SIGULER GUFF SMALL BUSINESS CREDIT OPPORTUNITIES FUND, INC - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - SIGULER GUFF SMALL BUSINESS CREDIT OPPORTUNITIES FUND, INC	ex32_2.htm
EX-32.1 - EXHIBIT 32.1 - SIGULER GUFF SMALL BUSINESS CREDIT OPPORTUNITIES FUND, INC	ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - SIGULER GUFF SMALL BUSINESS CREDIT OPPORTUNITIES FUND, INC	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - SIGULER GUFF SMALL BUSINESS CREDIT OPPORTUNITIES FUND, INC	ex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2017

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

SIGULER GUFF SMALL BUSINESS CREDIT OPPORTUNITIES FUND, INC.

(Exact name of registrant as specified in its charter)

Commission File Number: 814-01157

Maryland		47-1290650
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

825 Third Avenue, 10^th Floor, New York, NY 10022

(Address of principal executive offices) (Zip code)

(212) 332-5100

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name or former address, 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

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

☐ Yes ☒ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company in Rule 12b-2 of the Exchange Act

Large accelerated filer ☐

Accelerated Filer ☐

Non-accelerated filer ☒ (Do not check if a smaller reporting company)	Smaller reporting company ☐

Emerging Growth 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 pursuant to Section 13(a) of the Exchange Act. ☐

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

APPLICABLE ONLY TO CORPORATE ISSUERS

As of November 13, 2017 there were 100,000 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	5

	Consolidated Statements of Assets and Liabilities (Unaudited) As of September 30, 2017 and December 31, 2016	5

	Consolidated Schedules of Portfolio Investments (Unaudited) As of September 30, 2017 and December 31, 2016	6

	Consolidated Statements of Operations (Unaudited) For the Three Months Ended September 30, 2017 and 2016 and the Nine Months Ended September 30, 2017 and 2016	8

	Consolidated Statements of Changes in Net Assets (Unaudited) For the Nine Months Ended September 30, 2017 and 2016	9

	Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2017 and 2016	10

	Notes to Consolidated Financial Statements (Unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	37

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 3.	Defaults Upon Senior Securities	39

Item 4.	Mine Safety Disclosures	39

Item 5.	Other Information	39

Item 6.	Exhibits	40

	SIGNATURES	41

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology. You should read statements that contain these words carefully because they discuss our plans, strategies, prospects and expectations concerning our business, operating results, financial condition and other similar matters. We believe that it is important to communicate our future expectations to our investors. Our forward-looking statements include information in this report regarding general domestic and global economic conditions, our future financing plans, our ability to operate as a business development company (“BDC”) and the expected performance of, and the yield on, our portfolio companies. There may be events in the future, however, that we are not able to predict accurately or control. The factors listed under “Risk Factors” as well as any cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. The occurrence of the events described in these risk factors and elsewhere in this report could have a material adverse effect on our business, results of operation and financial position. Any forward-looking statement made by us in this report speaks only as of the date of this report. Factors or events that could cause our actual results to differ from our forward-looking statements may emerge from time to time, and it is not possible for us to predict all of them. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the U.S. Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Under Section 21E(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in periodic reports we file under the Exchange Act, such as this quarterly report on Form 10-Q.

The following factors are among those that may cause actual results to differ materially from our forward-looking statements:

our future operating results;

changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets;

uncertainty surrounding the strength of the U.S. economic recovery;

our business prospects and the prospects of our portfolio companies;

the impact of investments that we expect to make;

the impact of increased competition;

our contractual arrangements and relationships with third parties;

the dependence of our future success on the general economy and its impact on the industries in which we invest;

the ability of our current prospective portfolio companies to achieve their objectives;

the relative and absolute performance of our investment adviser;

our expected financings and investments;

the use of borrowed money to finance a portion of our investments;

our ability to make distributions;

Table of Contents

the adequacy of our cash resources and working capital including our ability to raise additional capital;

the timing of cash flows, if any, from the operations of our portfolio companies;

the impact of future acquisitions and divestitures;

the effect of changes in tax laws and regulations and interpretations thereof;

our ability to maintain our status as a BDC and a qualifying regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”);

actual and potential conflicts of interest with Siguler Guff Advisers, LLC (“Siguler Guff Advisers” or the “Investment Manager”) and its affiliates;

general price and volume fluctuations in the financial markets;

the ability of the Investment Manager to attract and retain highly talented professionals; and

the impact on our business of new legislation.

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Consolidated Statements of Assets and Liabilities (Unaudited)

	September 30, 2017		December 31, 2016
Assets
Portfolio Investments at fair value:
Non-controlled, non-affiliated portfolio investments	$	39,374,065	$	23,211,946
(cost, September 30, 2017: $39,374,065; December 31, 2016: $23,211,946)
Cash		141,246		122,577
Interest receivable		203,470		108,702
Other receivable		189,673		-
Net deferred tax asset		112		94,837
Total Assets	$	39,908,566	$	23,538,062

Liabilities
Due to Affiliates	$	7,100,782	$	5,323,799
Investor note credit facility		4,600,000		-
Accrued expenses and other liabilities		128,378		208,409
Taxes payable		69,765		96,758
Total Liabilities		11,898,925		5,628,966
Net Assets	$	28,009,641	$	17,909,096

Commitments and Contingencies (Note 8)

Components of Net Assets
Common stock, $0.001 par value, 10,000,000 shares authorized, 100,000 issued and 100,000 outstanding at September 30, 2017 and December 31, 2016		100		100
Paid-in capital in excess of par		26,154,808		17,686,258
Accumulated undistributed net investment income/(loss)		1,854,733		222,738
Total Net Assets	$	28,009,641	$	17,909,096

Net Asset Value Per Share	$	280.10	$	179.09

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

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Consolidated Schedules of Portfolio Investments (Unaudited)

September 30, 2017

Portfolio Investment	Industry	Interest Rate			Maturity	Principal / Shares		Fair Value

Senior Subordinated Notes (112%) ^{(1), (2)}
United States
C&M Technologies Group, Inc.	Industrial Equipment & Components		12.00	%	09/30/2022	$	4,156,928	$	4,088,971
Earthlite, LLC ⁽³⁾	Business Equipment		11.00	%	07/11/2022	$	1,425,350		1,401,419
Gatekeeper Systems, Inc. ⁽³⁾	Security and Protection Services		11.00	%	03/02/2022	$	2,766,950		2,725,240
La Tavola, LLC ⁽³⁾	Commercial Retail		11.00	%	06/01/2021	$	3,681,573		3,634,332
Medsurant Holdings, LLC	Healthcare Services		12.25	%	06/18/2021	$	2,921,898		2,878,433
Northeastern Bus Rebuilders Inc. ⁽³⁾	Business Services		10.00	%	06/05/2022	$	5,602,816		5,528,014
S.R. Smith, LLC	Consumer / Sporting Goods		11.00	%	03/27/2022	$	2,649,963		2,619,442
Schlotterbeck & Foss, LLC ⁽³⁾	Processed & Packaged Goods		11.00	%	03/01/2023	$	4,974,244		4,888,130
Trachte, LLC ⁽³⁾	Manufacturing		11.00	%	04/13/2021	$	3,686,424		3,640,551
Total Senior Subordinated Notes (Cost: $31,404,532)								$	31,404,532

Term Notes (6%) ^{(1), (2)}
United States
NetFortris Operating Co., Inc. ⁽⁴⁾ (Cost: $1,799,424)	Telecommunications		9.63	%	02/21/2021	$	1,807,360	$	1,799,424

Total Senior Subordinated and Term Notes (Cost: $33,203,956)								$	33,203,956

Money Market Fund (22%)
United States
Western Asset Institutional U.S. Treasury Reserves (Cost: $6,170,109)	U.S. Treasury Bills and Notes						6,170,109	$	6,170,109

Total United States (Cost: $39,374,065)								$	39,374,065

Total Portfolio Investments (Cost: $39,374,065)								$	39,374,065

Notes:

(1)

The Company 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 the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation; "Affiliate Investments" are defined as investments in companies in which the Company owns between 5% and 25% of the voting securities; and "Non-Control/Non-Affiliate Investments" are defined as investments that are neither Control Investments nor Affiliate Investments. The Portfolio Investments are classified as Non-Control/Non-Affiliate Investments.

(2)	The Portfolio Investments are valued using unobservable inputs (level 3). Refer to Note 2 in the accompanying notes to the consolidated financial statements for more information.

(3)	The Portfolio Investments have a stated payment-in-kind interest income rate of up to 2.00% which is not reflected in the stated interest rate.

(4)

The interest rate of this investment is equal to the greater of LIBOR plus 8.40% or 8.90% through the fiscal quarter ending December 31, 2017. Thereafter, the interest rate is equal to the greater of LIBOR plus 8.40% or 8.90% if the senior leverage ratio is greater than or equal to 3.50x, the greater of LIBOR plus 9.00% or 9.50% if the senior leverage ratio is less than 3.50x and greater than or equal to 3.00x or the greater of LIBOR plus 9.50% or 10.00% if the senior leverage ratio is less than 3.00x. The senior leverage ratio is equal to total obligations minus total cash divided by EBITDA of the portfolio investment.

