribution. We may fund our cash distributions to shareholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, and dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies. We have not established limits on the amount of funds we may use from available sources to make distributions.

When we commenced operations, we initiated a policy of declaring semi-monthly distributions at an annual distribution rate of 7.35% per annum of our offering price. We have authorized, declared and paid distributions to our shareholders at that rate on a semi-monthly basis beginning in July 2012, then changed to a monthly distribution beginning in August 2015. Our distributions historically have not been based on our investment performance. Prior to September 2013, our distributions were supported by our Manager in the form of operating expense support payments to us, and a portion of our distributions constituted a return of capital. Since September 2013, we have not had an expense support agreement with our Manager and as a result a greater portion of our distributions have constituted a return of capital. A return of capital generally is a return of your investment rather than a return of earnings or gains derived from our investment activities.

As of June 30, 2016, the Fund had not accrued any stockholder distributions that were unpaid. As of December 31, 2015, the Fund had accrued $0.3 million in stockholder distributions that were unpaid. All amounts with record dates in December 2015 and paid in January 2016 had been accrued in the December 31, 2015 financial statements.

The following table reflects the distributions per share paid or payable in cash or with the DRIP on the Fund’s common stock to date (dollars in thousands except per share amounts), as well as the source of the distributions:

Source of Distribution by Cash vs. DRIP:

			Net		Realized
			Investment		Gain From		Return of				Paid in
Period	Per Share		Income		Investments		Capital		Total		Cash		DRIP
July 12, 2012 - September 30, 2012	$	0.183750	$	32	$	-	$	18	$	50	$	34	$	16
October 1, 2012 - December 31, 2012*		0.260750		118		-		82		200		123		77
January 1, 2013 - March 31, 2013*		0.262586		247		47		75		369		221		148
April 1, 2013 - June 30, 2013		0.186504		235		43		27		305		186		119
July 1, 2013 - September 30, 2013		0.186504		244		47		183		474		274		200
October 1, 2013 - December 31, 2013		0.186504		72		258		219		549		345		204
January 1, 2014 - March 31, 2014		0.186504		168		85		379		632		405		227
April 1, 2014 - June 30, 2014		0.186504		372		-		382		754		491		263
July 1, 2014 - September 30, 2014		0.184668		135		29		644		808		511		297
October 1, 2014 - December 31, 2014		0.181467		144		52		748		944		584		360
January 1, 2015 - March 31, 2015		0.179154		153		52		824		1,029		654		375
April 1, 2015 - June 30, 2015		0.179154		705		163		243		1,111		719		392
July 1, 2015 - September 30, 2015		0.209015		240		142		904		1,286		836		450
October 1, 2015 - December 31, 2015**		0.170315		—		68		996		1,064		685		379
January 1, 2016 – March 31, 2016 ***		0.169969		8		—		1,045		1,053		684		369
April 1, 2016 - June 30, 2016****		0.107188		—		—		669		669		452		217
TOTAL	$	3.020536	$	2,873	$	986	$	7,438	$	11,297	$	7,204	$	4,093

* Includes a special distribution of $0.077 per share.

** For the period from October 31, 2015 to December 31, 2015, the Fund had a net investment loss of approximately $268 thousand. That amount is reflected on the source of distributions table below in the distributions from paid in capital amount.

*** For the period from January 1, 2016 to March 31, 2016, the Fund had a realized loss from investments of approximately $700 thousand. That amount is reflected on the source of distributions table below in the distributions from paid in capital amount.

**** For the period from April 1, 2016 to June 30, 2016, the Fund had a net investment loss of approximately $4 thousand and a realized loss from investments of approximately $12.6 million. These amounts are reflected on the source of distributions table below in the distributions from paid in capital amount.

The following table shows the percentage of our distributions, which have been funded from net investment income, realized capital gains and paid in capital since the inception of operations:

Percentage of Distributions by Source:

			Net			Realized			Return
			Investment			Gain From			of
Period	Per Share		Income			Investments			Capital
July 12, 2012 - September 30, 2012	$	0.183750		64	%		0	%		36	%
October 1, 2012 - December 31, 2012 *		0.260750		59	%		0	%		41	%
January 1, 2013 - March 31, 2013*		0.262586		67	%		13	%		20	%
April 1, 2013 - June 30, 2013		0.186504		77	%		14	%		9	%
July 1, 2013 - September 30, 2013		0.186504		51	%		10	%		39	%
October 1, 2013 - December 31, 2013		0.186504		4	%		47	%		49	%
January 1, 2014 - March 31, 2014		0.186504		27	%		13	%		60	%
April 1, 2014 - June 30, 2014		0.186504		49	%		0	%		51	%
July 1, 2014 - September 30, 2014		0.184668		17	%		3	%		80	%
October 1, 2014 - December 31, 2014		0.181467		15	%		6	%		79	%
January 1, 2015 - March 31, 2015		0.179154		15	%		5	%		80	%
April 1, 2015 - June 30, 2015		0.179154		63	%		15	%		22	%
July 1, 2015 - September 30, 2015		0.209015		19	%		11	%		70	%
October 1, 2015 - December 31, 2015		0.170315		—	%		6	%		94	%
January 1, 2016 – March 31, 2016		0.169969		1	%		—	%		99	%
April 1, 2016 - June 30, 2016		0.107188		—	%		—	%		100	%

* 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 Fund has paid on its common stock (dollars in thousands) during the six months ended June 30, 2016 and the fiscal years ended December 31, 2015, 2014 and 2013:

	Six months ended June 30, 2016				Year ended December 31, 2015				Year ended December 31, 2014				Year ended December 31, 2013
Source of Distributions:
Distributions from net investment income	$	8	0.5	%	$	830	18.5	%	$	819	26.1	%	$	798	47.0	%
Distributions from realized gains		—	—			425	9.5			166	5.3			395	23.3
Distributions from paid In capital		1,714	99.5			3,235	72.0			2,153	68.6			504	29.7
Total	$	1,722	100.0	%	$	4,490	100.0	%	$	3,138	100.0	%	$	1,697	100.0	%

There were no distributions paid with borrowings, non-capital gain proceeds from sale of assets, distribution on account of preferred and common equity.

We expect to continue paying distributions at the same distribution rate, based on the current offering price, and that a substantial part of those distributions will constitute a return of capital for the foreseeable future. Our distributions will continue to constitute return of capital until our net investment income is sufficient to support our distribution rate, which will probably not occur until our Manager enters into an expense support agreement with us, our mix of interest and dividend paying assets increase, or our assets increase enough to lower our expense ratio, which we do not expect to occur until we have significantly more net assets than we do at present.

