Attached files

file filename
EX-31.2 - EXHIBIT 31.2 - VII Peaks Co-Optivist Income BDC II, Inc.v343965_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - VII Peaks Co-Optivist Income BDC II, Inc.v343965_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - VII Peaks Co-Optivist Income BDC II, Inc.v343965_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - VII Peaks Co-Optivist Income BDC II, Inc.v343965_ex31-1.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

  

Form 10-Q

 

 

  

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

 

For the quarterly period ended March 31, 2013

 

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

 

For the transition period from             to

 

Commission File No. 0-54615

 

 

 

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

(Exact name of Registrant as specified in its charter)

 

 

 

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

 

255 Shoreline Drive, Suite 428

Redwood City, California 94065

(Address of principal executive offices)

 

(877) 700-0527

(Registrant’s telephone number, including area code)

 

Not applicable

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

  

 

 

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

  

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

 

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

 

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

 

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

  

The number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding as of May 14, 2013 was 1,990,515.

 

 
 

 

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

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

 

TABLE OF CONTENTS

 

    Page
     
PART I. FINANCIAL INFORMATION 1
     
Item 1. Financial Statements 1
     
  Statements of Assets and Liabilities as of March 31, 2013 (unaudited) and December 31, 2012 1
     
  Statements of Operations for the three months ended March 31, 2013 and 2012 (unaudited) 2
     
  Statements of Changes in Net Assets for the three months ended March 31, 2013 and 2012 (unaudited) 3
     
  Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited) 4
     
  Schedule of Investments as of March 31, 2013 (unaudited) 5
     
  Schedule of Investments as of December 31, 2012 6
     
  Notes to Financial Statements (unaudited) 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
     
Item 4. Controls and Procedures 23
     
PART II. OTHER INFORMATION 24
     
Item 1. Legal Proceedings 24
     
Item 1A. Risk Factors 24
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
     
Item 3. Defaults upon Senior Securities 24
     
Item 4. Mine Safety Disclosures 24
     
Item 5. Other Information 24
     
Item 6. Exhibits 24
     
Signatures   25

  

ii
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

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

 

STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share and per share data) 

  

   As of 
   March 31, 2013   December 31, 2012 
   (Unaudited)     
ASSETS          
           
Investments, at fair value (amortized cost of $11,182 and $5,942)  $11,252   $5,823 
Investments, money market at fair value   1,801    1,304 
Interest receivable   326    132 
Prepaid expenses   18    5 
Due from related party   610    107 
Deferred offering costs   236    449 
Receivable for common stock purchased   1,241    729 
Total assets  $15,484   $8,549 
           
LIABILITIES          
Management and incentive fees payable  $66   $21 
Accounts payable and accrued liabilities   119    71 
Stockholder distributions payable   102    120 
Total liabilities   287    212 
           
NET ASSETS          
Preferred stock, par value, $.001 per share, 50,000,000 authorized, none issued and outstanding   -    - 
Common stock, par value, $.001 per share, 200,000,000 authorized;          
1,705,761 and 950,733 shares issued and outstanding, respectively   2    1 
Paid-in capital in excess of par value   15,407    8,559 
Accumulated distribution in excess of net investment income   (329)   (104)
Accumulated undistributed net realized gain from investments   47    - 
Net unrealized appreciation (depreciation) on investments   70    (119)
Total net assets   15,197    8,337 
Total liabilities and net assets  $15,484   $8,549 
           
Net asset value per share  $8.91   $8.77 

 

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

 

1
 

  

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

 

STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(Unaudited) 

 

   For the Three Months
Ended March 31, 2013
   For the Three Months
Ended March 31, 2012
 
         
Investment income:          
Interest from investments  $243   $- 
Other income   1    - 
Total investment income   244    - 
           
Operating expenses:          
Professional fees   61    - 
Directors fees   11    - 
Insurance   19    - 
Management fees   75    - 
Incentive fees   24    - 
General and administrative   47    36 
Offering expense   369    - 
Organizational expense   -    63 
Operating expenses before expense reimbursements   606    99 
Expense reimbursement   (507)   - 
Total operating expenses net of expense reimbursements   99    99 
           
Net investment income (loss)   145    (99)
           
Realized and unrealized gain (loss) on investments:          
Net realized gain from investments   47    - 
Net unrealized appreciation on investments   189    - 
Net realized and unrealized gain on investments   236    - 
           
Net increase (decrease) in net assets resulting from operations  $381   $(99)
           
Per share information - basic and diluted:          
Net investment income (loss)  $0.11   $(4.43)
Net increase (decrease) in net assets resulting from operations  $0.29   $(4.43)
Weighted average common shares outstanding   1,292,508    22,333 

  

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

 

2
 

  

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

 

STATEMENTS OF CHANGES IN NET ASSETS

(in thousands, except share and per share data)

(Unaudited) 

  

   For the Three Months
Ended March 31, 2013
   For the Three Months
Ended March 31, 2012
 
         
Operations:          
Net investment income (loss)  $145   $(99)
Net realized gain from investments   47    - 
Net unrealized appreciation on investments   189    - 
Net increase (decrease) in net assets from operations   381    (99)
Stockholder distributions:          
Distributions from net investment income   (370)   - 
Net decrease in net assets from stockholder distributions   (370)   - 
Capital share transactions:          
Issuance of common stock, net of issuance costs   6,696    - 
Reinvestment of stockholder distributions   153      
Net increase in net assets from capital share transactions   6,849    - 
           