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

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Consolidated Schedules of Portfolio Investments (Unaudited)

December 31, 2016

Portfolio Investment	Industry	Interest Rate			Maturity	Principal / Shares		Fair Value

Senior Subordinated Notes (129%) ^{(1), (2)}
United States
Earthlite, LLC ⁽³⁾	Business Equipment		11.00	%	07/11/2022	$	1,339,496	$	1,314,575
Gatekeeper Systems, Inc. ⁽³⁾	Security and Protection Services		11.00	%	03/02/2022	$	1,942,640		1,910,130
La Tavola, LLC ⁽³⁾	Commercial Retail		11.00	%	06/01/2021	$	3,433,977		3,382,949
Medsurant Holdings, LLC	Healthcare Services		12.25	%	06/18/2021	$	2,745,902		2,698,054
Northeastern Bus Rebuilders Inc. ⁽³⁾	Business Services		10.00	%	06/05/2022	$	5,265,338		5,187,086
Rudy's Food Products, Inc. ⁽³⁾	Processed & Packaged Goods		11.00	%	07/05/2021	$	5,361,235		5,267,650
Trachte, LLC ⁽³⁾	Manufacturing		11.00	%	04/13/2021	$	3,438,524		3,388,650
Total Senior Subordinated Notes (Cost: $23,149,094)								$	23,149,094

Money Market Fund (0%)
United States
Western Asset Institutional U.S. Treasury Reserves (Cost: $62,852)	U.S. Treasury Bills and Notes						62,852	$	62,852

Total United States (Cost: $23,211,946)								$	23,211,946

Total Portfolio Investments (Cost: $23,211,946)								$	23,211,946

Notes:

(1)

(2)	The Portfolio Investments are valued using unobservable inputs (level 3). Refer to Note 2 in the accompanying notes to the consolidated financial statements for more information.

(3)	The Portfolio Investments have a stated payment-in-kind interest income rate of up to 2.00% which is not reflected in the stated interest rate.

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

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Consolidated Statements of Operations (Unaudited)

	For the Three Months Ended September 30, 2017			For the Nine Months Ended September 30, 2017			For the Three Months Ended September 30, 2016			For the Nine Months Ended September 30, 2016
Investment Income
Non-Controlled, Non-Affiliated Investments:
Interest income	$	1,151,473		$	2,744,148		$	353,527		$	931,323
Other income		16,531			247,294			-			-
Payment-in-kind interest income		48,003			146,181			32,809			77,752
Total Investment Income		1,216,007			3,137,623			386,336			1,009,075

Expenses
Investment Management Fee		123,043			308,857			54,589			143,862
Professional fees		96,783			191,691			105,167			331,630
Directors fees		41,250			126,750			41,250			124,750
Other general and administrative		8,449			17,540			3,258			7,248
Total Expenses		269,525			644,838			204,264			607,490
Investment Management Fee Waived (Note 7)		(8,420	)		(7,927	)		(15,597	)		(48,588	)
Total Net Expenses		261,105			636,911			188,667			558,902
Net Investment Income/(Loss) before income tax (benefit)/expense		954,902			2,500,712			197,669			450,173
Income tax (benefit)/expense (Note 2)		393,012			960,539			131,372			107,968
Net Investment Income/(Loss) after income tax (benefit)/expense		561,890			1,540,173			66,297			342,205

Realized Gain/(Loss) on Portfolio Investments
Non-Controlled, Non-Affiliated Investments:
Net Realized Gain/(Loss)		6,138			91,822			-			-
Net Realized Gain/(Loss) on Portfolio Investments		6,138			91,822			-			-

Net Increase/(Decrease) in Net Assets Resulting from Operations	$	568,028		$	1,631,995		$	66,297		$	342,205

Net Investment Income/(Loss) after income tax (benefit)/expense Per Share (Basic and Diluted)	$	5.62		$	15.40		$	0.66		$	3.42

Net Increase/(Decrease) in Net Assets Resulting from Operations Per Share (Basic and Diluted)	$	5.68		$	16.32		$	0.66		$	3.42
Weighted average shares outstanding		100,000			100,000			100,000			100,000

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

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Consolidated Statements of Changes in Net Assets (Unaudited)

	For the Nine Months Ended September 30, 2017		For the Nine Months Ended September 30, 2016

Net Increase/(Decrease) in Net Assets Resulting from Operations
Net investment income/(loss) after income tax (benefit)/expense	$	1,540,173	$	342,205
Net realized gain/(loss) on Portfolio Investments		91,822		-
Net Increase/(Decrease) in Net Assets Resulting from Operations		1,631,995		342,205

Capital Stock Transactions
Contributions from stockholder		8,468,550		5,843,267
Net Increase in Net Assets From Capital Stock Transactions		8,468,550		5,843,267

Total Increase in Net Assets
Net assets at beginning of period		17,909,096		6,467,902
Net assets at end of period	$	28,009,641	$	12,653,374


Capital Share Activity
Shares issued		-		-
Shares redeemed		-		-
Net Increase/(Decrease) in Shares Outstanding		-		-


Undistributed Net Investment Income/(Loss)	$	1,854,733	$	(182,984	)

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

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Consolidated Statements of Cash Flows (Unaudited)

	For the Nine Months Ended September 30, 2017			For the Nine Months Ended September 30, 2016
Cash Flows From Operating Activities
Net Increase/(Decrease) in Net Assets Resulting from Operations	$	1,631,995		$	342,205
Adjustments to reconcile Net Increase/(Decrease) in Net Assets
Resulting from Operations to Net Cash Used in Operating Activities:
Net Realized Gain/(Loss) on Portfolio Investments		(91,822	)		-
Purchases of Portfolio Investments		(21,628,961	)		(6,079,884	)
Sales of Portfolio Investments		5,762,147			-
Payment-in-kind interest income		(146,181	)		(77,752	)
Accretion of discount on notes		(57,302	)		(17,214	)
Decrease/(Increase) in interest receivable		(94,768	)		(23,230	)
Decrease/(Increase) in other receivable		(189,673	)		-
Decrease/(Increase) in net deferred tax asset		94,725			(54,704	)
(Decrease)/Increase in due to Affiliates		1,776,983			170,862
(Decrease)/Increase in accrued expenses and other liabilities		(80,031	)		(41,472	)
(Decrease)/Increase in taxes payable		(26,993	)		36,272
Net Cash Used in Operating Activities		(13,049,881	)		(5,744,917	)

Cash Flows From Financing Activities
Payment of receivable from stockholder		-			25,000
Contributions from stockholder		8,468,550			5,818,267
(Decrease)/Increase in investor note credit facility		4,600,000			-
Net Cash Provided by Financing Activities		13,068,550			5,843,267
Net Increase/(Decrease) in Cash		18,669			98,350

Cash
Beginning of period		122,577			102,615
End of period	$	141,246		$	200,965

Supplemental cash flow information
Income Taxes Paid	$	897,411		$	126,400

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

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2017

1.	Business and Organization

Siguler Guff Small Business Credit Opportunities Fund, Inc. (“SBCOF” or the “Company”), was incorporated in Maryland on July 7, 2014 as a non-diversified, closed-end management investment company and elected status as a business development company (a “BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”) on July 1, 2015. Siguler Guff Advisers, LLC (the “Investment Manager”) serves as the Company’s Investment Manager. The Investment Manager is an investment adviser registered with the U.S. Securities and Exchange Commission, pursuant to the 1940 Act. One hundred percent of the stock of the Company is held by Siguler Guff Small Business Credit Opportunities Fund, LP (the “Partnership”). Prior to commencing its operations on October 13, 2015, the Company had no operations other than the issuance to the Partnership of 100,000 shares of common stock, $0.001 par value for $25,000 in September 2014.

The Company’s investment objective is to achieve attractive risk-adjusted returns by generating current income from debt investments. There can be no assurance that the Company will attain its investment objective. The Company will typically invest in U.S. companies in the lower middle market segment. The Investment Manager defines the “lower middle market” as privately-owned companies with between $2 to $15 million of earnings before interest, taxes, depreciation, and amortization (“EBITDA”), and between $10 to $100 million of revenue. Investments take the form of mezzanine debt as well as some “unitranche” loans with a first lien on a company’s assets, as well as second lien loans. The Partnership generally seeks to purchase equity securities alongside the Company’s investments into those same companies, generally with an aggregate cost of up to 20% of the value of the Company’s total investment. The Company also may extend mezzanine financing in forms other than subordinated loans, such as convertible loans and preferred stock.

The Company jointly co-invests in investments alongside the Partnership and Siguler Guff SBCOF Parallel Fund, LP (the “Parallel Partnership”) and may co-invest with other investment funds managed by or otherwise affiliated with the Investment Manager (collectively, the “Affiliated Funds”). The Company and the Affiliated Funds generally invest pro-rata and pari passu with each other in investments, except when tax, regulatory or investment restrictions prevent the Company or the Affiliated Funds from investing. The General Partner of the Partnership and Parallel Partnership is an Affiliate of the Investment Manager.

The Company is subject to certain investment guidelines and restrictions as set forth in its registration statement filed with the U.S. Securities and Exchange Commission on Form 10.

2.	Summary of Significant Accounting Policies

Unaudited Interim Consolidated Financial Statements

The accompanying unaudited consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to this Quarterly Report on 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. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair statement of results for the interim periods. The results of operations for interim periods are not necessarily indicative of operating results for an entire year.

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2017

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2016, which are included in the Company's Annual Report on Form 10-K filed with the SEC on March 31, 2016.

Basis of Accounting

These consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and such differences could be material. The most significant estimates inherent in the preparation of the Company's consolidated financial statements are the valuation of investments and revenue recognition.

The Company is an investment company and follows the accounting and reporting guidance as prescribed by Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 946, Financial Services – Investment Companies (“ASC 946”).

The financial statements include portfolio investments at fair value of $39,374,065 at September 30, 2017 and $23,211,946 at December 31, 2016. The portfolio investments represent 140% of net assets at September 30, 2017 and 129% of net assets at December 31, 2016 and their fair values have been determined in good faith by the Company's Board of Directors (“Directors”). Because of the inherent uncertainty of valuation, the determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

Consolidation

The Company has certain wholly-owned subsidiaries, including subsidiaries that are not consolidated for U.S. federal income tax purposes, which hold certain portfolio investments of the Company. These subsidiaries are consolidated with the Company for accounting purposes, and the portfolio investments held by the subsidiaries are included in the Company's consolidated financial statements as investments. All significant intercompany balances and transactions have been eliminated. The investments held through the subsidiaries are reflected in the Consolidated Schedule of Portfolio Investments in addition to any investments the Company holds directly. As provided under Regulation S-X and ASC 946, the Company will generally not consolidate its investment in a company other than a wholly-owned investment company or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of certain of its wholly-owned subsidiaries in its financial statements.