We are in a fund-raising stage. As such, we incur offering expenses of 1.5% of the gross offering proceeds. The chart below shows the percentages of distributions from net investment income excluding offering costs (dollars in thousands):

	Offering Expenses		Net Investment Income (Loss) excluding offering costs		% Distribution from Net Investment Income (Loss) excluding offering costs			% Distributions from Realized Gains excluding offering costs			% Distributions from Paid In Capital excluding offering costs
2016	$	—	$	8		1	%		—	%		99	%
2015	$	96	$	926		21	%		9	%		70	%
2014	$	352	$	1,171		37	%		5	%		58	%
2013	$	322	$	1,120		66	%		23	%		11	%
2012	$	142	$	292		100	%		0	%		0	%

Note 11. Financial Highlights

The following is a schedule of financial highlights for the six months ended June 30, 2016 and 2015:

	For the Six Months Ended June 30, 2016			For the Six Months Ended June 30, 2015

Per share data:
Net asset value, beginning of period	$	4.61		$	7.34

Results of operations ⁽¹⁾
Net investment income		0.00			0.14
Net realized gain (loss) on investments		(2.14	)		0.04
Net unrealized gain (loss) on investments		2.90			(0.09	)
Net increase in net assets resulting from operations		0.76			0.09

Stockholder distributions ⁽²⁾
Distributions from net investment income		-			(0.14	)
Distributions from realized gains		-			(0.04	)
Distributions from capital		(0.28	)		(0.18	)

Net decrease in net assets resulting from stockholder distributions		(0.28	)		(0.36	)

Capital share transactions
Impact from issuance of common stock ⁽³⁾		-			0.19
Impact from reinvestment of stockholder distributions ⁽⁴⁾		0.05			-

Net increase in net assets resulting from capital share transactions		0.05			0.19

Net asset value, end of period	$	5.14		$	7.26

Shares outstanding at end of period	$	6,263,323		$	6,313,300
Total return ⁽⁵⁾		15.14	%		2.47	%

Ratio/Supplemental data:
Net assets, end of period (in thousands)	$	32,181		$	45,850
Average net assets (in thousands)	$	32,004		$	42,140
Ratio of net investment income to average net assets ⁽⁷⁾		0.02	%		4.11	%
Ratio of operating expenses to average net assets ⁽⁷⁾		8.62	%		7.02	%
Portfolio turnover ratio ⁽⁶⁾		57.54	%		33.15	%

(1)	The per share amounts were derived by using the weighted average shares outstanding during the period.
(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 impact from reinvestment of stockholder distributions on a per share basis reflects the incremental net asset value changes as a result of the reinvestment of stockholder distributions.
(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.
(6)	Portfolio turnover rate is calculated using the lesser of year-to-date sales or purchases over the average of the invested assets at fair value. Not annualized.
(7)	Ratios are annualized and calculated based on average net assets using current and prior 3 quarter’s net assets.

Note 12. Subsequent Events

On May 23, 2016, the Board of Directors of the Fund approved resolutions to reorganize the Fund as a closed end fund that would operate as an “Interval Fund.” An Interval Fund is a closed end fund that has adopted a fundamental policy of making periodic repurchase offers of the fund’s shares pursuant to SEC Rule 23c-3. The reorganization is subject to shareholder approval. On September 29, 2016, the Fund filed a final proxy statement with the SEC to submit the reorganization to a vote of shareholders. The final proxy statement was submitted for shareholder approval on October 7, 2016 with the following resolutions relating to the reorganization:

Withdrawal of the Fund’s election to be treated as a BDC;

Reorganization of the Fund from a Maryland corporation to a Delaware Statutory Trust;

Approval of a fundamental policy under which the Fund will make annual repurchases offers of between 5% and 25% at the net asset value per share of the Fund;

Approval of fundamental restrictions of the Fund’s investments that are consistent with the Fund’s current investment strategy;

Approval of a new investment management agreement with the current Manager, which would result in the following changes to its management agreement: management fees would be calculated on gross assets instead of net assets; elimination of the current incentive fee on capital gains; all organization and offering expenses would be payable directly by the Fund, whereas they are now incurred by the Manager and reimbursed to the extent of 1.5% of gross offering proceeds.

The annual shareholder meeting was adjourned twice during the fourth quarter of 2016, as the proxy voting did not reach a quorum. During the last week of December 2016, a quorum was reached and the shareholders approved the conversion to an Interval Fund. Management anticipates the completion of the conversion during the second quarter of 2017. In the meantime, the Fund will continue to operate as a BDC.

On July 25, 2016, the Board of Directors of the Company declared one monthly distribution, and voted to keep the annual distribution rate at 7.35% of the $8.75 gross offering price. The distribution was to stockholders of record on July 25, 2016 and was paid on July 29, 2016.

On August 8, 2016, Logan’s Roadhouse, Inc. filed for bankruptcy in Delaware. The portfolio company entered into a restructuring support agreement with revolving facility lenders and holders of over 83.9% of approximately $378.0 million in notes that will reduce debt by over $300.0 million. As a part of the plan, the Company has identified 18 restaurants that it will close and expects to help employees with reassignments to other Logan’s restaurants. The portfolio company will seek interim approval to borrow as much as $10.0 million of a total of $25.0 million in debtor-in-possession financing.

On October 14, 2016, the Fund made an additional investment in a senior secured first lien loan of $0.8 million to GeoCommerce, Inc. The total investment in GeoCommerce, Inc. is now $3.3 million.

On October 24, 2016 and October 27, 2016, the Fund made additional investments in senior secured first lien loans of $0.3 million and $1.5 million, respectively, in Ansgar Media, LLC. The total investment in Ansgar Media, LLC is now $5.8 million.

On November 2, 2016, the Fund made an additional investment in a senior secured first lien loan of $0.8 million to Nima, LLC. The total investment in Nima, LLC is now $3.8 million.

On January 11, 2017, the Fund signed a senior secured loan agreement to invest $2.0 million in Digital Golf Technologies, LLC. The loan agreement specifies that the investment will be made in four draws of $0.5 million per draw. The initial draw of $0.5 million was made on January 17, 2017 and the second draw was made on March 3,2017. The two remaining draws are due on or around June 1, 2017 and September 1, 2017. In conjunction with this investment, the Fund will also receive, per $0.5 million draw, a Warrant to purchase 11,111 Series A Preferred Units for an aggregate purchase price of $1.00 in total with an aggregate value of $0.05 million. In the first quarter 2017, the Fund received warrants to purchase a total of 22,222 Series A Preferred Units.

On January 12, 2017, the Fund sold $0.6 million par value of investments in APX Group, Inc.'s 8.75% senior unsecured notes at the rate of $102.50.

On January 23, 2017, the Board of Directors of the Fund declared one monthly distribution, and voted to keep the annual distribution rate at 7.35% of the current $8.75 gross offering price. The distribution was to stockholders of record on January 23, 2017 and was paid on January 30, 2017.

On January 24, 2017, Goodman Networks, Inc. entered into a restructuring support agreement of the company's 12.125% senior secured notes due 2018. The restructuring support agreement sets forth the commitment of the company, the consenting noteholders, and the consenting equity holders to support a comprehensive restructuring of over $325.0 million of the company’s long term debt. The restructuring will be effectuated no later than February 27, 2017, through a joint prepackaged plan of reorganization to be filed under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court.

On February 1, 2017, APX Group Holdings, Inc. issued an additional $300.0 million aggregate principal amount of 7.875% senior secured notes due 2022. The net proceeds from this offering are intended to redeem $300.0 million aggregate principal amount of its 6.375% senior secured notes due 2019. In connection to the same redemption, $0.3 million of Fund's 6.375% senior secured notes were partially called at the rate of $103.188 on January 23, 2017.

On February 6, 2017, iHeartCommunications, Inc. announced the expiration of its private offer to holders of outstanding 10.0% senior notes due 2018 to exchange outstanding notes for newly-issued 11.25% priority guarantee notes due 2021. The Fund submitted its consent to accept the exchange offer on February 7, 2017.