Total increase (decrease) in net assets   6,860    (99)
Net assets at beginning of period   8,337    96 
Net assets at end of period  $15,197   $(3)
           
Net asset value per common share  $8.91   $(0.13)
Common shares outstanding at end of period   1,705,761    22,333 
           
Accumulated distribution in excess of net investment income  $(329)  $- 

 

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

 

3
 

  

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

 

STATEMENTS OF CASH FLOWS

(in thousands, except share and per share data)

(Unaudited)

 

   For the Three
Months Ended
March 31, 2013
   For the Three
Months Ended
March 31, 2012
 
         
Operating activities:          
Net increase (decrease) in net assets from operations  $381   $(99)
Adjustments to reconcile net increase (decrease) in net assets from operations to net cash used in operating activities:          
Net accretion of discount on investments   (18)   - 
Amortization of deferred financing costs   213    - 
Repayments of investments   2,006    - 
Purchase of investments   (7,182)   - 
Repayments of investments - money market   7,786    49 
Purchase of investments - money market   (8,283)   - 
Net realized gain from investments   (47)   - 
Net unrealized appreciation on investments   (189)   - 
(Increase) decrease in operating assets:          
Interest receivable   (195)   - 
Prepaid expenses   (13)   (9)
Due from related party   (502)   (2)
Deferred offering costs   -    (316)
Increase (decrease) in operating liabilities:          
Management and incentive fees payable   46    - 
Accounts payable and accrued liabilities   47    1 
Due to related party   -    376 
Net cash used in operating activities   (5,950)   -
           
Financing activities:          
Proceeds from issuance of shares of common stock, net   6,184    - 
Stockholder distributions   (234)   - 
Net cash provided by financing activities   5,950    - 
           
Net decrease in cash and cash equivalents   -    -
Cash and cash equivalents, beginning of period   -    - 
Cash and cash equivalents, end of period  $-   $- 
           
Supplemental non-cash information:          
DRIP distribution payable  $41   $- 
Cash distribution payable  $61   $- 
DRIP distribution paid  $154   $- 

 

 

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

 

4
 

 

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

 

SCHEDULE OF INVESTMENTS

(dollars in thousands)

 

March 31, 2013

(Unaudited)

 

 

                           
Portfolio Company (a)  Industry  Investment Coupon Rate, Maturity Date   Principal    Amortized Cost    Fair Value    % of
Net Assets
 
                           
Senior Secured First Lien Debt - 10.0% (b)                          
                           
Apria Healthcare Group Inc.  Healthcare & Pharmaceuticals  11.25%, 11/01/2014  $335   $347   $345    2.3%
GXS Worldwide, Inc.  Services: Business  9.75%, 6/15/2015   585    608    607    4.0%
Rotech Healthcare, Inc.  Healthcare & Pharmaceuticals  10.75%, 10/15/2015   569    571    569    3.7%
Sub Total Senior Secured First Lien Debt         1,489    1,526    1,521    10.0%
                           
                           
Senior Secured Second Lien  Debt - 18.9% (b)                          
                           
Apria Healthcare Group Inc.  Healthcare & Pharmaceuticals  12.375%, 11/1/2014   335    335    342    2.1%
Aspect Software Inc.  Telecommunications  10.625%, 5/15/2017   585    586    585    3.9%
Bon-ton Department Stores, Inc.  Retail  10.625%, 7/15/2017   300    300    300    2.0%
Caesar's Entertainment Corp.  Hotel, Gaming & Leisure  10.00%, 12/15/2015   300    283    278    1.8%
Logan's Roadhouse, Inc.  Beverage, Food & Tobacco  10.75%, 10/15/2017   610    577    570    3.8%
Radiation Therapy Services, Inc.  Healthcare & Pharmaceuticals  8.875%, 1/15/2017   600    593    585    3.9%
Saratoga Resources, Inc.  Energy: Oil & Gas  12.50%, 7/1/2016   200    211    206    1.4%
Sub Total Senior Secured Second Lien Debt         2,930    2,885    2,866    18.9%
                           
                           
Senior Unsecured Debt - 34.6% (b)                          
                           
Alliance HealthCare Services, Inc.  Healthcare & Pharmaceuticals  8.00%, 12/01/2016   585    537    565    3.7%
Alliance One International, Inc.  Beverage, Food & Tobacco  10.00%, 7/15/2016   585    613    618    4.1%
Avaya, Inc.  Telecommunications  9.75%, 11/01/2015   225    200    224    1.5%
Avaya, Inc.  Telecommunications  10.125%, 11/01/2015   225    200    224    1.5%
Bon-ton Department Stores, Inc.  Retail  10.25%, 3/15/2014   249    251    250    1.6%
Caesar's Entertainment Corp.  Hotel, Gaming & Leisure  10.75%, 2/01/2016   300    278    273    1.8%
Education Management LLC  Services: Consumer  15.00%, 7/01/2018   270    228    278    1.8%
First Data Corp.  Banking, Finance, Insurance & Real Estate  9.875%, 9/24/2015   360    370    371    2.4%
Harland Clarke Corp.  Banking, Finance, Insurance & Real Estate  9.50%, 5/15/2015   600    600    592    3.9%
Quicksilver Resources, Inc.  Energy: Oil & Gas  8.25%, 8/01/2015   285    278    280    1.8%
Quicksilver Resources, Inc.  Energy: Oil & Gas  11.75%, 1/01/2016   300    306    306    2.0%
Seitel, Inc.  High Tech Industries  9.75%, 2/15/2014   450    455    452    3.0%
Suntech Power Holdings Company, Ltd. (c)  Environmental Industries  3.00%, 5/15/2013   100    95    29    0.2%
Travelport LLC  Services: Consumer  9.875%, 9/01/2014   585    532    588    3.9%
YCC Holdings LLC  Consumer goods: Non-durable  10.25%, 2/15/2016   200    208    206    1.4%
Sub Total Senior Unsecured Debt         5,319    5,151    5,256    34.6%
                           