Valuation of Portfolio Investments

The Financial Accounting Standards Board ("FASB") ASC 820, Fair Value Measurements and Disclosures ("ASC 820") defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A liability's fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments' complexity.

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2017

Assets and liabilities recorded at fair value in the Company's consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1 - Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Under ASC 820, the Company performs detailed valuations of its debt investments for which quotations are not readily available on an individual basis, using bond yield, market and income approaches as appropriate. In certain instances, the Company may use alternative methodologies, including recent purchase transactions, asset liquidation, expected recovery model or other alternative approaches to estimate the fair value.

Investments where market quotations for securities of the same issue are readily available on an exchange are marked-to-market at fair value at the closing price on the financial statement date. Financial instruments with readily available quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value.

Under the bond yield approach, the Company uses bond yield models to determine the present value of the future cash flow streams of its debt investments. The Company reviews various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assesses the information in the valuation process.

Under the market approach, the Company estimates the enterprise value of the portfolio companies in which it invests. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which the Company derives a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, the Company analyzes various factors, including the portfolio company's historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA, cash flows, net income or revenues. The Company generally requires portfolio companies to provide annual audited and quarterly or monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year.

Under the income approach, the Company generally prepares and analyzes discounted cash flow models based on projections of the future free cash flows of the business.

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2017

The fair value of the Company's portfolio investments at September 30, 2017 and December 31, 2016 was determined in good faith by the Directors. The Directors are ultimately responsible for the valuation of the portfolio investments at fair value as determined in good faith pursuant to the Company's valuation policy. Because of the inherent uncertainty of valuation, these estimated fair values do not necessarily represent amounts that might be ultimately realized and the differences could be material.

The following table summarizes the level of the Company’s assets measured at fair value as of September 30, 2017 and December 31, 2016:

	Assets at Fair Value as of September 30, 2017
	Level 1		Level 2		Level 3		Total

Senior Subordinated Notes	$	-	$	-	$	31,404,532	$	31,404,532
Term Notes		-		-		1,799,424		1,799,424
Money Market Fund		6,170,109		-		-		6,170,109
Total Portfolio Investments	$	6,170,109	$	-	$	33,203,956	$	39,374,065

	Assets at Fair Value as of December 31, 2016
	Level 1		Level 2		Level 3		Total

Senior Subordinated Notes	$	-	$	-	$	23,149,094	$	23,149,094
Money Market Fund		62,852		-		-		62,852
Total Portfolio Investments	$	62,852	$	-	$	23,149,094	$	23,211,946

At September 30, 2017 and December 31, 2016, 100% of the Company’s portfolio investments have been classified within Level 3, with the exception of the Money Market Fund. Assumptions used by the Company due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Company's results of operations. The following table summarizes the significant unobservable inputs the Company used to value investments categorized within Level 3. The below table is not intended to be all-inclusive, but instead captures the significant unobservable inputs relevant to the determination of fair values:

				Unobservable Input as of September 30, 2017
Investment Type	Fair Value¹		Primary Valuation Technique	Input	Range

Senior Subordinated Notes	$	19,807,989	Discounted Cash Flow	Discount Rate		10.0% - 14.0	%


Total	$	19,807,989

Not reflected in the table above are Level 3 investments that have been primarily valued based upon recent transactions totaling $13,395,967 as of September 30, 2017.

				Unobservable Input as of December 31, 2016
Investment Type	Fair Value¹		Primary Valuation Technique	Input	Range

Senior Subordinated Notes	$	14,737,303	Discounted Cash Flow	Discount Rate		10.0% - 14.0	%


Total	$	14,737,303

Not reflected in the table above are Level 3 investments that have been primarily valued based upon recent transactions totaling $8,411,791 as of December 31, 2016.

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2017

The following is a rollforward of the portfolio investments in which significant unobservable inputs (Level 3) were used in determining fair value:

	Fair Value Measurements using Significant Unobservable Inputs (Level 3)
	For the Three Months Ended September 30, 2017
	Beginning Balance		Purchases		Sales Proceeds		Reallocations		Accretion/Payment- in-Kind Interest Income		Net Realized Gain/(Loss)		Ending Balance
Senior Subordinated Notes	$	24,705,044	$	4,883,260	$	-	$	1,769,228	$	47,000	$	-	$	31,404,532
Term Notes		1,678,220		-		-		120,710		494		-		1,799,424
Total	$	26,383,264	$	4,883,260	$	-	$	1,889,938	$	47,494	$	-	$	33,203,956

	For the Nine Months Ended September 30, 2017
	Beginning Balance		Purchases		Sales Proceeds			Reallocations		Accretion/Payment- in-Kind Interest Income		Net Realized Gain/(Loss)		Ending Balance
Senior Subordinated Notes	$	23,149,094	$	12,252,740	$	(5,762,147	)	$	1,470,640	$	202,383	$	91,822	$	31,404,532
Term Notes		-		1,798,324		-			-		1,100		-		1,799,424
Total	$	23,149,094	$	14,051,064	$	(5,762,147	)	$	1,470,640	$	203,483	$	91,822	$	33,203,956

	For the Three Months Ended September 30, 2016
	Beginning Balance		Purchases		Sales Proceeds		Reallocations		Accretion/Payment- in-Kind Interest Income		Net Realized Gain/(Loss)		Ending Balance
Senior Subordinated Notes	$	10,632,044	$	2,335,939	$	-	$	-	$	40,378	$	-	$	13,008,361
Term Notes		-		-		-		-		-		-		-
Total	$	10,632,044	$	2,335,939	$	-	$	-	$	40,378	$	-	$	13,008,361

	For the Nine Months Ended September 30, 2016
	Beginning Balance		Purchases		Sales Proceeds		Reallocations		Accretion/Payment- in-Kind Interest Income		Net Realized Gain/(Loss)		Ending Balance
Senior Subordinated Notes	$	6,833,511	$	6,079,884	$	-	$	-	$	94,966	$	-	$	13,008,361
Term Notes		-		-		-		-		-		-		-
Total	$	6,833,511	$	6,079,884	$	-	$	-	$	94,966	$	-	$	13,008,361

Net change in unrealized gain/(loss) and net realized gain/(loss), if any, on Level 3 portfolio investments in the table above are included in the accompanying Consolidated Statement of Operations. For the periods ended September 30, 2017 and September 30, 2016, the Company has a net change in unrealized gain/(loss) of $0 on Level 3 portfolio investments still held by the Company as of the financial statement date.

Investments

Security transactions are accounted for on the trade date unless there are substantial conditions to the purchase. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment. Unrealized gains or losses primarily reflect the change in investment values, including the reversal of previously recorded unrealized gains or losses when gains or losses are realized. Realized gains or losses on the disposition of investments are calculated using the specific identification method.

Cash

Cash is comprised of deposit accounts held at one United States financial institution. During the period, the balances held at the financial institution may at times exceed federally insured limits.

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2017

Income and Expense

Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on investments when it is determined that interest is no longer collectible. Fees received upon closing a transaction generally are treated as a reduction in the cost basis of the investment. Any resulting discount, or closing fee received, from recording the loan or otherwise purchasing a security at a discount, is accreted into interest income over the life of the loan using the effective-yield method.

The Company has investments in debt securities which contain payment-in-kind ("PIK") interest provisions. PIK interest is computed at the contractual rate specified in each investment agreement and added to the principal balance of the investment and recorded as interest income. The Company stops accruing PIK interest on investments when it is determined that PIK interest is no longer collectible.

Other income includes the estimated amount of the exit fee due in connection with the purchase of the NetFortris Operating Co., Inc. term notes as well as a prepayment fee received in connection with the sale of the Rudy's Food Products, Inc. senior subordinated notes.

Expenses include investment management fees, legal fees, directors' fees, audit and tax service expenses, and other general and administrative expenses. Expenses are recognized on an accrual basis.

Reallocations

Additional Limited Partners may be admitted to the Partnership and existing Limited Partners may increase their Capital Commitments, with the consent of the General Partner at any time up to and including the Final Closing. Each Capital Commitment of such additional Limited Partner and each increased Capital Commitment, shall be treated as having been made, as of the Initial Closing date for all purposes of the Agreement.

Prior to the Final Closing, portfolio investments and items of income and expense were allocated according to the committed capital ownership percentages as of the latest Closing. Following the Final Closing, reallocation of portfolio investments and items of income and expense between the Company, the Partnership and the Parallel Partnership has occurred.

As a result, included in the Consolidated Statements of Operations for the three and nine month periods ended September 30, 2017 are reallocations of amounts previously included in the Consolidated Statements of Operations for the year ended December 31, 2016. Below is a summary of such adjustments:

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2017

	2016 As Reported			Reallocations (to)/from Parallel Partnership			2016 Adjusted
Investment Income
Non-Controlled, Non-Affiliated Investments:
Interest income	$	1,890,751		$	82,819		$	1,973,570
Payment-in-kind interest income		157,660			7,995			165,655
Total Investment Income		2,048,411			90,815			2,139,226

Expenses
Investment Management Fee		295,764			20,635			316,399
Professional fees		508,701			453			509,154
Directors fees		172,500			-			172,500
Other general and administrative		8,832			(50	)		8,782
Total Expenses		985,797			21,038			1,006,835
Investment Management Fee Waived (Note 7)		(77,534	)		(7,927	)		(85,461	)
Total Net Expenses		908,263			13,111			921,374
Net Investment Income/(Loss) before income tax (benefit)/expense		1,140,148			77,704			1,217,852
Income tax (benefit)/expense (Note 2)		392,221			-			392,221
Net Investment Income/(Loss) after income tax (benefit)/expense		747,927			77,704			825,631
Net Increase/(Decrease) in Net Assets Resulting from Operations	$	747,927		$	77,704		$	825,631

Net Investment Income/(Loss) and Net Increase/(Decrease) in Net Assets Resulting from Operations Per Share (Basic and Diluted)	$	7.48		$	0.78		$	8.26
Weighted average shares outstanding		100,000			-			100,000

Income Taxes

During the period ended September 30, 2017 and the year ended December 31, 2016, the Company did not qualify to be treated as a regulated investment company, or RIC, for federal income tax purposes. As such, the Company will be treated as a corporation for U.S. federal income tax purposes. It is anticipated that, by the end of the third year of its investment operations, the Company will seek to meet the requirements, including diversification, gross income, and distribution requirements, to qualify for the special pass-through status available to RICs under the Internal Revenue Code, and thus to be relieved of federal income tax on that part of its net investment income and realized capital gains that it distributes. Unless and until the Company meets these requirements, it will be taxed as a corporation on its taxable income for that year even if that income is distributed to the Partnership (its sole stockholder), and all distributions out of its earnings and profits will be taxable as dividends to the investors of the Partnership; thus, such income will be subject to two layers of tax (although corporate Limited Partners may be entitled to a dividends-received deduction). There is no assurance that the Company will meet the requirements to qualify as a RIC or be able to maintain such status.