On February 6, 2017, the Fund submitted its consent to receive 128.40 shares of the new reorganized holding common stock for every $1,000 in principal amount of unexchanged 10.75% senior secured second lien Logan's Roadhouse, Inc. notes.

On February, 16, 2017, the Fund made an additional investment of $0.45 million in a senior secured first lien loan to Nima, LLC.

On February 16, 2017, the Board of Directors of the Fund declared one monthly distribution, and voted to keep the annual distribution rate at 7.35% of the current $8.75 gross offering price. The distribution was to stockholders of record on February 16, 2017 and was paid on February 28, 2017.

On February 27, 2017, the Board of Directors of the Fund declared one monthly distribution, and voted to keep the annual distribution rate at 7.35% of the current $8.75 gross offering price. The distribution was to stockholders of record on March 1, 2017 and was paid on March 30, 2017.

On April 6, 2017, the Fund made an additional investment of $0.5 million in a senior secured first lien loan to Nima, LLC.

On April 7, 2017, the Fund made an investment of $1.34 million in a senior secured first lien loan to Vieste Group, LLC. In conjunction with this investment, the Fund received a Warrant to purchase 94,628.5017 Class A Units for an aggregate purchase price of $1.00 in total with an aggregate value of $0.11million.

On April 24, 2017, the Board of Directors of the Fund declared one monthly distribution, and voted to keep the annual distribution rate at 7.35% of the current $8.75 gross offering price. The distribution was to stockholders of record on April 24, 2017 and was paid on April 28, 2017.

On May 22, 2017, the Board of Directors of the Fund declared two monthly distributions, and voted to keep the annual distribution rate at 7.35% of the current $8.75 gross offering price. The distributions will be paid to stockholders of record on May 22, 2017, payable on May 30, 2017; and to stockholders of record on June 1, 2017, payable on June 30, 2017.

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 Co-Optivist Income BDC II, Inc., and the notes thereto. As used herein, the terms “we,” “us,” “our” and the “Fund” refer to VII Peaks Co-Optivist Income BDC II, Inc., a Maryland corporation and, as required by context to VII Peaks Capital, 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™ 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, senior secured term loan and equity-linked debt securities of companies that have a perceived risk of near term liquidity issues but have solid business fundamentals and prospects, including historical revenue growth, positive cash flow, significant and sustainable market presence, and sufficient asset coverage. We take a principal position in discounted debt securities with the primary goal of restructuring the terms of the debt to allow the target company to increase its liquidity and strengthen its balance sheet. Our typical target company has a debt redemption event (typically either a put or maturity event) on average within 24 months of our investment and has experienced a significant decline in its equity value reflective of a highly leverage capital structure or general market conditions. We believe that proactively guiding such companies to restructure their debt will allow them to increase liquidity and free up resources to grow their businesses rather than focusing on managing their debt obligations. We also believe that our involvement can allow the target company more flexibility to explore strategic alternatives, since the terms of the existing debt structure often limits strategic options for the target company. In addition, we also provide direct loans with equity warrant coverage to portfolio companies to help facilitate corporate expansion.

Our investment activities are managed by our Manager. 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 has an investment committee that is responsible for reviewing, discussing and approving each investment opportunity we seek to pursue. Our investment committee meets routinely to discuss new and existing opportunities and developments on current investments.

Critical Accounting Policies

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to the valuation of portfolio securities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Valuation of Portfolio Investments

We have adopted Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”), Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”), which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP 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 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. US Bank is the Fund custodian. Through US Bank, the Fund uses FT Interactive, a third-party valuation firm, to price the notes. The prices are reviewed by the CEO.

Level 3: Unobservable inputs for the asset or liability.

The investment portfolio is recorded on a trade date basis. 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. Twenty-five of the forty investments were valued using the closing market price at period end June 30, 2016.

The following table presents investments that were not valued using the closing market price, as of June 30, 2016:

Portfolio Company	Asset Type	Investment Coupon Rate			Maturity Date
Affinion Group, Inc.	Equity – Common Stock		-		-
Ansgar Media, LLC - Class B Units	Equity – Preferred Stock		-		-
Ansgar Media, LLC	Senior Secured First Lien Debt		12.00	%	September 8, 2017
Ansgar Media, LLC	Senior Secured First Lien Debt		12.00	%	January 11, 2018
Aspire Holdings ⁽¹⁾	Equity – Common Stock		-		-
Aspect Software, Inc. ⁽²⁾	Senior Unsecured Convertible Debt		3.00	%	May 23, 2023
Colt Defense, LLC	Senior Unsecured Debt		8.00	%	July 12, 2021
Education Management, LLC	Equity – Common Stock		-		-
Education Management, LLC	Warrant		-		-
GeoCommerce, Inc.	Senior Secured First Lien Debt		12.00	%	April 27, 2018
GeoCommerce, Inc.	Senior Secured First Lien Debt		12.00	%	May 15, 2018
GeoCommerce, Inc.	Warrant		-		-
Nima, LLC	Warrant		-		-
Nima, LLC	Senior Secured First Lien Debt		12.00	%	May 20, 2018
Nuverra Environmental Solutions, Inc.	Warrant		-		-

(1)

Converted from exchange of 12.00% Endeavour International Corp, senior secured first lien debt.

(2)

Securities that are not publicly-traded are valued at fair value as determined in good faith by our Board of Directors, or a committee thereof. 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, or a committee thereof; and

	•	the Board of Directors, or committee thereof, 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.

Revenue Recognition

Securities transactions are accounted for on the trade date. We generate investment income in the form of interest, dividend and fees earned on senior secured loans, senior secured notes, subordinated debt, senior unsecured debt, senior unsecured convertible debt and collateralized securities in our portfolio. The level of income we receive is directly related to the balance of collectible income producing investments multiplied by the coupon rate of our investments. Coupon interest income is adjusted for the amortization of premiums and accretion of discounts. We record interest income on an accrual basis to the extent that we expect to collect such amounts. The Fund stops accruing when the invested company defaults in payment and has passed the 30-day grace period, files for bankruptcy or goes through reorganization converting bonds to equity. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases.

Dividend income is recognized on the ex-dividend date for common equity securities and on an accrual basis for preferred equity securities to the extent that such amounts are expected to be collected or realized. In determining the amount of dividend income to recognize, if any, from cash distributions on common equity securities, we will assess many factors including a portfolio company’s cumulative undistributed income and operating cash flow. Cash distributions from common equity securities received in excess of such undistributed amounts are recorded first as a reduction of our investment and then as a realized gain on investment. We stop accruing interest or dividends on our investments when it is determined that the interest or dividend is not collectible. We assess the collectability of the interest and dividends based on many factors including the portfolio company’s ability to service our loan based on current and projected cash flows as well as the current valuation of the portfolio company’s current total enterprise value. For investments with payment-in-kind (“PIK”) interest and cumulative dividends, we base income and dividend accruals on the valuation of the PIK notes or securities received from the borrower or the redemption value of the security. If the portfolio company valuation indicates a value of the PIK notes or securities or redemption value that is not sufficient to cover the contractual interest or dividend, we will not accrue interest or dividend income on the notes or securities and will record an allowance for any accrued interest or dividend receivable as a reduction of interest or dividend income in the period we determine it is not collectible.