                           
Senior Subordinated Debt -10.6% (b)                          
                           
First Data Corp.  Banking, Finance, Insurance & Real Estate  11.25%, 3/31/2016   300    299    302    1.9%
Sealy Mattress Co.  Consumer goods: Durable  8.25%, 6/15/2014   600    605    602    4.0%
Serena Software, Inc.  High Tech Industries  10.375%, 3/15/2016   490    506    497    3.3%
The Yankee Candle Company, Inc.  Consumer goods: Non-durable  9.75%, 2/15/2017   200    209    208    1.4%
Sub Total Senior Subordinated Debt         1,590    1,619    1,609    10.6%
                           
                           
Investments - Money Market -11.8%                          
Investments - Money Market         1,801    1,801    1,801    11.8%
Sub Total Investments - Money Market         1,801    1,801    1,801    11.8%
                           
TOTAL INVESTMENTS - 85.9% (b)        $13,129   $12,982   $13,053    85.9%
                           
                           

 

(a) All of our investments are issued by eligible U.S. portfolio companies, as defined in the Investment Company Act of 1940, except for Alliance One International, Inc., Bon-ton Department Stores, Inc., Caesar's Entertainment Corp., Education Management LLC, Quicksilver Resources, Inc. and Suntech Power Holdings Company, Ltd.

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

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

 

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

 

5
 

 

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

 

SCHEDULE OF INVESTMENTS

(dollars in thousands)

 

December 31, 2012

 

Portfolio Company (a)  Industry  Investment Coupon Rate,
Maturity Date
  Principal   Amortized Cost   Fair Value   % of
Net Assets
 
                       
Senior Secured First Lien Debt - 10.0% (b)                          
                           
Apria Healthcare Group, Inc.  Healthcare & Pharmaceuticals  11.25%, 11/01/2014  $150   $155   $155    2.0%
GXS Worldwide, Inc.  Services: Business  9.75%, 6/15/2015  $350    364    365    4.4%
Rotech Healthcare, Inc.  Healthcare & Pharmaceuticals  10.75%, 10/15/2015  $300    301    299    3.6%
Sub Total Senior Secured First Lien Debt              820    819    10.0%
                           
                           
Senior Secured Second Lien  Debt - 10.3% (b)                          
                           
Apria Healthcare Group, Inc.  Healthcare & Pharmaceuticals  12.375%, 11/1/2014  $150   $149   $149    1.8%
Aspect Software, Inc.  Telecommunications  10.625%, 5/15/2017  $400    409    362    4.3%
Logan's Roadhouse, Inc.  Beverage, Food & Tobacco  10.75%, 10/15/2017  $375    353    348    4.2%
Sub Total Senior Secured Second Lien Debt              911    859    10.3%
                           
                           
Senior Unsecured Debt - 37.3% (b)                          
                           
Alliance HealthCare Services, Inc.  Healthcare & Pharmaceuticals  8.00%, 12/1/2016  $250   $217   $227    2.7%
Alliance One International, Inc.  Beverage, Food & Tobacco  10.00%, 7/15/2016  $400    417    421    5.1%
Avaya, Inc.  Telecommunications  9.75%, 11/01/2015  $225    198    200    2.4%
Avaya, Inc.  Telecommunications  10.125%, 11/01/2015  $225    198    201    2.4%
Bon-ton Department Stores, Inc.  Retail  10.25%, 3/15/2014  $350    351    347    4.2%
Claire's Stores, Inc.  Retail  9.625%, 6/01/2015  $235    219    217    2.6%
Education Management LLC  Services: Consumer  8.75%, 6/1/2014  $400    343    321    3.9%
First Data Corp.  Banking, Finance, Insurance & Real Estate  10.55%, 9/24/2015  $175    181    179    2.1%
First Data Corp.  Banking, Finance, Insurance & Real Estate  9.875%, 9/24/2015  $175    180    179    2.1%
Seitel, Inc.  High Tech Industries  9.75%, 2/15/2014  $350    355    351    4.2%
Suntech Power Holdings Company, Ltd. (c)  Environmental Industries  3.00%, 3/15/2013  $100    91    47    0.5%
Travelport LLC  Services: Consumer  9.875%, 9/01/2014  $250    216    220    2.6%
YCC Holdings LLC  Consumer goods: Non-durable  10.25%, 2/15/2016  $200    208    206    2.5%
Sub Total Senior Unsecured Debt              3,174    3,116    37.3%
                           
                           
Senior Subordinated Debt -12.3% (b)                          
                           