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2017

Income taxes payable/(receivable) and prepaid taxes, including deferred benefits, consists of the following:

	For the Nine Months Ended September 30, 2017			For the Year Ended December 31, 2016
Federal income taxes:
Current	$	67,996		$	79,211
Deferred		(99	)		(83,598	)
State income taxes:
Current		1,769			17,547
Deferred		(13	)		(11,239	)
Total	$	69,653		$	1,921

The provision for income taxes is composed of the following charges/(benefits):

Current:	For the Three Months Ended September 30, 2017		For the Nine Months Ended September 30, 2017		For the Three Months Ended September 30, 2016			For the Nine Months Ended September 30, 2016
Federal (1)	$	339,875	$	754,392	$	128,612		$	144,132
State (2)		51,827		111,422		15,698			18,540
Total Current		391,702		865,814		144,310			162,672
Deferred:
Federal		1,163		83,499		(11,185	)		(48,612	)
State		147		11,226		(1,753	)		(6,092	)
Total Deferred		1,310		94,725		(12,938	)		(54,704	)
Total Net (Benefit)/Expense	$	393,012	$	960,539	$	131,372		$	107,968

(1)

The current federal income tax (benefit)/expense is net of the use of federal net operating losses totaling $45,939 as of September 30, 2016.

(2)

The current state income tax (benefit)/expense is net of the use of state net operating losses totaling $41,822 as of September 30, 2016.

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2017

The deferred tax assets and liabilities have been recognized in the Consolidated Statement of Assets and Liabilities as follows:

	For the Nine Months Ended September 30, 2017			For the Year Ended December 31, 2016
Deferred Tax Assets:
Accrued Professional Fees	$	41,414		$	76,718
Organizational Expenses		113,488			120,277
Debt Issuance Costs		74,978			66,828
Total Deferred Tax Assets	$	229,880		$	263,823
Deferred Tax Liabilities:
Interest Income	$	65,380		$	-
Total Deferred Tax Liabilities	$	65,380		$	-
Valuation Allowance		(164,388	)		(168,986	)
Net Deferred Income Taxes	$	112		$	94,837

The Company recognizes deferred tax assets to the extent that it believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.

As of September 30, 2017 and December 31, 2016, the Company concluded that it was more likely than not that an amount of the deferred tax assets, relating to the period after RIC qualification, would not be utilized. Therefore, the Company recorded a valuation allowance of $164,388 and $168,986 against its net deferred tax assets, for the period ending September 30, 2017 and for the year ending December 31, 2016, respectively, representing the portion of net deferred tax assets for which the Company is not expected to realize a benefit after the Company meets RIC qualification. If the Company determines that it would be able to realize net deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

As of September 30, 2017 and December 31, 2016, the Company had no federal or state net operating loss carryforwards.

The effective tax rate varied from the statutory federal income tax rates. The effective tax rate is affected by a number of factors, the most significant of which has been the state income taxes and valuation allowance related to our deferred tax assets.

	For the Nine Months Ended September 30, 2017			For the Year Ended December 31, 2016
Computed "Expected" Tax Rate		34.00	%		34.00	%
Permanent Differences		0.06	%		0.00	%
State Income Taxes, Net of Federal Income Tax Benefit		3.11	%		2.93	%
Deferred Tax Asset Valuation Allowance Impact		(0.13	)%		(2.53	)%
Effective Tax Rate		37.04	%		34.40	%

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2017

The Company records uncertain tax positions in accordance with FASB ASC 740, Income Taxes (“ASC 740”) on the basis of a two-step process whereby (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, it recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company has determined that there are no uncertain tax positions that would have a material impact to the financial statements of the Company, and therefore, no provisions are required to be recorded by the Company. The Company does not anticipate significant increases to uncertain tax positions in the next twelve months. The Company will recognize any interest and penalties, if applicable, for any uncertain tax positions as a component of income tax expense. No interest or penalties were recorded during the period ended September 30, 2017 or accrued for as of September 30, 2017 and December 31, 2016.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, local and foreign jurisdictions, where applicable. At September 30, 2017, no examinations were being conducted by the Internal Revenue Service or any other taxing authority. Under the respective statute of limitations, tax years beginning in 2015 remain subject to examination by the various tax jurisdictions.

Other Receivable

Included in other receivable is the estimated amount of the exit fee due in connection with the purchase of the NetFortris Operating Co., Inc. term notes. The exit fee rate is 2.75% of the outstanding principal balance of the term notes through the fiscal quarter ending December 31, 2017. Thereafter, the exit fee rate is 2.75% of the outstanding principal balance of the term notes if the senior leverage ratio of the portfolio investment is greater than or equal to 3.50x, 1.25% of the outstanding principal balance of the term notes if the senior leverage ratio of the portfolio investment is less than 3.50x and greater than or equal to 3.00x or 0.25% of the outstanding principal balance of the term notes if the senior leverage ratio of the portfolio investment is less than 3.00x. The exit fee accrues monthly and will be repaid in addition to the principal at the maturity date, or if repaid earlier.

Investor Note Credit Facility

On August 8, 2017, the Company, Partnership and Parallel Partnership entered into a credit facility of short term borrowings (the “Credit Facility”) in the amount of $10,000,000 collateralized by the unfunded Committed Equity Capital of the Limited Partners of the Partnership and Parallel Partnership. The Credit Facility is intended to fund the operations of the Company, Partnership and Parallel Partnership and is scheduled to expire on August 8, 2018, subject to extension. In consideration for establishing the Credit Facility, the Partnership and Parallel Partnership paid a Facility Fee in the amount of 0.25% times the maximum commitment amount. The Credit Facility is stated at its outstanding principal amount and bears interest on the outstanding principal amount at a rate per annum equal to LIBOR plus 1.55%. In addition, an unused commitment fee equal to 0.25% per annum times the difference between the total commitment amount and the average daily outstanding amount of principal is incurred as an expense. As of September 30, 2017, the Credit Facility held an outstanding balance of $5,700,000 of which the Company’s portion was $4,600,000 at a rate of 2.78%. The weighted average interest rate from the date of the first drawdown was 2.78%. The balance presented on the Consolidated Statement of Assets and Liabilities approximates its fair value.

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2017

3.	Portfolio Investments

The terms and conditions of the portfolio investments, including restrictions on resale, are subject to the terms of the companies’ purchase and sale agreements, limited partnership agreements, private placement memoranda and other governing documents.

Purchases of investments for the period ended September 30, 2017 totaled $20,158,321 with an additional $1,470,640 being reallocated from the Parallel Partnership due to the reallocation of Portfolio Investments (see Note 2). Sales of investments for the period ended September 30, 2017 totaled $5,762,147. Purchases of investments for the period ended September 30, 2016 totaled $6,079,884. There were no sales, repayments or other exits of investments for the period ended September 30, 2016.

At September 30, 2017 and December 31, 2016, the cost of portfolio investments for federal income tax purposes was $33,400,172 and $23,324,043, respectively. There was no aggregate or net unrealized appreciation/(depreciation) of portfolio investments for federal income tax purposes.

The Company’s investment holdings are illiquid, with the exception of the Money Market Fund, and are subject to redemption/resale restrictions in accordance with their respective agreements.

The Company’s investments are subject to general economic, political and market risk. These factors may affect the level and volatility of prices and the liquidity of Portfolio Investments, which could adversely affect the Company’s profitability or result in losses.

In addition, the Company is subject to credit risk (the risk that an issuer or borrower will default in the payment of principal and/or interest on an instrument), interest rate risk (the risks associated with market changes in interest rates), illiquidity risk/risks of investing in smaller and lower middle market size companies (the risk that the value of Portfolio Investment will decline sharply after its purchase, whether because of adverse developments affecting that security or a general withdrawal of capital from the small and lower middle market) and concentration/lack of diversification risk (various factors, including prevailing market conditions, available investment opportunities, regulatory constraints, constraints imposed by certain portfolio companies, and the timing of investments, may prevent the Investment Manager from diversifying the Company’s portfolio or may result in the Company’s portfolio not being as diversified as the Investment Manager may otherwise prefer).

Lastly, the Company is subject to subordination of interest risk. Portfolio Investments may be in subordinated loans, structurally subordinated loans, mezzanine loans and other structured investments and preferred equity interests or equity interests of an issuer. These Portfolio Investments will be subordinated to the senior obligations of the property or issuer, either contractually, structurally or inherently due to the nature of the securities. Greater credit risks are usually attached to these subordinated investments than to investments in senior obligations. In addition, these securities may not be protected by financial or other covenants, such as limitations upon additional indebtedness, typically protecting the senior debt, and may have limited liquidity.

The Company’s risk of loss related to any one investment is generally limited to its aggregate investment in such Portfolio Investment.