For loans and debt securities with contractual 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. Dividend income, if any, is recognized on an accrual basis to the extent that we expect to collect such amount. We record prepayment premiums on loans and debt securities as interest income when we receive such amounts. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees generated in connection with investments will be recognized when earned.

Loans and debt securities, including those that are individually identified as being impaired under ASC Topic 310 — Receivables (“ASC Topic 310”), are generally placed on non-accrual status immediately if, in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the debt agreement, or when principal or interest is past due 90 days or more. Interest accrued but not collected at the date a loan or security is placed on non-accrual status is reversed against interest income. Interest income is recognized on non-accrual loans or debt securities only to the extent received in cash. However, where there is doubt regarding the ultimate collectability of principal, cash receipts, whether designated as principal or interest, are thereafter applied to reduce the carrying value of the loan or debt security. Loans or securities are restored to accrual status only when interest and principal payments are brought current and future payments are reasonably assured.

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

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the weighted-average amortized cost 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 reflects 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 regulated investment company, or (“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.

Organizational and Offering Costs

U.S. Federal Income Taxes

The Fund has elected to be treated for U.S. Federal income tax purposes as a RIC under subchapter M of the Internal Revenue Code of 1986, as amended, or (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.

The Fund has evaluated the implications of ASC Topic 740, Accounting for Income Taxes (“ASC Topic 740”), for all open tax years and in all major tax jurisdictions, and determined that there is no material impact on the financial statements. The Fund continues to remain subject to examination by U.S. federal and state authorities for the years 2011 through 2015.

Portfolio and Investment Activity

During the six months ended June 30, 2016, we made $23.3 million of investments in new and existing portfolio companies and had $19.1 million in aggregate amount of exits, maturities and repayments, resulting in net investments of $4.2 million for the period. During the six months ended June 30, 2015, we made $14.9 million of investments in new and existing portfolio companies and had $12.3 million in aggregate amount of exits and repayments, resulting in net investments of $2.6 million for the period.

As of June 30, 2016, we have invested an aggregate of approximately $40.9 million in 40 investment positions in 30 portfolio companies. On June 30, 2016, the fair value of our investment positions was $37.9 million (including money market investments and the accrued interest of $0.5 million). As of such date, our estimated gross annual portfolio yield was 8.6% and gross annual portfolio yield to maturity was 8.7% (excluding equity investments and non-accrual investments) based on the purchase price of our investments. The average duration of our debt portfolio was approximately 2.00 years. During the six months ended June 30, 2016, five T-bills matured, we exited three portfolio companies in full and three companies in partial, for aggregate sales proceeds of $19.1 million. As of June 30, 2016, we had one portfolio investment in default of payment of its par value at maturity date, 10.75% Caesar’s Entertainment Corp., with a fair value of $0.3 million, which represented a negligible amount of our total portfolio.

The following table presents three debt investments that had not paid coupon interest as due beyond the thirty-day grace period, as of June 30, 2016. Interest on these investments was accrued through the date that the last coupon payment was received:

Portfolio Company	Asset Type	Investment Coupon Rate			Maturity Date
Logan's Roadhouse, Inc. ⁽¹⁾	Senior Secured Second Lien Debt		10.75	%	October 15, 2017
Saratoga Resources, Inc.	Senior Secured Second Lien Debt		12.50	%	July 1, 2016
UCI International, Inc.	Senior Unsecured Debt		8.63	%	February 15, 2019

(1)

On August 8, 2016, filed for bankruptcy in Delaware. The company is in the initial stages of its restructuring process.

The following table presents nine equity investments which are non-income producing, as of June 30, 2016:

Portfolio Company		Asset Type
Affinion Group, Inc.		Equity – Common Stock
Ansgar Media, LLC - Class B Units		Equity – Preferred Stock
Aspire Holdings ⁽¹⁾		Equity – Common Stock
Education Management, LLC		Equity – Common Stock
Education Management, LLC		Warrant
GeoCommerce, Inc.		Warrant
NII Holdings, Inc.		Equity – Common Stock
Nima, LLC		Warrant
Nuverra Environmental Solutions, Inc.		Warrant

(1)

Converted from exchange of 12.00% Endeavour International Corp First Lien Bonds.

The following table presents four investments that were completely written off during the three months ended June 30, 2016:

Portfolio Company	Investment Type	Investment Coupon Rate			Maturity Date
Aspect Software, Inc.	Senior Secured Second Lien Debt		10.63	%	May 15, 2017
Suntech Power Holdings Company, Ltd.	Senior Unsecured Debt		3.00	%	May 15, 2013
QuickSilver Resources, Inc.	Senior Subordinated Debt		7.13	%	April 1, 2016
Relativity Media, LLC - Class E Units	Equity – Preferred Stock		-		-

The following table shows the weighted average yield of our portfolio composition based on fair value at June 30, 2016:

	At June 30, 2016
	Percentage of Total Portfolio			Weighted Average Current Coupon Yield
Investments – Money Market		4.6	%		—	%
Senior Secured First Lien Debt		37.3			10.7
Senior Secured Second Lien Debt		2.0			11.3
Senior Unsecured Debt		17.8			10.4
Senior Subordinated Debt		3.7			9.6
Senior Unsecured Convertible Debt		0.7			3.0
U.S. Government Securities		13.4			0.4
Equity Securities		20.5			n/a
Total		100.0	%		8.6	%*

* 8.6% yield is on non-defaulted, non-equity positions and excludes money market investments.

As of June 30, 2016, our non-defaulted, non-equity portfolio had a yield to maturity of 8.7%, and an average duration of 2.00 years.

The following table shows the weighted average yield of our portfolio composition based on fair value at December 31, 2015:

	At December 31, 2015
	Percentage of Total Portfolio			Weighted Average Current Coupon Yield
Investments – Money Market		18.9	%		—	%
Senior Secured First Lien Debt		27.4			9.5
Senior Secured Second Lien Debt		5.4			10.6
Senior Unsecured Debt		19.0			10.0
Senior Subordinated Debt		4.5			9.6
U.S. Government Securities		15.0			0.2
Equity Securities		9.8			n/a
Total		100.0	%		7.6	%*

* 7.6% yield is on non-defaulted, non-equity positions and excludes money market investments.

As of December 31, 2015, our non-defaulted, non-equity portfolio had a yield to maturity of 7.6%, and an average duration of 1.80 years.