Sealy Mattress Co.  Consumer goods: Durable  8.25%, 6/15/2014  $400   $404   $401    4.8%
Serena Software, Inc.  High Tech Industries  10.375%, 3/15/2016  $410    424    420    5.0%
The Yankee Candle Company, Inc.  Consumer goods: Non-durable  9.75%, 2/15/2017  $200    210    209    2.5%
Sub Total Senior Subordinated Debt              1,038    1,030    12.3%
                           
                           
Investments - Money Market -15.6%                          
Investments - Money Market        $1,304    1,304    1,304    15.6%
Sub Total Investments - Money Market              1,304    1,304    15.6%
                           
                           
TOTAL INVESTMENTS - 85.5% (b)             $7,247   $7,128    85.5%

 

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

(b) Percentages are based on net assets of $8,337 as of December 31, 2012.

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

 

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

 

6
 

 

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

  

NOTES TO FINANCIAL STATEMENTS

March 31, 2013

 

(Unaudited)

 

Note 1.  Nature of Operations

 

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

 

On August 9, 2011, the Fund filed a registration statement on Form N-2 to sell up to 75.0 million shares of common stock at an initial public offering price of $10.00 per share. The registration statement was declared effective by the Securities Exchange Commission (the “SEC”) on March 1, 2012. The Fund was to commence operations when it raised gross offering proceeds of over $1.0 million, all of which was from persons who were not affiliated with the Fund or VII Peaks-KBR BDC Advisor II, LLC (the “Manager”) by one year from the date the registration statement was declared effective by the SEC. Prior to the successful satisfaction of that condition, all subscription payments were placed in an account held by the escrow agent, UMB Bank, N.A., in trust for the benefit of the Fund’s subscribers, pending release to the Fund. The Fund achieved the minimum offering requirement on July 10, 2012 and commenced operations on such date. As of March 31, 2013, the Fund had issued 1.7 million shares of common stock for gross proceeds of $17.0 million.

  

Note 2.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

The financial statements of the Fund included herein were prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments and accruals, necessary for a fair presentation of the results for the interim period. This Form 10-Q should be read in conjunction with the Fund’s annual report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on February 19, 2013. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2013. Certain prior period amounts have been reclassified to conform with the current period presentation.

 

Use of Estimates in the Preparation of Financial Statements

 

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

 

Investments - money market

 

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

 

7
 

  

Note 2.  Summary of Significant Accounting Policies (continued)

 

Organizational Costs

 

Organizational costs are expensed by the Fund as incurred (see Note 4).

 

Offering Costs

 

The Fund is a closed-end fund with a continuous offering period. Accordingly, the Fund follows the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topics 946 20-25-6 and 946-20-35-5 and offering costs prior to commencement of operations are capitalized and amortized on a straight-line basis over a period not to exceed twelve months from the date that operations commence. Offering costs subsequent to commencement of operations are expensed as incurred. The Fund commenced operations on July 10, 2012. As of March 31, 2013 and December 31, 2012, $0.2 million and $0.4 million, respectively, have been recorded as deferred offering costs on the Statements of Assets and Liabilities.

 

U.S. Federal Income Taxes

 

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

 

New Accounting Pronouncements

 

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

 

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

 

Note 3. Valuation of Portfolio Investments

 

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

 

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

 

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

 

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

 

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

 

8
 

 

Note 3. Valuation of Portfolio Investments (continued)

 

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

 

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

 

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

 

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

 

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

 

Level 3:  Unobservable inputs for the asset or liability.

 

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

 

The following table presents fair value measurements of investments, by major class, as of March 31, 2013 according to the fair value hierarchy (dollars in thousands). 

 

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

 

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

 

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

 

No transfers between levels have occurred during the periods presented.

  

9
 

 

Note 3. Valuation of Portfolio Investments (continued)

 

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

 

   Investments at
Amortized Cost
   Investments at
Fair
Value
   Fair Value
Percentage
of Total Portfolio
 
Senior Secured First Lien Debt  $1,526   $1,521    11.6%
Senior Secured Second Lien Debt   2,885    2,866    22.0
Senior Unsecured Debt   5,151    5,256    40.3
Senior Subordinated Debt   1,619    1,609    12.3
Investments - money market   1,801    1,801    13.8%
Total  $12,982   $13,053    100.0%

 

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

 

   Investments at
Amortized Cost
   Investments at
Fair
Value
   Fair Value
Percentage
of Total Portfolio
 
Senior Secured First Lien Debt  $820   $819    11.5%
Senior Secured Second Lien Debt   911    859    12.1
Senior Unsecured Debt   3,174    3,116    43.7
Senior Subordinated Debt   1,038    1,030    14.4
Investments - money market   1,304    1,304    18.3 
Total  $7,247   $7,128    100.0%

 

Note 4.  Related Party Transactions

 

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

 

Under the investment advisory agreement between the Fund and the Manager, the Manager is entitled to a base management and incentive fee as outlined in the Investment Advisory Agreement with the Fund. The base management fee is 2% of net assets below $100 million; 1.75% of net assets between $100 million and $250 million; and 1.5% of net assets over $250 million. The incentive fee has two parts. The first part, the subordinated incentive fee on income, is calculated and payable quarterly in arrears based upon the Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter. The subordinated incentive fee on income is 20% of pre-incentive net investment income subject to a quarterly return to investors, expressed as a rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 2.0% (8.0% annualized). The second part of the incentive fee, the incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated investments from the portfolio and is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement). This fee equals 20.0% of the Fund’s incentive fee capital gains, which will equal the Fund’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. For the three months ended March 31, 2013, the Fund incurred $0.08 million in base management fees. For the three months ended March 31, 2013, the Fund incurred no incentive fees related to pre-incentive fee net investment income and $0.02 million in incentive fees on capital gains. As of March 31, 2012, no services were performed by the Manager under this agreement, and no fees were paid.