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2017

4.	Capital Stock

The Company is owned entirely by the Partnership, to which the Company sold 100,000 shares (“Initial Shares”), at a price of $0.25 per share in an offering exempt from the registration requirements of the Securities Act of 1933, as amended (“1933 Act”) pursuant to Section 4(a)(2) and Regulation D (“Regulation D”) thereof. The Partnership offers and sells limited partnership interests (the “Interests”) to investors (the “Limited Partners”) in an offering exempt from the registration requirements of the 1933 Act pursuant to Regulation D, and will sell its Interests in offerings solely to persons that are both “accredited investors”, as that term is defined in Regulation D, and “qualified purchasers” within the meaning of the 1940 Act. To the extent called for by the Company, the Partnership, subject to its approval of the need for such funds, may make further contributions to the capital of the Company to the extent of the Limited Partners’ capital commitment to the Partnership (“Committed Equity Capital”). Total Committed Equity Capital of the Partnership is $112,960,000. Total contributed capital to the Partnership through September 30, 2017 was $59,083,413, of which $26,154,908 was contributed to the Company.

Two Limited Partners of the Partnership have Committed Equity Capital in excess of ten percent of the total Committed Equity Capital of the Partnership, which cumulatively represent approximately 29% of the total Committed Equity Capital of the Partnership. The concentration of these partners’ Committed Equity Capital could have a material effect on the Partnership and the Company in the event of default or other actions by these partners.

As of September 30, 2017 and December 31, 2016, there were 10,000,000 shares of $0.001 par value common stock authorized, and 100,000 shares issued and outstanding.

5.	Distributions

Prior to qualifying as a RIC, distributions are not expected to be made from the Company. Any distributions made will be at the sole discretion of the Directors.

6.	Related Party Transactions

The Company has a Board of Directors, a majority of whom are directors that are not “interested persons” of the Company, as defined in the 1940 Act (the “Independent Directors”). During the nine month periods ended September 30, 2017 and September 30, 2016, the Independent Directors received compensation from the Company aggregating to $126,750 and $124,750, respectively. During the three month periods ended September 30, 2017 and September 30, 2016, the Independent Directors received compensation from the Company aggregating to $41,250 and $41,250, respectively.

The General Partner of the Partnership and Parallel Partnership has committed $10,000 each to the Partnership and Parallel Partnership, and Affiliates of the General Partner have committed $300,000 and $12,030,000 to the Partnership and Parallel Partnership, respectively.

Due to Affiliates represents amounts paid on behalf of the Company by the Parallel Partnership in connection with the purchase of underlying investments and income and expenses paid or received on behalf of the Company as a result of reallocations (see Note 2).

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2017

7.	Fees and Expenses

As compensation for its services, the Investment Manager will receive an investment management fee from the Company (the “Investment Management Fee”). For the period from October 13, 2015 (commencement of operations) through November 8, 2016, the Investment Management Fee was paid by the Company quarterly in arrears in an amount equal to 1.75% per annum of the Company’s Invested Capital, as measured as of the close of business on the last business day of such quarterly period. “Invested Capital” means the cost basis of the portfolio investments of the Company (excluding cash and cash equivalents) that have not been written off or disposed of, including portfolio investments acquired with borrowed funds. On March 29, 2016, the Investment Manager voluntarily reduced the Investment Management Fee to 1.25% per annum (effective as of the commencement of the Company’s operations). This resulted in the Investment Manager waiving $48,588 for the nine months ended September 30, 2016 and $15,597 for the three months ended September 30, 2016. The Investment Manager has no ability to claw back any Investment Management Fees waived. On November 9, 2016, the Independent Directors amended the Investment Management Agreement reducing the Investment Management Fee from 1.75% to 1.25% per annum of the Company’s Invested Capital, as measured as of the close of business on the last business day of such quarterly period. For the three and nine months ended September 30, 2017, the amended Investment Management Fee rate of 1.25% was in affect and as such, the amount of Investment Management Fees waived during the periods were charged as a result of reallocations (see Note 2).

The General Partner of the Partnership and Parallel Partnership also receives from the Partnership a share of any profits derived from the investments held by the Partnership and Parallel Partnership, including those of the Company.

8.	Contingencies

In the normal course of business, the Company enters into contracts that contain a variety of representations and warranties which provide general indemnifications. The Company’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Company that have not yet occurred. However, based on experience, the Investment Manager expects the risk of loss to be remote.

Table of Contents

Siguler Guff Small Business Credit Opportunities Fund, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2017

9.	Financial Highlights

The following per share data and ratios have been derived from information provided in the consolidated financial statements. The following is a schedule of consolidated financial highlights for a common share outstanding for the nine months ended September 30, 2017 and September 30, 2016.

	For the Nine Months Ended September 30, 2017			For the Nine Months Ended September 30, 2016

Total Return¹		6.80	%		3.39	%

Per Share Amounts:
Net Asset Value, Beginning of Period	$	179.09		$	64.68
Net Investment Income/(Loss) after income tax (benefit)/expense		15.40			3.42
Net Realized Gain/(Loss) on Portfolio Investments		0.92			-
Net Increase/(Decrease) in Net Assets Resulting from Operations		16.32			3.42
Contributions from Stockholder		84.69			58.43
Net Asset Value, End of Period	$	280.10		$	126.53

Net Assets, End of Period	$	28,009,641		$	12,653,374
Average Net Assets	$	23,957,355		$	10,238,048

Ratios / Supplemental Data:
Ratio of net investment income/(loss) after income tax (benefit)/expense to average net assets		6.43	%		3.34	%
Ratio of total expenses to average net assets before Investment Management Fee Waived		2.69	%		5.93	%
Ratio of total expenses to average net assets after Investment Management Fee Waived		2.66	%		5.46	%
Common Shares Outstanding, End of Period		100,000			100,000
Portfolio Turnover Rate		21.29	%		0.00	%
Average Outstanding Borrowings²	$	4,600,000			N/A
Asset Coverage Ratio		7.09			N/A

Given the Company’s similarities to a non-registered close-ended fund, the Company calculated total return as the change in the Company's capital over the period ended, and adjusted for stockholder contributions and distributions during the period. The Company noted that the total return calculated under the typical method for a registered investment company resulted in a total return of 56.40% as of the nine months ended September 30, 2017 (not annualized) and 95.62% as of the nine months ended September 30, 2016 (not annualized). The Company determined this did not appropriately represent the performance of the Company, and thus calculated the total return based on the change in value of a theoretical investment at the beginning of the period by geometrically linking the cash flows, which is a method more commonly used by non-registered funds.

The average outstanding borrowings has been calculated from the date of the first drawdown.

10.	Subsequent Events

Subsequent to quarter end and through October 18, 2017, the Partnership contributed $8,000,000 to the Company, bringing the Partnership’s total capital contributed to the Company to $34,154,908.

On October 18, 2017, the Company made a distribution to the Partnership in the amount of $7,311,442.

Table of Contents

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Siguler Guff Small Business Credit Opportunities Fund, Inc. (“SBCOF” or the “Fund”) is a non-diversified closed-end management investment company electing status as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). The Fund is a wholly-owned subsidiary of Siguler Guff Small Business Credit Opportunities Fund, LP, a Delaware limited partnership (the “Partnership”). The Partnership is the Fund’s sole direct shareholder and makes capital contributions to the Fund as needed for the Fund to make investments or pay its expenses, to the extent that the Partnership has available capital and in accordance with the Partnership’s governing documents. The Fund’s investment objective is to achieve attractive risk-adjusted returns by generating current income from debt investments and capital appreciation from equity investments.

The Fund is a specialty finance investment company providing financing and advisory services to carefully selected companies in the lower middle market, which Siguler Guff Advisers (the “Investment Manager”) defines as privately-owned companies with between $2 to $15 million of earnings before income tax, depreciation and amortization (“EBITDA”), and between $10 to $100 million of revenue. The Fund’s investments generally take the form of mezzanine debt, “unitranche” loans with a first lien on the company’s assets, as well as second lien loans. The Partnership generally seeks to purchase equity securities alongside the Fund’s investments into those same companies, generally with an aggregate cost of up to 20% of the value of the investment. The Partnership also may extend mezzanine financing in forms other than subordinated loans, such as convertible loans and preferred stock. The Fund commenced investment operations on October 13, 2015, and its portfolio as of September 30, 2017 (excluding cash and cash equivalents) consisted of investments held in healthcare services, manufacturing, business equipment, business services, commercial retail, consumer and sporting goods, industrial equipment and components, security and protection services, telecommunications and processed and packaged goods.

Table of Contents

The Investment Manager will seek to increase the diversification of the Fund’s portfolio so as to make it possible (commencing on January 1, 2018) to meet the regulated investment company (“RIC”) diversification requirements under Section 851(b) of the Internal Revenue Code (the “Code”), although there is no assurance that the Fund will meet the RIC requirements at that time. Until the Fund meets the requirements to qualify as a RIC, it will be taxed as an ordinary corporation on its taxable income for that year, regardless whether that income is distributed to the Partnership as the Fund’s sole direct shareholder, and all distributions out of earnings and profits will be taxable to investors as ordinary dividend income (i.e., the income from the Fund will be subject to a double layer of tax).

CRITICAL ACCOUNTING POLICIES

The Investment Manager has identified the most critical accounting estimates upon which the financial statements depend and determined the critical accounting estimates by considering accounting policies that involve the most complex or subjective decisions or assessments. The critical accounting policies relate to the valuation of investments, the recognition of income and expense, and income taxes.

Valuation of Portfolio Investments

The Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, fair valuation techniques are applied. These techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments’ complexity.

Assets and liabilities recorded at fair value in the Fund’s consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs used in the fair valuation of these assets and liabilities, are as follows:

Level 1 - Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 3 - Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the fair valuation technique and the risk inherent in the inputs to the model.

Under ASC 820, the Fund performs detailed valuations of its debt investments for which quotations are not readily available on an individual basis, using bond yield, market and income approaches as appropriate.

Table of Contents

In certain instances, the Fund may use alternative methodologies, including recent purchase transactions, asset liquidation, expected recovery model or other alternative approaches to estimate the fair value.

Investments where market quotations for securities of the same issue are readily available on an exchange are marked to market at fair value at the closing price on the financial statement date. Financial instruments with readily available quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value.

Under the bond yield approach, the Fund uses bond yield models to determine the present value of the future cash flow streams of its debt investments. The Fund reviews various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assesses the information in the valuation process.