The following table shows the portfolio composition by industry grouping at fair value at June 30, 2016 (dollars in thousands):

	At June 30, 2016
	Investments at Fair Value		Percentage of Total Portfolio
Media: Broadcasting & Subscription	$	6,809		18.2	%
U.S. Government Securities		5,014		13.4
Technology		4,605		12.3
Consumer Electronics		4,000		10.7
Retail		2,626		7.0
Media: Advertising, Printing & Publishing		2,182		5.8
Aerospace and Defense		1,839		4.9
Investments – Money Market		1,736		4.6
Automobile		1,619		4.3
Energy: Oil & Gas		1,605		4.3
Services: Consumer		1,405		3.8
Metals & Mining		1,402		3.8
Healthcare & Pharmaceuticals		1,013		2.7
Telecommunications		703		1.9
Environmental Industries		481		1.3
Hotel, Gaming & Leisure		297		0.8
Beverage, Food & Tobacco		85		0.2
Total	$	37,421		100.0	%

The following table shows the portfolio composition by industry grouping at fair value at December 31, 2015 (dollars in thousands):

	At December 31, 2015
	Investments at Fair Value		Percentage of Total Portfolio
Investments – Money Market	$	6,210		18.9	%
U.S. Government Securities		4,946		15.0
Media: Broadcasting & Subscription		4,641		14.1
Metals & Mining		2,137		6.5
Media: Advertising, Printing & Publishing		2,116		6.4
Retail		1,969		6.0
Aerospace and Defense		1,734		5.3
Telecommunications		1,640		5.0
Energy: Oil & Gas		1,593		4.8
Automobile		1,578		4.8
Services: Consumer		1,476		4.5
Healthcare & Pharmaceuticals		1,139		3.4
Hotel, Gaming & Leisure		765		2.3
Beverage, Food & Tobacco		531		1.6
Environmental Industries		457		1.4
Total	$	32,932		100.0	%

Our fair value of total investments was $37.4 million as of June 30, 2016 as compared to $32.9 million as of December 31, 2015. The increase in the fair value of our investments was attributable to two factors: a) The surprise outcome of the Brexit vote, in addition to Dovish Central Bank actions across the globe, led to broad bond strength over the quarter with high-yield returning 5.5%; b) investments in the senior secured first lien notes of GeoCommerce, Inc. and Nima, LLC that granted us cashless warrants.

Discussion and Analysis of Results of Operations

Results of Operations

The results of operations are based on revenue less expenses, adjusted for the impact of the realized gain/loss and change in unrealized gain/loss on our investment portfolio. To the extent that it is expected to be received, revenue is recognized on an accrual basis. Income is earned as coupon interest adjusted for the amortization of premiums and accretion of discounts on the high-yield corporate debt investments. Expenses include professional services, management fees, administrative services, organizational and offering costs and other general and administrative. Realized gains/losses are from investments sold, written off, or called at an advantageous price. The unrealized gain/loss is the change in the market price on investments in the portfolio at period end, subject to significant fluctuation.

Operating results for the three and six months ended June 30, 2016 and 2015 were as follows (dollars in thousands):

	For the Three Months Ended June 30, 2016			For the Three Months Ended June 30, 2015
Total investment income	$	739		$	1,412
Total operating expenses		743			707
Net investment income (loss)		(4	)		705
Net realized gain (loss) from investments		(12,603	)		163
Net unrealized appreciation (depreciation) on investments		16,735			(526	)

Net increase in net assets resulting from operations	$	4,128		$	342

	For the Six Months Ended June 30, 2016			For the Six Months Ended June 30, 2015
Total investment income	$	1,376		$	2,326
Total operating expenses		1,373			1,468
Net investment income (loss)		3			858
Net realized gain (loss) from investments		(13,303	)		215
Net unrealized appreciation (depreciation) on investments		18,006			(550	)

Net increase in net assets resulting from operations	$	4,706		$	523

Revenues

We generated investment income of $0.7 million and $1.4 million for the three and six months ended June 30, 2016, respectively, as compared to $1.4 million and $2.3 million for the three and six months ended June 30, 2015, respectively. Interest revenue was $0.7 million and $1.3 million for the three and six months ended June 30, 2016, respectively, as compared to $0.9 million and $1.8 million for the three and six months ended June 30, 2015, respectively. The decrease in interest revenue in 2016 as compared to 2015 was attributable to an increase in debt investments placed on non-accrual status, restructuring of certain debt investments into equity investments as well as a reallocation of portfolio investments from debt investments to equity investments in 2015. Fee income was $0.01 million and $0.03 million for the three and six months ended June 30, 2016, respectively, as compared to $0.5 million for the three and six months ended June 30, 2015, respectively. The decrease in fee income in 2016 as compared to 2015 was attributable to a 5% origination fee that was earned and immediately accrued on our investment in Relativity Media, LLC in 2015. The fee income earned on investments in 2016 was lower and is being amortized over the term of the loan instead of realized upon receipt.

Interest from debt investments is in the form of interest and fees earned on senior secured loans, senior secured notes, subordinated debt, senior unsecured debt, senior unsecured convertible debt and collateralized securities in our debt portfolio. Our debt portfolio constituted approximately 74.9% of investment portfolio at June 30, 2016 (excluding money market investments). The level of interest income we receive is directly related to the balance of collectible income producing investments multiplied by the weighted average yield of our investments, offset by debt investments held in non-accrual status. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. The average balance of the debt portfolio during the six months ended June 30, 2016 was lower than the six months ended June 30, 2015, which was attributable to an increase in debt investments held on non-accrual status, the restructuring of certain debt instruments into equity instruments as well as a reallocation of portfolio investments from debt investments to equity investments in 2015, which resulted in the decrease in interest income in 2016 as compared to 2015. At June 30, 2016, the weighted average coupon yield of our debt investments was 8.6%, as compared to 9.5% as of June 30, 2015. For the six months ended June 30, 2016, the average net assets were $32.0 million, as compared to $42.1 million for the six months ended June 30, 2015.

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, 2016 and 2015 was as follows (dollars in thousands):

	For the Three Months Ended June 30, 2016		For the Three Months Ended June 30, 2015

Professional fees	$	294	$	134
Director fees		11		12
Insurance		29		24
Interest expense		52		-
Management fees – related parties		161		229
Administrative services – related parties		54		54
General and administrative (CFO salary and related party travel expenses, respectively)		104		167
Transfer Agent Fees		38		47
Offering expense		-		40
Total operating expenses	$	743	$	707

	For the Six Months Ended June 30, 2016		For the Six Months Ended June 30, 2015

Professional fees	$	472	$	230
Director fees		19		30
Insurance		56		48
Interest expense		127		-
Management fees – related parties		303		444
Administrative services – related parties		108		108
General and administrative (CFO salary and related party travel expenses, respectively)		222		419
Transfer Agent Fees		66		93
Offering expense		-		96
Total operating expenses	$	1,373	$	1,468

For the three months ended June 30, 2016 and 2015, our operating expenses were $0.7 million and $0.7 million, respectively. Included within general and administrative expenses for the three months ended June 30, 2016 and 2015 were $0.03 million and $0.03 million, respectively, for the cost of our chief financial officer’s salary reimbursed to the Manager. Also included within general and administrative expenses for the three months ended June 30, 2016 and 2015 were $0.01 million and $0.03 million, respectively, for related party travel expenses reimbursed to the Manager. For the six months ended June 30, 2016 and 2015, our operating expenses were $1.4 million and $1.5 million, respectively. Included within general and administrative expenses for the six months ended June 30, 2016 and 2015 were $0.06 million and $0.06 million, respectively, for the cost of our chief financial officer’s salary reimbursed to the Manager. Also included within general and administrative expenses for the six months ended June 30, 2016 and 2015 were $0.02 million and $0.06 million, respectively, for related party travel expenses reimbursed to the Manager. The slight decrease in expenses for the six months ended June 30, 2016 as compared to June 30, 2015 was primarily due to the fact that the Fund has not raised new capital since April 30, 2015 as our registration statement has not been declared effective by the Securities and Exchange Commission, or (“SEC”). With no additional capital coming into the Fund, no offering expenses were incurred, and general and administrative expenses were less as there was less travel and conference fees.