 

Under the investment advisory agreement, the Fund is responsible for all operating expenses.  In addition, the Fund is contingently responsible for all offering and organizational expenses to the extent of 1.5% of the gross proceeds of the future offering of the Fund’s securities, and the Manager is responsible for any amount of offering or organization expenses above the 1.5% limit.  To the extent there are not future securities offerings, the Fund is not responsible for reimbursement to the manger.  At March 31, 2013, the Fund is contingently indebted to the Manager for $1.2 million for offering costs and $0.1 of organizational costs that have been incurred by the Manager in excess of the 1.5% limit.  From each closing held in the Fund’s offering of common stock, the Fund pays the Manager 1.5% of the gross proceeds of the closing for application to the payable to the Manager. 

 

10
 

 

Note 4.  Related Party Transactions (continued)

 

The Fund has also entered into an expense reimbursement agreement with the Manager under which the Manager agreed to reimburse the Fund for all U.S. GAAP compliant expenses recognized on the quarterly financial statements of the Fund for 2012, retroactive to the date of formation of the Fund on August 3, 2011. In 2013, the expenses reimbursement agreement was modified to exclude management fees and incentive fees payable to the Manager effective as of January 1, 2013. The Fund recognizes a receivable on its books for the amount due from the Manager under the expense reimbursement agreement, and the Manager recognizes a liability on its books in the same amount. The expense reimbursement agreement allows the Manager and the Fund to offset the related receivables from and payables to each other resulting in a net receivable, or payable position. As of March 31, 2013, the Manager was indebted to the Fund for $1.9 million of expense reimbursements under the investment advisory agreement, the Fund was indebted to the Manager for $1.3; therefore, the Fund has recorded $0.6 million as due from related party at March 31, 2013, which reflects the netting of $1.9 million due from the Manager and $1.3 million due to the Manager.

 

The expense reimbursement agreement expires on the earlier of August 3, 2014 or the start of the quarter in which the Fund reaches $75 million in net assets. Amounts reimbursed by the Manager under the expense reimbursement agreement are subject to recoupment by the Manager at a later date.

 

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

   

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

 

Note 5.  Common Stock

 

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

 

On July 10, 2012, the Fund had raised sufficient proceeds to break escrow on its IPO and through March 31, 2013, the Fund has sold 1.7 million shares of common stock for gross proceeds of $17.0 million including the purchases made by the Manager.

 

During the three months ended March 31, 2013, the Fund sold 755,028 shares of common stock in its offering for net proceeds of $6.85 million.

 

Note 6.  Earnings Per Share

 

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

 

The following information sets forth the computation of the weighted average basic and diluted net increase (decrease) in net assets per share from operations for the three months ended March 31, 2013 and 2012 (dollars in thousands except share and per share amounts).

 

   For the three
months ended
March 31, 2013
   For the three
months ended
March 31, 2012
 
Basic and diluted          
Net increase (decrease) in net assets resulting from operations  $381   $(99)
Weighted average common shares outstanding   1,292,508    22,333 
Net increase (decrease) in net assets resulting from operations per share - basic and diluted  $0.29   $(4.43)

  

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

 

11
 

 

Note 7.  Distributions

 

The Fund has declared and paid distributions to stockholders on a semi-monthly basis since it commenced operations. From time to time, the Fund may also pay interim distributions at the discretion of its board of directors. The Fund may fund its distributions to stockholders from any sources of funds available to it, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets and non-capital gains proceeds from the sale of assets. The Fund’s distributions may exceed its earnings, especially during the period before the Fund has substantially invested the proceeds from its IPO. As a result, a portion of the distributions may represent a return of capital for tax purposes. As of March 31, 2013, the Fund has accrued $0.1 million in stockholder distributions that were unpaid.

 

The following table reflects the distributions per share paid or payable in cash or with the reinvestment plan (“DRIP”) on the Fund’s common stock to date (dollars in thousands except per share amounts):

 

Payment Date   Source of Distribution  Per share   Distributions Paid in
Cash
   Distributions Paid
Through the DRIP
   Total Distributions
Paid
 
2012:                        
August 17, 2012   (2)  $0.03   $3   $1   $4 
August 31, 2012   (2)   0.03    3    1    4 
September 14, 2012   (2)   0.03    6    3    9 
September 28, 2012   (2)   0.03    6    3    9 
October 15, 2012   (2)   0.03    8    4    12 
October 31, 2012   (2)   0.03    8    4    12 
November 16, 2012   (2)   0.03    11    6    17 
November 30, 2012   (2)   0.03    11    6    17 
December 17, 2012   (2)   0.03    13    10    23 
December 31, 2012   (2)   0.03    13    10    23 
2013:                        
January 17, 2013   (2)   0.03    17    10    27 
January 17, 2013 (1)   (2)   0.08    41    26    67 
January 31, 2013   (2)   0.03    18    11    29 
February 15, 2013   (2)   0.03    21    14    35 
February 28, 2013   (2)   0.03    23    15    38 
March 15, 2013   (2)   0.03    25    17    42 
March 15, 2013 (1)   (2)   0.08    62    43    105 
March 29, 2013   (2)   0.03    27    18    45 
April 15, 2013   (2)   0.03    29    20    49 
April 30, 2013   (2)   0.03    32    21    53 
            $377   $243   $620 

 

(1)Includes a special distribution of $0.077 per share.
   