Under the market approach, the Fund estimates the enterprise value of the portfolio companies in which it invests. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which the Fund derives a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, the Fund analyzes various factors, including the portfolio company’s historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA, cash flows, net income or revenues. The Fund generally requires portfolio companies to provide annual audited and quarterly or monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year.

Under the income approach, the Fund generally prepares and analyzes discounted cash flow models based on projections of the future free cash flows of the business.

The fair value of the Fund’s portfolio investments at September 30, 2017 and December 31, 2016 was determined in good faith by the Fund’s Board of Directors. The Board of Directors is ultimately and solely responsible for the valuation of the portfolio investments at fair value as determined in good faith pursuant to the Fund’s valuation policy and a consistently applied valuation process.

The following table summarizes the level of the Fund’s assets measured at fair value as of September 30, 2017 and December 31, 2016.

	Assets at Fair Value as of September 30, 2017
	Level 1		Level 2		Level 3		Total

Senior Subordinated Notes	$	-	$	-	$	31,404,532	$	31,404,532
Term Notes		-		-		1,799,424		1,799,424
Money Market Fund		6,170,109		-		-		6,170,109
Total Portfolio Investments	$	6,170,109	$	-	$	33,203,956	$	39,374,065

	Assets at Fair Value as of December 31, 2016
	Level 1		Level 2		Level 3		Total

Senior Subordinated Notes	$	-	$	-	$	23,149,094	$	23,149,094
Money Market Fund		62,852		-		-		62,852
Total Portfolio Investments	$	62,852	$	-	$	23,149,094	$	23,211,946

Table of Contents

At September 30, 2017 and December 31, 2016, 100% of the Fund’s portfolio investments have been classified within Level 3, with the exception of the Money Market Fund. Assumptions used by the Fund due to the lack of observable inputs may significantly impact fair value determinations and therefore the Fund’s results of operations. The following table summarizes the significant unobservable inputs the Fund used to value investments categorized within Level 3. The below table is not intended to be all-inclusive, but instead captures the significant unobservable inputs relevant to the determination of fair values:

				Unobservable Input as of September 30, 2017
Investment Type	Fair Value¹		Primary Valuation Technique	Input	Range

Senior Subordinated Notes	$	19,807,989	Discounted Cash Flow	Discount Rate		10.0% - 14.0	%


Total	$	19,807,989

¹Not reflected in the table above are Level 3 investments that have been primarily valued based upon recent transactions totaling $13,395,967 as of September 30, 2017.

				Unobservable Input as of December 31, 2016
Investment Type	Fair Value¹		Primary Valuation Technique	Input	Range

Senior Subordinated Notes	$	14,737,303	Discounted Cash Flow	Discount Rate		10.0% - 14.0	%


Total	$	14,737,303

¹Not reflected in the table above are Level 3 investments that have been primarily based upon recent transactions totaling $8,411,791 as of December 31, 2016.

Critical factors in determining the fair value of investments include payment history, collateral position, financial strength of borrower, financial performance relative to covenants, likelihood of sale or acquisition of the borrower, and length of expected holding period of the loan, as well as the general interest rate environment. The actual value realized from investments may differ from management’s estimates and such differences could be material. In addition, such differences would impact the carrying value of investments presented in the financial statements, as well as, the Fund’s change in net assets resulting from operations.

Income and Expense

Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Fund stops accruing interest on investments when it is determined that interest is no longer collectible. Fees received upon closing a transaction generally are treated as a reduction in the cost basis of the investment. Any resulting discount, or closing fee received, from recording the loan or otherwise purchasing a security at a discount, is accreted into interest income over the life of the loan using the effective-yield method.

The Fund has investments in debt securities which contain payment-in-kind (“PIK”) interest provisions. PIK interest is computed at the contractual rate specified in each investment agreement and added to the principal balance of the investment and recorded as income. The Fund stops accruing PIK interest on investments when it is determined that PIK interest is no longer collectible.

Table of Contents

Expenses include investment management fees, legal fees, directors’ fees, audit and tax expenses, and other general and administrative expenses. Expenses are recognized on an accrual basis.

Income Taxes

During the nine months ended September 30, 2017 and the year ended December 31, 2016, the Fund did not qualify to be treated as a RIC for federal income tax purposes. As such, the Fund will be treated as a corporation for U.S. federal income tax purposes. It is anticipated that, by the end of the third year of its investment operations, the Fund will seek to meet the requirements, including diversification, gross income, and distribution requirements, to qualify for the special pass-through status available to RICs under the Internal Revenue Code, and thus to be relieved of federal income tax on that part of its net investment income and realized capital gains that it distributes. Unless and until the Fund meets these requirements, it will be taxed as a corporation on its taxable income for that year even if that income is distributed to the Partnership (its sole stockholder), and all distributions out of its earnings and profits will be taxable as dividends to the investors of the Partnership; thus, such income will be subject to two layers of tax (although corporate Limited Partners may be entitled to a dividends-received deduction). There is no assurance that the Fund will meet the requirements to qualify as a RIC or be able to maintain such status.

The Fund accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Fund recognizes deferred tax assets to the extent that it believes these assets are more likely than not to be realized. In making such a determination, the Fund considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.

As of September 30, 2017 and December 31, 2016, the Fund concluded that it was more likely than not that an amount of the deferred tax assets, relating to the period after RIC qualification, would not be utilized. Therefore, the Fund recorded a valuation allowance against a portion of its net deferred tax assets, for the period ending September 30, 2017 and for the year ending December 31, 2016, representing the portion of net deferred tax assets for which the Fund is not expected to realize a benefit after the Fund meets RIC qualification. If the Fund determines that it would be able to realize net deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Fund records uncertain tax positions in accordance with FASB ASC 740, Income Taxes (“ASC 740”) on the basis of a two-step process whereby (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than not recognition threshold, it recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Fund has determined that there are no uncertain tax positions that would have a material impact to the financial statements of the Fund, and therefore, no provisions are required to be recorded by the Fund. The Fund does not anticipate significant increases to uncertain tax positions in the next twelve months. The Fund will recognize any interest and penalties, if applicable, for any uncertain tax positions as a component of income tax expense. No interest or penalties were recorded during the periods ended September 30, 2017 and September 30, 2016 or accrued for as of September 30, 2017 and December 31, 2016.

Table of Contents

Results of Operations – For the three months ended September 30, 2017 and 2016, and nine months ended September 30, 2017 and 2016

Total investment income for the three months ended September 30, 2017 increased to $1,216,007, as compared to $386,336 for the three months ended September 30, 2016, and primarily consisted of interest income on investments held during the reporting period, as well as reallocations of investment income due to additional commitments received in 2017 by the Partnership and Siguler Guff SBCOF Parallel Fund, LP (the “Parallel Partnership”). Total investment income for the nine months ended September 30, 2017 increased to $3,137,623 as compared to $1,009,075 for the nine months ended September 30, 2016, and primarily consisted of interest income on investments held during the reporting period, a prepayment fee received from the sale of Rudy's Food Products, Inc., the estimated amount of the exit fee due in connection with the purchase of NetFortris Operating Co., Inc., as well as reallocations of investment income due to additional commitments received in 2017 by the Partnership and Parallel Partnership. The average outstanding principal amount of loans made by the Fund (calculated on a monthly basis) during the three months ended September 30, 2017 increased to $29,728,870, as compared to $11,062,821 for the three months ended September 30, 2016. The average outstanding principal amount of loans made by the Fund (calculated on a monthly basis) during the nine months ended September 30, 2017 increased to $28,298,796, as compared to $10,019,319 for the nine months ended September 30, 2016.

During the three and nine months ended September 30, 2017 and the three and nine months ended September 30, 2016, all senior subordinated note investments held by the Fund incorporated fixed interest rates. The weighted average interest rate on the outstanding loans that incorporated fixed interest rates was 11.96% for the three and nine months ended September 30, 2017 and 12.37% for the three and nine months ended September 30, 2016. Interest is calculated using the effective interest method, and rates earned by the Fund will fluctuate based on factors including, but not limited to, pre-payments of outstanding loans, defaults or uncollectibility of payments, and changes in interest rates.

Total Fund expenses for the three months ended September 30, 2017 increased to $261,105, as compared to $188,667 for the three months ended September 30, 2016. These amounts consisted of investment management fees of $114,623 (gross fees of $123,043 less waived fees reallocated of $8,420), professional fees of $96,783, directors’ fees of $41,250 and other general and administrative expenses of $8,449 for the three months ended September 30, 2017, and investment management fees of $38,992 (gross fees of $54,589 less waived fees of $15,597), professional fees of $105,167, directors’ fees of $41,250 and other expenses of $3,258 for the three months ended September 30, 2016. There was an income tax expense of $393,012 for the three months ended September 30, 2017, as compared to $131,372 for the three months ended September 30, 2016. Total Fund expenses for the nine months ended September 30, 2017 increased to $636,911, as compared to $558,902. For the nine months ended September 30, 2017, Fund expense amounts consisted of investment management fees of $300,930 (gross fees of $308,857 less waived fees reallocated of $7,927), professional fees of $191,691, directors’ fees of $126,750, and other general and administrative expenses of $17,540. For the nine months ended September 30, 2016, Fund expense amounts consisted of investment management fees of $95,274 (gross fees of $143,862 less waived fees of $48,588), professional fees of $331,630, directors’ fees of $124,750 and other expenses of $7,248. There was an income tax expense of $960,539 for the nine months ended September 30, 2017, as compared to an income tax expense of $107,968 for the nine months ended September 30, 2016.