Management fees for the three and six months ended June 30, 2016 and 2015 remain at 2% of the net asset value. The offering costs are consistent at 1.5% of the gross closing proceeds for the three and six months ended June 30, 2016 and 2015. However, since the Fund has not been open to new investments, there has not been any offering costs expense since June 30, 2015.

Net Investment Income (Loss)

Our net investment income (loss) totaled $(0.004) million and $0.7 million for the three months ended June 30, 2016 and 2015, respectively. Our net investment income totaled $0.003 million and $0.9 million for the six months ended June 30, 2016 and 2015, respectively. Our net investment income (loss) was attributable to investment income less operating expenses for the period. For the three months ended June 30, 2016 and 2015, total investment income was $0.7 million and $1.4 million, respectively. For the same periods, the total investment income included $0.01 million and $0.5 million of non-recurring fees, respectively. For the six months ended June 30, 2016 and 2015, total investment income was $1.4 million and $2.3 million, respectively. For the same periods, the total investment income included $0.03 million and $0.5 million of non-recurring fees.

The decrease in net investment income for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015 was primarily due to the decrease in interest revenue attributable to an increase in debt investments placed on non-accrual status, restructuring of certain debt investments into equity investments as well as a reallocation of portfolio investments from debt investments to equity investments in 2015, partially offset by a decrease in total expenses. For the three months ended June 30, 2016 and 2015, total operating expenses were $0.7 million and $0.7 million, respectively. For the six months ended June 30, 2016 and 2015, total operating expenses were $1.4 million and $1.5 million, respectively.

Net Realized Gains or Losses from Investments

For the three and six months ended June 30, 2016, we had $14.7 million and $19.1 million of sales, maturities, write-offs and principal repayments, resulting in $12.6 million and $13.3 million of realized loss, respectively. For the three and six months ended June 30, 2015, we had $10.2 million and $12.3 million of principal repayments, resulting in $0.2 million and $0.2 million of realized gain, respectively.

Net Change in Unrealized Appreciation or Depreciation on Investments

For the three and six months ended June 30, 2016, we experienced $16.7 million and $18.0 million of unrealized appreciation, respectively. For the three and six months ended June 30, 2015, we experienced $0.5 million and $0.6 million of unrealized depreciation, respectively. The increase in unrealized appreciation during the first half of 2016 was due to three main factors. First, despite the negative trends and volatility early in the year, the high-yield index has swiftly recovered and is now up 9.32% year–to-date. Much of this was due to the improving global market for commodities, particularly the price of oil, as well as in the metals and mining sector. High-yield bonds in both of these areas outperformed the overall market. In terms of the quality spectrum, CCC-rated bonds led the high-yield market, which underscores the healthy appetite for risk among investors in recent months. In addition, a continued search for yield and accommodative Central Banks’ monetary policies were supportive of high-yield market returns. Second, the Fund invested in senior secured first lien notes of two companies – GeoCommerce, Inc. and Nima, LLC, which provided the Fund with cashless warrants amounting to approximately $2.0 million of unrealized appreciation. Third, an unrealized depreciation of $10.4 million from our investment in Relativity Media, LLC was reclassified as a realized loss. Although, there has been an increase in unrealized appreciation in fiscal 2016, our net asset value per share declined significantly since June 2015, mainly due to two factors. First, we incurred a $10.4 million loss on our investment in Relativity Media, LLC Series E preferred stock. Our loss on our investment in Relativity Media, LLC has been offset to some extent by unrealized appreciation in another one of our portfolio investments, Ansgar Media, LLC. We initially acquired a 25% equity interest in Ansgar Media, LLC in connection with senior secured debt investments. Ansgar Media, LLC has since raised initial equity financing at a pre-money equity valuation of $40.0 million. While Ansgar is ahead of its business plan operationally, we have used an enterprise valuation of $12.0 million, which has resulted in a net equity ownership value of $2.1 million based upon a current 24.4% equity ownership interest in Ansgar and after applying a liquidity discount. Below is a table that shows our pro forma NAV per share assuming that our investment in Ansgar Media, LLC is valued at full value:

Adjusted Pro Forma NAV per share (non GAAP)
Current NAV per share	$	5.14
Ansgar Equity Ownership post Equity raise (in millions)	$	10.00
Adjusted NAV per share	$	6.40

Although, there has been an increase in unrealized appreciation on fiscal 2016, our net asset value per share declined significantly since June 2015, mainly due to two factors. First we incurred a $10.4 million loss on our investment in Relativity Media, LLC Series E preferred stock. Second, we encountered greater than average declines in certain positions that were caused by conditions unique to the company or industry. In particular, we had a number of positions that either initiated a restructuring of their indebtedness (either in Chapter 11 bankruptcy or prepackaged bankruptcy) or announced that they were considering a restructuring. Such announcements generally reduce liquidity in the secondary market creating greater mispricing in underlying bonds. Until the bankruptcy or other restructuring process is complete, it becomes difficult to ascertain whether some of these positions will result in a loss of principal or full recovery of principal given their position in the capital structure of the issuer and the underlying asset values. Generally, we expect much higher recoveries or full payment for senior secured first lien type bonds, as compared to senior secured second lien or unsecured bonds for defaulted bonds.

Changes in Net Assets from Operations

For the three and six months ended June 30, 2016, we recorded a net increase in net assets resulting from operations of $4.1 million and $4.7 million, respectively. For the three and six months ended June 30, 2016, this increase is mainly due to net unrealized appreciation of $16.7 million and $18.0 million, respectively, partially offset by net investment loss of $0.004 million and net investment income of $0.003 million, respectively, and net realized loss from investments of $12.6 million and $13.3 million, respectively, on our portfolio investments. This increase is largely due to a strong rally in high yield markets because of increases in the market price of oil, which has positively impacted our investments in the energy sector and the completion of restructuring plans by a few of our bond investment companies. Overall, the portfolio experienced a market value increase, with an increase in net unrealized appreciation on investments of $18.0 million for the six months ended June 30, 2016. Based on 6,237,728 and 6,217,239 weighted average common shares outstanding for the three and six months ended June 30, 2016, our per share net increase in net assets resulting from operations was $0.66 and $0.76, respectively.

For the three and six months ended June 30, 2015, we recorded a net increase in net assets resulting from operations of $0.3 million and $0.5 million, respectively. For the three and six months ended June 30, 2015, this increase is mainly due to net investment income of $0.7 million and $0.9 million, respectively, and net realized gain from investment of $0.2 million and $0.2 million, respectively, earned on our portfolio investments, partially offset by net unrealized depreciation of $0.5 million and $0.6 million, respectively. Based on 6,199,493 and 5,965,660 weighted average common shares outstanding for the three and six months ended June 30, 2015 our per share net increase in net assets resulting from operations was $0.06 and $0.09, respectively.

Liquidity and Capital Resources

On August 4, 2015, we entered into an agreement with Wells Fargo Advisors, LLC for the purpose of obtaining a revolving line of credit. The amount we can borrow is based upon the value of cash deposited in an account at Wells Fargo Advisors, LLC and the treasury notes that Wells Fargo purchases, which serve as collateral for the loan. On August 27, 2015, we initially drew down $2.0 million. As of December 31, 2015, the outstanding balance was $4.5 million. As of June 30, 2016, the outstanding balance under this credit line was $5.1 million. The interest rate on the outstanding balance is currently 3.00%.