 (2)Net Investment Income; there were no distributions paid with borrowings, offering proceeds, capital gain proceeds from sale of assets, non-capital gain proceeds from sale of assets, distribution on account of preferred and common equity or expense reimbursement from sponsor.
   

 

12
 

  

Note 8.  Financial Highlights

 

The following is a schedule of financial highlights for the three months ended March 31, 2013 and 2012:

 

   For the three months
ended March 31, 2013
   For the three months
ended March 31, 2012
 
Per share data:          
Net asset value, beginning of period  $8.77   $4.30 
           
Results of operations (1)          
Net investment income (loss)   0.11    (4.43)
Net realized gain on investments   0.04     
Net unrealized gain on investments   0.14     
Net increase (decrease) in net assets resulting from operations   0.29    (4.43)
           
Stockholder distributions (2)          
Distributions from net investment income   (0.28)    
Net decrease in net assets resulting from stockholder distributions   (0.28)    
           
Capital share transactions          
Issuance of common stock (3)   0.13     
Net increase in net assets resulting from capital share transactions   0.13     
Net asset value, end of period  $8.91   $(0.13)
Shares outstanding at end of period   1,705,761    22,333 
Total return (5)   4.07%   (101.44)%
Ratio/Supplemental data:          
Net assets, end of period (in thousands)  $15,197   $(3)
Average net assets (in thousands)  $6,799   $47 
Ratio of net investment income to average net assets (4)(7)   8.65%   (854.22)%
Ratio of operating expenses to average net assets (4)(7)   5.90%   854.22%
Ratio of incentive fees to average net assets (7)   1.40%   0.00%
Ratio of expenses reimbursed to average net assets (7)   30.23%   0.00%
Portfolio turnover ratio (6)   34.51%   0.00%

  

 

 

(1)The per share amounts were derived by using the weighted average shares outstanding during the period. Net investment income per share excluding the expense waivers and reimbursements equals ($0.28) for the three months ended March 31, 2013. There was no expense waiver and reimbursement for March 31, 2012.

 

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

 

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

 

(4)For the three months ended March 31, 2013, excluding the expense waiver and reimbursement, the ratio of net investment income and operating expenses to average net assets was (21.58%) and 36.13%, respectively. For the three months ended March 31, 2012, there was no expense waiver and reimbursement.

 

(5)Total return is calculated assuming a purchase of shares at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the DRIP. The total return based on net asset value for the three months ended March 31, 2013, includes the effect of the expense reimbursement which added 7.45% to the return. For the three months ended March 31 2012, there was no expense reimbursement.

 

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

 

(7)Ratios are annualized.

  

13
 

 

Note 9.  Subsequent Events

 

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

 

 From April 1, 2013 to May 14, 2013, the Fund issued 0.3 million shares of common stock for gross proceeds of $2.9 million. With the proceeds from the Fund’s continuous offering, the Fund purchased a total of twenty four debt investments with an aggregate face value of $5.2 million for $5.0 million in cash. The Fund had four debt investments fully called with a carrying value of $1.8 million and an aggregate redemption value of $1.8 million and two debt investments partially called with a carrying value of $0.4 million and a redemption value of $0.4 million.

 

14
 

 

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

 

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

 

Forward-Looking Statements

 

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

 

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

 

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

 

  a limited pool of prospective target businesses;

 

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

 

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

 

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

 

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

 

Overview

 

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

 

15
 

 

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

 

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

 

We make investments in target companies that meet our investment criteria. The size of an individual investment will vary based on numerous factors, including the amount of funds raised in this offering. However, assuming we raise the maximum offering amount of $750 million, we expect to hold at least 50 investments, and we anticipate that the minimum investment size will be approximately $0.25 million. We do not anticipate being heavily invested in any one industry, and generally, we do not expect to invest in more than two different classes of debt of the same target company. We intend to invest in debt and equity-linked debt of target companies with a minimum enterprise value of $200 million and whose debt and equity-linked debt is actively traded in the secondary loan market. We expect our portfolio to be predominantly composed of fixed-rate high-yield and equity-linked corporate debt securities. However, we may also purchase senior secured corporate debt securities which may have variable interest rates. We currently anticipate that the portion of our portfolio composed of variable rate corporate debt securities, if any, will not exceed 20%, but we may increase that to 33% of our aggregate portfolio at the time of any purchase depending on market opportunities.

 

We offer our stockholders the ability to receive distributions as well as the potential capital appreciation resulting from the restructuring of the debt of our target companies. To the extent we have distributable income available we anticipate declaring and paying distributions on a semi-monthly basis.