Table of Contents

The Fund’s investment management fee for the three and nine months ended September 30, 2017, and three and nine months ended September 30, 2016, was computed and paid quarterly in arrears in an amount equal to 1.25% per annum of the Fund’s Invested Capital, as measured as of the close of business on the last business day of each quarterly period. On November 9, 2016, the Independent Directors of the Fund’s Board approved amendments to the Investment Management Agreement which included the reduction of the management fee from 1.75% to 1.25% of Invested Capital. Prior to the Independent Director approval of the management fee reduction, the Investment Manager elected to voluntarily waive all management fees greater than 1.25% per annum of the Fund’s invested capital, retroactive to the inception of the Fund. The Fund’s investment management fee amounted to $114,623 (gross fees of $123,043 less waived fees reallocated of $8,420) and $38,992 (gross fees of $54,589 less waived fees of $15,597) for the three months ended September 30, 2017 and September 30, 2016, respectively, and $300,930 (gross fees of $308,857 less waived fees reallocated of $7,927) and $95,274 (gross fees of $143,862 less waived fees of $48,588) for the nine months ended September 30, 2017 and September 30, 2016, respectively. “Invested Capital” means the cost basis of the Fund’s portfolio investments (excluding cash and cash equivalents) that have not been written off or disposed of, including portfolio investments acquired with borrowed funds.

The Fund’s professional fees for the three and nine months ended September 30, 2017 were comprised of legal, audit, tax and other professional fees. Other general and administrative expenses included miscellaneous other expenses related to the operation of the Fund.

Net investment income for the three months ended September 30, 2017 was $561,890, as compared to $66,297 for the three months ended September 30, 2016. Net investment income for the nine months ended September 30, 2017 was $1,540,173, as compared to $342,205 for the nine months ended September 30, 2016. The increase in net investment income was due to the increase in the number of investments that pay interest during the period, the sale of Rudy's Food Products, Inc., the estimated amount of the exit fee due in connection with the purchase of NetFortris Operating Co., Inc. as well as reallocations of investment income due to additional commitments received in 2017 by the Partnership and Parallel Partnership. The Fund continues to make investments in income-producing assets.

Net realized gain/(loss) during the three months ended September 30, 2017 amounted to $6,138 and for the nine months ended September 30, 2017 amounted to $91,822. There were no net realized gains/(losses) from investments during the three and nine months ended September 30, 2016. Net increase in net assets resulting from operations for the three months ended September 30, 2017 was $568,028, as compared to $66,297 for the three months ended September 30, 2016. Net increase in net assets resulting from operations for the nine months ended September 30, 2017 was $1,631,995, as compared to $342,205 for the nine months ended September 30, 2016.

Due to additional commitments received in 2017 by the Partnership and Parallel Partnership, portfolio investments and items of income and expense have been reallocated between the Fund, the Partnership and the Parallel Partnership to reflect committed capital ownership percentages as of the final closing, which occurred on September 29, 2017. Prior to the final closing, portfolio investments and items of income and expense were allocated according to the committed capital ownership percentages as of the latest closing. Following the final closing, reallocation of portfolio investments and items of income and expense between the Fund, the Partnership and the Parallel Partnership has occurred. As a result, included in the 2017 Consolidated Statements of Operations for the three and nine month period ended September 30, 2017 are reallocations of $77,704 (reallocations of investment income totaling $90,815 and reallocations of expenses totaling $13,111) which equal amounts previously included in the Consolidated Statements of Operations for the year ended December 31, 2016.

Table of Contents

Financial Condition, Liquidity, and Capital Resources

During the three months ended September 30, 2017 and September 30, 2016, the Fund was wholly owned by the Partnership. The Partnership is expected, but not required, to make further contributions of capital to the Fund in an aggregate amount that will not exceed the Partnership’s limited partners’ capital commitments to the Partnership. From inception of the Partnership through September 30, 2017, the Partnership (excluding the Parallel Partnership) had received subscriptions for capital in the amount of $112,960,000, of which $59,083,413 had been called and of which $26,154,908 was contributed to the Fund. As of September 30, 2017, $53,876,587 of capital remained uncalled by the Partnership.

At September 30, 2017, the Fund had adequate resources consisting of cash on hand, a Money Market Fund and expected future capital contributions from the Partnership that could be used to fund future obligations. The Fund, based upon the investments held at September 30, 2017, expects to receive approximately $3,850,000 in scheduled interest payments over the next year. The future capital contributions and scheduled interest payments are sufficient to meet the requirements of anticipated investments and operational expenses of the Fund over the next year.

As of September 30, 2017, 0.5% of the Fund’s net assets consisted of cash and for the year ended December 31, 2016, 0.7% of the Fund’s net assets consisted of cash. During the nine months ended September 30, 2017, the Fund invested in senior subordinated and term notes, and during the year ended December 31, 2016, the Fund invested in senior subordinated notes. There were no distributions made by the Fund during the nine months ended September 30, 2017 and year ended December 31, 2016. The principal balance and fair value of loans in the Fund’s investment portfolio at September 30, 2017 and December 31, 2016 was $33,673,506 and $33,203,956, and $23,527,112 and $23,149,094, respectively.

The Fund’s consolidated financial statements include portfolio investments held at a fair value of $39,374,065 at September 30, 2017 and $23,211,946 at December 31, 2016. The portfolio investments represent 140% of net assets at September 30, 2017 and 129% of net assets at December 31, 2016 and their fair values have been determined in good faith by the Fund’s Board of Directors. Because of the inherent uncertainty of fair valuation, the determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material. Because the Fund’s investments consist of privately negotiated transactions, investments in these assets are considered to be illiquid.

Contractual Obligations

The Fund has entered into certain contracts under which it has future commitments. Payments under the Investment Management Agreement, pursuant to which Siguler Guff Advisers has agreed to serve as the Fund’s investment adviser, are equal to a percentage of the invested capital of the Fund, including assets acquired with borrowed funds, if any. The Investment Management Agreement will continue in effect until June 8, 2018. Thereafter, regardless of the dissolution of the Fund, the Investment Management Agreement shall continue automatically for successive periods of a year each June, if not terminated. Either party may terminate the Investment Management Agreement without penalty on least 60 days’ written notice to the other party. The Fund has also entered into a Custodian Agreement, pursuant to which Citibank N.A. has agreed to serve as the Fund’s custodian (the “Custodian”). The Fund pays the Custodian such fees as have been agreed between the Fund and the Custodian, as described in the Custodian Agreement which the Fund has determined are commercially reasonable in its sole discretion.

Table of Contents

On August 8, 2017, the Fund, Partnership, and Parallel Partnership, entered into a credit facility of short term borrowings (the “Credit Facility”) in the amount of $10,000,000 collateralized by the unfunded Committed Equity Capital of the Limited Partners of the Partnership and Parallel Partnership. The Credit Facility is intended to fund the operations of the Fund, Partnership, and Parallel Partnership, and is scheduled to expire on August 8, 2018, subject to extension. In consideration for establishing the Credit Facility, the Partnership and Parallel Partnership paid a Facility Fee in the amount of 0.25% times the maximum commitment amount. The Credit Facility is stated at its outstanding principal amount and bears interest on the outstanding principal amount at a rate per annum equal to LIBOR plus 1.55%. In addition, an unused commitment fee equal to 0.25% per annum times the difference between the total commitment amount and the average daily outstanding amount of principal is incurred as an expense. As of September 30, 2017, the Credit Facility held an outstanding balance of $5,700,000, of which the Fund’s portion was $4,600,000 at a rate of 2.78%.

We are required to maintain a minimum asset coverage ratio (total assets-to-debt outstanding) of 200% under the 1940 Act. As of September 30, 2017, the Fund had an asset coverage ratio of 7.09.

As mentioned in the previous paragraph, the Fund does bear interest on its outstanding principal amount and is subject to certain fees and costs that could affect its liquidity and cash flows, however, as of September 30, 2017, the Fund had not incurred any financing obligations with respect to interest on borrowings, undrawn fees or unused commitment fees that would have an impact on liquidity or cash flows.

Taxation of the Fund as a RIC

Consequences of Converting From an Ordinary Corporation to a RIC. In order to qualify as a RIC, the Fund must, at the end of the first year in which it so qualifies, have no accumulated earnings and profits from years in which it was not taxed as a RIC. To meet this requirement, the Fund must, before the end of the first year in which it qualifies as a RIC, distribute as dividends all of its accumulated earnings and profits. In addition to the foregoing, pursuant to the Treasury regulations, the Fund must either (i) recognize gain on the disposition of any asset during the subsequent recognition period (generally 10 years) (the “Recognition Period”) beginning on the first day of the first taxable year for which the Fund qualifies for pass-through status as a RIC that is held by the Fund as of the beginning of such Recognition Period, to the extent of the excess of (a) the fair market value of such asset as of the beginning of such Recognition Period over (b) the Fund’s adjusted tax basis in such asset as of the beginning of such Recognition Period (such excess, hereinafter, “built-in gain”), taxable at the highest regular corporate rates or (ii) elect to immediately recognize and pay tax on any such built-in gain with respect to any of its portfolio holdings and, as described above, distribute the earnings and profits from such deemed sales. As a RIC, the Fund generally would not be able to use any net operating loss carryforwards relating to periods prior to the first year in which the Fund qualifies as a RIC.

Table of Contents

RIC Qualification Requirements. In order to qualify as a RIC under Subchapter M of the Code, the Fund must, among other things, (1) at all times during the taxable year, have a valid and effective election to be a BDC under Sections 6(f) and 54 of the 1940 Act; (2) derive at least 90% of its gross income for each taxable year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including gains from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in a qualified publicly traded partnership (as defined in Section 851(h) of the Code); (3) diversify its holdings so that, at the end of each quarter of each taxable year: (a) at least 50% of the value of the Fund’s total assets is represented by (i) cash and cash items, U.S. government securities, and securities of other RICs, and (ii) other securities (counting each investment in such other securities only if the value of such securities does not exceed 5% of the value of the Fund’s total assets and the Fund does not own more than 10% of the outstanding voting securities of the issuer of such securities), and (b) not more than 25% of the value of the Fund’s total assets is invested in (i) the securities (other than U.S. government securities and securities of other RICs) of any one issuer, (ii) the securities (other than securities of other RICs) of two or more issuers that the Fund controls (defined as 20% or more of the voting power) and that are engaged in the same, similar, or related trades or businesses, or (iii) the securities of one or more qualified publicly traded partnerships; and (4) file an election to be a RIC.