On September 10, 2015, we entered into an agreement with Morgan Stanley Private Bank, N.A. The amount we can borrow is based upon the value of cash deposited in an account at Morgan Stanley Private Bank, N.A., which serves as a collateral for the loan. The maximum amount, which we may borrow under the line of credit, is $1.8 million. As of June 30, 2016, there was no outstanding balance under this credit line and the account was closed.

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, 2016, we had issued 6.6 million shares of common stock, including 0.4 million shares under our distribution reinvestment plan (“DRIP”) less 0.3 million shares redeemed under our tender offer. As of June 30, 2016, we had received gross proceeds from our continuous offering of total $64.9 million, including $4.1 million under our DRIP less $2.9 million paid to redeem shares in our quarterly tenders.

We currently sell our shares on a continuous basis. On May 23, 2016, the Board of Directors of the Fund and the Pricing Committee of the Board made a final decision to approve a price reduction from $9.25 to $8.75 per share. On November 24, 2015, the Board of Directors of the Fund and the Pricing Committee of the Board had approved a price reduction from $9.75 to $9.25 per share effective for the Funds next closing date and next declared distribution date. 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. However, since April 30, 2015, we have not been able to sell any shares in our continuous offering because our registration statement has been under review by the SEC.

Prior to investing in portfolio 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, 2016 and December 31, 2015, we had $1.7 million and $6.2 million, respectively, invested in money market investments pending investment in debt instruments.

For the six months ended June 30, 2016, we experienced a net decrease in money market investments of $4.5 million. For the six months ended June 30, 2016, approximately $0.8 million was used for our financing activities, which primarily consisted of $6.9 million repayments of the priority credit line and $1.4 million in distributions, partially offset by $7.5 million received through the priority credit line. We generated approximately $0.8 million of cash provided by our operating activities mainly as the result of the purchase of new portfolio debt investments of $23.3 million, partially offset by the receipt of proceeds from the sale of, repayment of and principal payments on portfolio debt investments of $19.1 million.

Distributions

Subject to our Board of Directors’ discretion and applicable legal restrictions, we have historically authorized and declared ordinary cash distributions on a semi-monthly basis and paid such distributions on a semi-monthly basis. However, at the August 17, 2015 Board of Directors meeting, the Board determined that monthly distributions, at the same annual rate, would reduce costs and would be in the best interest of the shareholders. The distribution paid to shareholders on September 30, 2015, with a record date of August 30, 2015, represented the first monthly distribution. Any distributions to our shareholders will be declared out of assets legally available for distribution. We may fund our cash distributions to shareholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, and dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies. We have not established limits on the amount of funds we may use from available sources to make distributions.

When we commenced operations, we initiated a policy of declaring semi-monthly distributions at an annual distribution rate of 7.35% per annum of our offering price. We have authorized, declared and paid distributions to our shareholders at that rate on a semi-monthly basis beginning in July 2012, then changed to a monthly distribution beginning in August 2015. Based upon our current level of operations, we estimate that about 100.0% of our distributions will constitute a return of capital. Our distributions historically have not been based on our investment performance. Prior to September 2013, our distributions were supported by our Manager in the form of operating expense support payments to us, and a portion of our distributions constituted a return of capital. Since September 2013, we have not had an expense support agreement with our Manager and as a result a greater portion of our distributions have constituted a return of capital. A return of capital generally is a return of your investment rather than a return of earnings or gains derived from our investment activities constitutes the return of capital previously paid to us for shares of our common stock.

The following table shows the percentage of our distributions which have been funded from net investment income, realized capital gains and paid in capital since the inception of operations:

			Net			Realized			Return
			Investment			Gain From			of
Period	Per Share		Income			Investments			Capital
July 12, 2012 - September 30, 2012	$	0.183750		64	%		0	%		36	%
October 1, 2012 - December 31, 2012*		0.260750		59	%		0	%		41	%
January 1, 2013 - March 31, 2013*		0.262586		67	%		13	%		20	%
April 1, 2013 - June 30, 2013		0.186504		77	%		14	%		9	%
July 1, 2013 - September 30, 2013		0.186504		51	%		10	%		39	%
October 1, 2013 - December 31, 2013		0.186504		4	%		47	%		49	%
January 1, 2014 - March 31, 2014		0.186504		27	%		13	%		60	%
April 1, 2014 - June 30, 2014		0.186504		49	%		0	%		51	%
July 1, 2014 - September 30, 2014		0.184668		17	%		3	%		80	%
October 1, 2014 - December 31, 2014		0.181467		15	%		6	%		79	%
January 1, 2015 - March 31, 2015		0.179154		15	%		5	%		80	%
April 1, 2015 - June 30, 2015		0.179154		63	%		15	%		22	%
July 1, 2015 - September 30, 2015		0.209015		19	%		11	%		70	%
October 1, 2015 - December 31, 2015 **		0.170315		—	%		6	%		94	%
January 1, 2016 – March 31, 2016 ***		0.169969		1	%		—	%		99	%
April 1, 2016 – June 30, 2016****		0.107188		—	%		—	%		100	%

* Includes a special distribution of $0.077 per share.

We expect to continue making distributions at the same distribution rate, based on the current offering price, unless our results of operations, our general financial condition, general economic conditions, or other factors prohibit us from doing so. From time to time, but not less than quarterly, we review our accounts to determine whether distributions to our shareholders are appropriate. 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 distribution (i.e., paid from ordinary income, paid from net capital gain on the sale of securities, or a return of capital) will be mailed to our shareholders. We expect to continue paying distributions at the same distribution rate, based on the current offering price, and that a substantial part of those distributions will constitute a return of capital for the foreseeable future. Furthermore, our ability to generate net investment income sufficient to cover our monthly dividend has been hindered by the fact that we have a number of portfolio investments that are on non-accrual status, and because we hold more equity investments that do not generate regular interest or dividend income. Our distributions will continue to constitute a return of capital until our net investment income is sufficient to support our distribution rate, which will probably not occur until our Manager enters into an expense support agreement with us, our mix of interest and dividend paying assets increase, or our assets increase enough to lower our expense ratio, which we do not expect to occur until we have significantly more net assets than we do at present. As a result, for the foreseeable future, a significant portion of the distributions we make will 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.

The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year. The actual tax characteristics of distributions to shareholders are reported to shareholders annually on a Form 1099-DIV.

We have elected to be treated, beginning with our taxable year ended December 31, 2013, as a RIC under the Code. To obtain and maintain RIC tax treatment, we must, among other things, distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our shareholders. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of: (i) 98% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period generally ended on October 31 of the calendar year (unless an election is made by us to use our taxable year) and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no federal income tax.