 

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

 

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

 

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

 

Critical Accounting Policies

 

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

 

16
 

 

Valuation of Portfolio Investments

 

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

 

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

 

  · our quarterly valuation process begins with each portfolio company or investment being initially valued by members of our investment committee, with such valuation taking into account information received from our independent valuation firm, if applicable;
     
  · preliminary valuation conclusions are then documented and discussed with the members of our board of directors; and

 

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

 

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

 

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

  

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

 

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

 

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

 

Level 3:  Unobservable inputs for the asset or liability.

 

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

 

Revenue Recognition

 

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

 

17
 

 

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

 

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

 

Payment-in-Kind Interest

 

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

 

Organization and Offering Expenses

 

Organization expenses are expensed on our statements of operations. Offering expenses, excluding sales load, are capitalized on our Statements of Assets and Liabilities as deferred offering costs and expensed on our statements of operations over a period not to exceed 12 months, from the date that operations commenced. We commenced operations on July 10, 2012. Continuous offering expenses incurred after July 10, 2012 are expensed on our statements of operations as they are incurred.

 

Federal Income Taxes

 

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

 

Portfolio and Investment Activity

 

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

 

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

 

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

 

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

 

18
 

 

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

 

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

 

Results of Operations

 

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

 

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

  

Revenues

 

Since becoming operational in the third quarter of 2012, we generate revenue primarily from the cash interest we collect on our debt investments and, to a lesser extent, from the early termination fees that many of our debt investments require the borrower to pay. Going forward, we may generate revenue in the form of commitment, origination, structuring or diligence fees. Any such fees will be generated in connection with our investments and recognized as earned.

 

19
 

 

Expenses

 

The composition of our operating expenses for the three months ended March 31, 2013 and 2012 was as follows (dollars in thousands):

 

   For the three
months ended
March 31, 2013
   For the three
months ended
March 31, 2012
 
Professional fees  $61   $ 
Director fees   11     
Insurance   19     
Management fees   75     
Incentive fees   24     
General and administrative   47    36 
Offering expense   369     
Organizational expense       63 
Operating expenses before expense reimbursements   606    99 
Expense reimbursement   (507)    
Total operating expenses net of expense reimbursements  $99   $99 

  

Net Realized Gains or Losses from Investments

 

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

 

Net Change in Unrealized Appreciation or Depreciation on Investments

 

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

 

Liquidity and Capital Resources

 

We generate cash primarily from the net proceeds of our ongoing continuous public offering and from cash flows from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. Immediately after we met our minimum offering requirement, gross subscription funds totaled over $1.0 million. We sell our shares on a continuous basis at a current offering price of $10.15; however, to the extent that our net asset value per share increases, we will sell at a price necessary to ensure that our shares are not sold at a price, after deduction of selling commissions and dealer manager fees, that is below our net asset value per share. In the event of a material decline in our NAV per share, which we consider to be a 5.0% decrease below our current net offering price, and subject to certain conditions, we will reduce our offering price accordingly. A decline in our NAV per share to an amount more than 5.0% below our current offering price, net of selling commissions and dealer manager fees, creates a rebuttable presumption that there has been a material change in the value of our assets such that a reduction in the offering price per share is warranted. This presumption may only be rebutted if our board of directors, in consultation with its management, reasonably and in good faith determines that the decline in NAV per share is the result of a temporary movement in the credit markets or the value of our assets, rather than a more fundamental shift in the valuation of our portfolio. In the event that (i) NAV per share decreases to more than 5.0% below our current net offering price and (ii) our board of directors believes that such decrease in NAV per share is the result of a non-temporary movement in the credit markets or the value of our assets, the board of directors will undertake to establish a new net offering price that is not more than 5.0% above our NAV per share. If our board of directors determines that the decline in our NAV per share is the result of a temporary movement in the credit markets or the value of our assets, investors will purchase common stock at an offering price per share, net of selling commissions and dealer manager fees, which represents a premium to the NAV per share of greater than 5.0%. In connection with each semi-monthly closing on the sale of our shares pursuant to this prospectus on a continuous basis, our board of directors or a committee thereof is required to make the determination that we are not selling our shares at a price below our then current net asset value within 48 hours of the time that we price our shares.

 

On July 10, 2012, we satisfied our minimum offering requirement of raising gross offering proceeds in excess of $1.0 million from persons who are not affiliated with us or our Manager, and commenced operations. As of March 31, 2013, we issued 1.7 million shares of common stock for gross proceeds of $17.0 million.

 

Prior to investing in debt securities, we invest the net proceeds from our continuous offering primarily in cash, cash equivalents, U.S. government securities, and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our election to be treated as a business development company (“BDC”) and our election to be taxed as a RIC.

 

20
 

 

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

 

Distributions

 

We offer our stockholders the ability to receive distributions as well as the potential capital appreciation resulting from the restructuring of the debt of our Target Investments. To the extent we have distributable income available we declare and pay distributions on a semi-monthly basis.

 

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

  

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

 

Distribution Reinvestment Plan

 

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

 

Election as a RIC

 

We elected to be treated as a RIC under Subchapter M of the Code beginning with the taxable year ended December 31, 2012. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income that we distribute to our stockholders from our tax earnings and profits. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. In addition, in order to obtain RIC tax treatment, we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our net ordinary income plus the excess, if any, of realized net short-term capital gain over realized net long-term capital loss, or the annual distribution requirement. Even if we qualify as a RIC, we generally will be subject to corporate-level U.S. federal income tax on our undistributed taxable income and could be subject to U.S. federal excise, state, local and foreign taxes.