If the Fund qualifies as a RIC and properly distributes to its shareholders each taxable year an amount equal to or exceeding the sum of (1) 90% of its “investment company taxable income” as that term is defined in the Code (which includes, among other things, dividends, taxable interest, and the excess of any net short-term capital gains over net long-term capital losses, as reduced by certain deductible expenses) without regard to the deduction for dividends paid and (2) 90% of the excess of its gross tax-exempt interest, if any, over certain disallowed deductions, the Fund generally will not be subject to U.S. federal income tax on any income of the fund, including “net capital gain” (the excess of net long-term capital gain over net short-term capital loss), distributed to the shareholders. However, if the Fund meets such distribution requirements and, thus, is eligible for pass-through status, but chooses to retain some portion of its investment company taxable income or net capital gain, it generally will be subject to U.S. federal income tax at regular corporate income tax rates on the amount retained. A distribution of warrants or equity investments to its shareholders will be treated as a sale by the Fund of such assets with the excess of the fair market value of those assets over their tax basis being the amount of the income or gain to the Fund arising from the distribution.

If, after initially qualifying as a RIC, the Fund fails to qualify as a RIC that is eligible for pass-through status for any taxable year, it will be treated as a U.S. corporation subject to U.S. federal income tax, thereby subjecting any income earned by the Fund to tax at the corporate level and to a further tax at the shareholder level when such income is distributed. In such a case, there may be substantial tax and other costs associated with re-qualifying as a RIC.

If the Fund qualifies as a RIC, the Fund will be subject to a nondeductible 4% excise tax (“Excise Tax”) to the extent it fails to distribute by the end of any calendar year at least 98% of its ordinary income for such calendar year and 98.2% of its capital gain net income for the one-year period ending on October 31 of such calendar year, plus certain other undistributed amounts. For these purposes, any taxable income retained by the Fund, and on which it pays federal income tax, will be treated as having been distributed.

The Fund currently intends to distribute in each year for which it qualifies as a RIC substantially all of its net investment income and capital gain net income so as not to be subject to either federal income tax or Excise Tax.

Table of Contents

Tax Status. The Fund must meet a number of requirements, described above under the caption “Taxation” to qualify for the pass-through status as a RIC and, if qualified, to continue to so qualify. If the Fund experiences difficulty in meeting the diversification requirement for any fiscal quarter of its taxable year, it may accelerate capital calls or, if available, borrowings in order to increase the portion of the Fund’s total assets represented by cash, cash items and U.S. government securities as of the close of the following fiscal quarter and thus attempt to meet the diversification requirement. The Fund, however, would incur additional interest and other expenses in connection with any such accelerated borrowings, and increased investments by the Fund in cash, cash items and U.S. government securities (whether the funds to make such investments are derived from called equity capital or from accelerated borrowings) are likely to reduce the Fund’s return. Furthermore, there can be no assurance that the Fund would be able to meet the diversification requirements through such actions. Failure to qualify as a RIC would deny the Fund pass-through status and, in a year in which the Fund has taxable income, would have a significant adverse effect on the returns of the Fund.

When the Fund elects to convert its status from that of an ordinary, or C, corporation to that of a RIC, it must choose either to (i) pay tax whenever an asset is sold during the subsequent “conversion period” (generally, ten years) following the conversion on the amount of gain which would have been realized had the asset been sold on the conversion date, or (ii) treat the entire amount of “built-in gain” as income at the time of conversion.

Effect of Certain Investments and Investment Practices. The Fund’s activities generally may be unlike the typical activities engaged in by most investment companies that seek to qualify as RICs for federal income tax purposes. Certain aspects of these activities may at times make it more difficult for the Fund to satisfy the requirements for qualifying as a RIC than is the case for other investment companies. For example, because the Fund generally will call capital from the Partnership on an “as needed” basis and will have relatively few investments in its early period of operations, the Fund will not be holding substantial amounts of “cash and cash items” that could be counted towards the Fund’s RIC diversification requirements. As noted above, it is anticipated that the Fund will not meet the RIC requirements (and in particular the diversification requirement) until the third year of its investment operations, and there is no assurance that the Fund will meet the requirements to qualify as a RIC within that timeframe.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Fund is subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both the cost of funding and our interest income from portfolio investments. The Fund’s risk management processes and procedures are designed to identify and analyze risk, to set appropriate policies and limits and to continually monitor these risks and limits by means of administrative and information systems and other policies and programs. Our investment income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent our debt investments include floating interest rates. In addition, our investments are carried at fair value as determined in good faith by our Board of Directors. Our valuation methodology utilizes discount rates in part in valuing our investments, and changes in those discount rates may have an impact on the valuation of our investments.

Table of Contents

The Fund’s business activities entail various elements of risk. The Fund considers the principal types of market risk to be interest rate risk, credit risk and valuation risk. Accordingly, the Fund’s risk management procedures are designed to identify and analyze the Fund’s risks, to set appropriate policies and limits and to continually monitor these.

The Fund intends to manage its risk by maintaining a portfolio that is diverse by industry, size of investment, and borrowers. The Fund has limited exposure to public market price fluctuations as the Fund invests in the debt of private business enterprises. The equity investment accompanying most debt investments (which, if it becomes publicly-traded, is subject to enhanced market risk) is generally made by the Partnership.

The Fund’s sensitivity to changes in interest rates is regularly monitored and analyzed by measuring the characteristics of assets and liabilities. The Fund uses various methods to assess interest rate risk in terms of the potential effect on interest income and investment valuation. The Fund’s valuation methodology utilizes discount rates as part of valuing its investments and changes in those discount rates, and interest rates in general, would be expected to have an impact on the valuation of investments. Assuming no changes in investment and capital structure, a hypothetical increase in interest rates of 100 basis points would decrease the Fund’s net assets resulting from operations by an estimated $1,145,000. As previously discussed in Item 2 Contractual Obligations, the Fund entered into a Credit Facility agreement on August 8, 2017, and as of September 30, 2017, held an outstanding balance of $4,600,000. Should the Fund elect to use additional leverage, its sensitivity to changes in interest rates and other risks would be substantially greater. The Fund intends to manage credit risk through diversification, and continually monitors the financial condition of its borrowers and reports thereon to the Fund’s Board of Directors.

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this report, Management carried out an evaluation under the supervision and with the participation of its President and the Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the President and Chief Financial Officer concluded that the Fund’s disclosure controls and procedures were effective in ensuring that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and in providing reasonable assurance that information required to be disclosed by the Fund in such reports was accumulated and communicated to the Fund’s management, including its President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

During the three months ended September 30, 2017, there were no changes in the Fund’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Fund’s internal control over financial reporting.

Table of Contents

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

The Fund is not currently a party to any legal proceedings.

ITEM 1A.

RISK FACTORS.

The risks described in the Annual Report on Form 10-K and Quarterly 10-Q are not the only risks facing the Fund. Additional risks and uncertainties not currently known to the Fund or the Investment Manager or that the Fund or the Investment Manager currently believe to be insignificant may materially affect the Fund’s business and financial condition in the future.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Prior to the Fund’s commencement of operations on October 13, 2015, the Fund sold 100,000 shares to the Fund’s sole shareholder, the Partnership, for $25,000 on September 19, 2014. No other shares of the Funds have been sold; however, the Fund received paid in capital during the period from October 13, 2015, commencement of operations, through September 30, 2017, which is expected to be used for fund investments and operations. The Fund may receive additional paid in capital from the Partnership in the future.

Table of Contents

Purchases of Equity Securities

This table provides certain information with respect to purchases of securities registered under Section 12 of the Exchange Act made by the Fund or its affiliates during the third fiscal quarter of 2017:

Period	Total Number of Shares (or Units) Purchased	Average Price Paid Per Share (or Unit)	Total Number of Shares (or Units) Purchases as Part of Publicly Announced Plans or Programs	Maximum Number (or approximate dollar value) of Shares That May Yet Be Purchases Under the Plan
July 1, 2017 through July 31, 2017	No purchases of publicly traded equities were made.	No purchases of publicly traded equities were made.	No purchases of publicly traded equities were made.	No purchases of publicly traded equities were made.
August 1, 2017 through August 31, 2017	No purchases of publicly traded equities were made.	No purchases of publicly traded equities were made.	No purchases of publicly traded equities were made.	No purchases of publicly traded equities were made.
September 1, 2017 through September 30, 2017	No purchases of publicly traded equities were made.	No purchases of publicly traded equities were made.	No purchases of publicly traded equities were made.	No purchases of publicly traded equities were made.

The Fund held its final close on September 29, 2017 (as referenced in Item 5 Other Information), and as of September 30, 2017, there were no dividend payments made.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.

OTHER INFORMATION.

(a)

No material changes have been made to the procedures with respect to the recommendation and nomination of members to the Fund’s Board of Directors.

(b)

On September 29, 2017, the Partnership held its final close and will no longer be accepting or seeking additional subscriptions from investors.

Table of Contents

ITEM 6.

EXHIBITS.

Exhibit	Description
3(i)	Articles of Incorporation of the Fund as filed with the Maryland Secretary of State on July 7, 2014, incorporated by reference to the Fund’s Form 10 filed with the SEC on July 21, 2014.

3(ii)	Bylaws of the Fund, incorporated by reference to the Fund’s Form 10 filed with the SEC on July 21, 2014.

31.1-31.2	Certifications pursuant to Section 302 of The Sarbanes-Oxley Act of 2002, filed herewith.

32.1-32.2	Certifications pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, filed herewith.

Table of Contents

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 of the undersigned thereunto duly authorized.

	SIGULER GUFF SMALL BUSINESS CREDIT OPPORUNITIES FUND, INC.

November 13, 2017	By:	/s/ Jun Isoda
	Name:	Jun Isoda
	Title:	Chief Financial Officer and Treasurer

November 13, 2017	By:	/s/ Sean Greene
	Name:	Sean Greene
	Title:	President

SIGULER GUFF SMALL BUSINESS CREDIT OPPORTUNITIES FUND, INC - FORM 10-Q - November 13, 2017

Attached files

SIGULER GUFF SMALL BUSINESS CREDIT OPPORTUNITIES FUND, INC Reports