The following table reflects the sources of the cash distributions on a tax basis that the Fund has paid on its common stock (dollars in thousands) during the six months ended June 30, 2016 and fiscal years ended December 31, 2015, 2014 and 2013:

Source of Distributions:	Six months ended June 30, 2016				Year ended December 31, 2015				Year ended December 31, 2014				Year ended December 31, 2013
Distributions from net investment income	$	8	0.5	%	$	830	18.5	%	$	819	26.1	%	$	798	47.0	%
Distributions from realized gains		—	—			425	9.5			166	5.3			395	23.3
Distributions from paid In capital		1,714	99.5			3,235	72.0			2,153	68.6			504	29.7
Total	$	1,722	100.0	%	$	4,490	100.0	%	$	3,138	100.0	%	$	1,697	100.0	%

Distribution Reinvestment Plan

We have adopted an “opt-in” 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.

We are in a fund-raising stage. As such, we incur offering expenses of 1.5% of the gross offering proceeds. The chart below shows the percentages of distributions from Net Investment Income excluding offering costs:

	Offering Expenses		Net Investment Income (Loss) excluding offering costs		% Distribution from Net Investment Income (Loss) excluding offering costs			% Distributions from Realized Gains excluding offering costs			% Distributions from Paid In Capital excluding offering costs
2016	$	—	$	8		1	%		—	%		99	%
2015	$	96	$	926		21	%		9	%		70	%
2014	$	352	$	1,171		37	%		5	%		58	%
2013	$	322	$	1,120		66	%		23	%		11	%
2012	$	142	$	292		100	%		0	%		0	%

Election as a RIC

We elected to be treated as a RIC under Subchapter M of the Code for U.S. federal income tax purposes. 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, whereby we pay certain fees and reimbursements. These include 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 may also be involved in other ventures, some of which may compete with us for investment opportunities.

As a business development company (“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 financial condition were 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 the June 30, 2016 levels would result in a decrease or an increase in net asset value of $0.6 million or 2.0%.

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

We did not make any changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the six months ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

However, subsequent to June 30, 2016, our Board of Directors elected to restate our financial statements for the three and six months ended June 30, 2016, and for the three and nine months ended September 30, 2016, in order to correct an error in the accounting for certain warrants received in connection with direct loans that we made. Specifically, we did not assign a cost to the warrants based upon their fair value on the date of receipt relative to the total fair value of the debt and warrants received. The difference between the face amount of the debt and its recorded cost resulting from the assignment of value to the warrants is to be treated as original issue discount, and accreted into interest income over the life of the loan. The change will result in an increase in net investment income, and a decrease in unrealized appreciation in the same amount, in each period, and will have no impact on our net asset value per share, as previously reported. Management previously concluded that its disclosure controls were effective for those periods. In response, in 2017 we implemented additional controls whereby officers will seek outside guidance in regard to accounting for transactions that we have not historically engaged in and which present novel issues. We will also obtain third party valuations of certain Level III assets in certain situations to corroborate managements’ internal valuations or guide management in valuing such assets.

We believe the material deficiency has been remediated by the additional controls and procedures that have been implemented.

During the year ended December 31, 2015, we determined that a material weakness in internal control over financial reporting existed relating to the determination of offering expenses that should have been borne by our Fund manager instead of us, and reimbursed to our Manager at the rate of 1.5% of gross offering proceeds in accordance with our investment management agreement with the Fund manager, and that the material weakness existed from the fourth quarter of 2013 to the end of fiscal 2014, including at December 31, 2013 and 2014 when management had previously concluded that its internal controls were effective. In response, in 2015 we implemented additional controls whereby officers will map out financial statement line items to the relevant portions of the agreements with our Fund manager to ensure compliance and proper accounting for amounts due thereunder. We believe the material weakness has been remediated by the additional controls and procedures that have been implemented.

Part II

OTHER INFORMATION

Item 1. Legal Proceedings

On July 30, 2015, Relativity Media, LLC (“Relativity”) filed a voluntary Chapter 11 case in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). The Fund owns 855,079 shares of Series E Preferred Stock of Relativity. On October 19, 2015, Relativity filed an adversary proceeding against VII Peaks Capital, LLC (“VII Peaks”) in the Bankruptcy Court, styled Relativity Fashion, LLC, et al. v. VII Peaks Capital, LLC, Adversary No. 15-1361 (the “Adversary Proceeding”), alleging that our investment manager, VII Peaks breached a commitment to provide $30 million of financing as part of a proposed reorganization of Relativity. The Fund was not named as a defendant in the Adversary Proceeding. On October 20, 2015, Relativity sought and obtained from the Bankruptcy Court an ex parte temporary restraining order (the “TRO”) that barred VII Peaks and “its agents, servants, officers, employees and attorneys, and all persons in active concert or participation with them from transferring, assigning, encumbering, or taking any other action with respect to any and all funds” in the US Bank and Wells Fargo accounts which belong to the Fund. Neither the Fund nor VII Peaks were provided with prior notice of the hearing on the TRO or was present at the hearing. The two accounts affected by the TRO contained substantially all of the Fund’s assets. The TRO was dissolved pursuant to a Stipulation and Agreed Order entered by the Bankruptcy Court on October 28, 2015 (the “Stipulation”), pursuant to which the parties agreed to engage in negotiations to resolve their dispute. As part of the Stipulation, VII Peaks agreed to cause its clients to deposit $3.0 million in escrow with its counsel while negotiations are pending, of which $2.5 million was provided by the Fund. The negotiations did not result in a settlement, and the funds in escrow were returned to VII Peaks as of December 15, 2015.

Relativity then filed a reorganization plan which provided that the Series E preferred stock would receive no consideration under the plan. The Fund filed an objection to the plan. On February 2, 2016, at the hearing on confirmation Relativity’s plan, VII Peaks and Relativity reached a memorandum of understanding regarding a settlement of Relativity’s claims against the VII Peaks and the Fund, as well as the Fund’s objection to the plan. Under the settlement, VII Peaks or the funds it manages, including the Fund, would receive warrants in the reorganized debtor and certain film distribution rights. VII Peaks or funds it manages would make a new $5.0 million loan to the reorganized debtor. On March 18, 2016, the Bankruptcy Court approved Relativity’s plan of reorganization, and Relativity emerged from bankruptcy in May 2016.

The proposed settlement with Relativity received opposition from certain of Relativity's creditors, and as a result Relativity decided not to submit the settlement for bankruptcy court approval at this time. If the settlement is not approved by the bankruptcy court, Relativity’s claims against VII Peaks will be assigned to a litigation trust created under Relativity’s plan to hold and prosecute a variety of claims held by Relativity’s bankruptcy estate. VII Peaks continues to defend the lawsuit as if it will not be settled. On March 1, 2016, VII Peaks filed a motion for summary judgment to dismiss Relativity’s adversarial complaint. In June 2016, Relativity filed a response to VII Peaks’ motion, and in July 2016 VII Peaks filed a reply to Relativity’s response. The matter is currently under advisement by the court. We do not believe that the Fund has any exposure in the lawsuit since no claims have been asserted against the Fund and it has not been named in the case.

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, 2015.

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 Co-Optivist Income BDC II, Inc.

Date: May 25, 2017	By	/s/ Gurpreet S. Chandhoke
		Gurpreet S. Chandhoke
		Chairman of the Board of Directors, Chief Executive Officer and President (Principal Executive Officer)

	VII Peaks Co-Optivist Income BDC II, Inc.

Date: May 25, 2017	By	/s/ Michelle E. MacDonald
		Michelle E. MacDonald Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer)

VII Peaks Co-Optivist Income BDC II, Inc. - FORM 10-Q/A - May 25, 2017

Attached files

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