 

Related-Party Transactions and Agreements

 

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

 

The Fund is managed by the Manager. The Manager is wholly-owned by VII Peaks-KBR, LLC which is a joint venture between VII Peaks Capital, LLC (“VII Peaks”), and KBR Capital Advisors, LLC (“KBR”).  Under the investment advisory agreement between the Fund and the Manager, the Fund is responsible for all operating expenses. In addition, the Fund is contingently responsible for all offering and organizational expenses to the extent of 1.5% of the gross proceeds of the future offering of the Fund’s securities, and the Manager is responsible for any amount of offering or organization expenses above the 1.5% limit. To the extent there are not future securities offerings, the Fund is not responsible for reimbursement to the manger. At March 31, 2013, the Fund is contingently indebted to the Manager for $1.2 million for offering costs and $0.1 of organizational costs that have been incurred by the Manager in excess of the 1.5% limit. From each closing held in the Fund’s offering of common stock, the Fund pays the Manager 1.5% of the gross proceeds of the closing for application to the payable to the Manager.

 

The Fund has also entered into an expense reimbursement agreement with the Manager under which the Manager agreed to reimburse the Fund for all U.S. GAAP compliant expenses recognized on the quarterly financial statements of the Fund for 2012, retroactive to the date of formation of the Fund on August 3, 2011. In 2013, the expenses reimbursement agreement was modified to exclude management fees and incentive fees payable to the Manager effective as of January 1, 2013. The Fund recognizes a receivable on its books for the amount due from the Manager under the expense reimbursement agreement, and the Manager recognizes a liability on its books in the same amount. The expense reimbursement agreement allows the Manager and the Fund to offset the related receivables from and payables to each other resulting in a net receivable, or payable position. As of March 31, 2013, the Manager was indebted to the Fund for $1.9 million of expense reimbursements under the investment advisory agreement, the Fund was indebted to the Manager for $1.3; therefore, the Fund has recorded $0.6 million as due from related party at March 31, 2013, which reflects the netting of $1.9 million due from the Manager and $1.3 million due to the Manager.

 

The expense reimbursement agreement expires on the earlier of August 3, 2014 or the start of the quarter in which the Fund reaches $75 million in net assets. Amounts reimbursed by the Manager under the expense reimbursement agreement are subject to recoupment by the Manager at a later date.

 

21
 

   

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

 

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

 

In addition, the officers of KBR may also be involved in other ventures, some of which may compete with us for investment opportunities.

 

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

 

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

 

KBR Capital Markets, LLC, our Dealer Manager, is an affiliate of KBR, and is a licensed broker-dealer registered with the Financial Industry Regulatory Authority, and serves as the Dealer Manager for our public offering of shares of common stock. The Dealer Manager will receive selling commission of 7% of gross offering proceeds and a dealer manager fee of up to 3% of gross offering proceeds, all or a portion of which may be reallowed to selected dealers. This relationship may create conflicts in connection with KBR Capital Markets’ due diligence obligations under the federal securities laws.

 

Contractual Obligations

 

We have entered into an agreement with the Manager to provide investment advisory services. Payments for investment advisory services under the investment advisory agreement are comprised of a base management fee and an incentive fee. The base management fee equals 2.0% of net assets below $100 million; 1.75% of net assets between $100 million and $250 million; and 1.5% of net assets over $250 million. The incentive fee has two parts. The first part, the subordinated incentive fee on income, is calculated and payable quarterly in arrears based upon our “pre-incentive fee net investment income” for the immediately preceding quarter. The subordinated incentive fee on income is 20% of pre-incentive net investment income subject to a quarterly return to investors, expressed as a rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 2.0% (8.0% annualized). The second part of the incentive fee, the incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated investments from the portfolio and is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement). This fee will equal 20.0% of our incentive fee capital gains, which equals our realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. As of March 31, 2013, $0.04 million of base management fees and $0.02 million of incentive fees were accrued and recorded as management and incentive fees payable in the Statements of Assets and Liabilities.

 

We have also entered into an administration agreement with the Manager under which the Manager provides us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities and provides or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain and preparing reports to our stockholders. The Manager is reimbursed amounts based on allocable portion of overhead costs under this agreement.

 

Off-Balance Sheet Arrangements

 

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

 

22
 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

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

 

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

 

Item 4. Controls and Procedures

 

Disclosure Controls

 

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

 

Change in Internal Control Over Financial Reporting

 

No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

23
 

 

PART II

 

OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

There have been no material changes from the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2012.

 

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

 

Not applicable.

 

Item 3. Defaults upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

Item 6. Exhibits

 

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

 

Exhibit
Number
  Description of Document
     
31.1*   Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
     
31.2*   Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
     
32.1*   Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     

* Filed herewith.

 

24
 

 

SIGNATURES

  

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

 

  VII Peaks-KBR Co-Optivist Income BDC II, Inc.
     
Date: May 15, 2013 By /s/ Gurpreet S. Chandhoke
    Gurpreet S. Chandhoke
    Chairman of the Board of Directors,
Chief Executive Officer and President
(Principal Executive Officer)

 

  VII Peaks-KBR Co-Optivist Income BDC II, Inc.
     
Date: May 15, 2013 By /s/ Cecilia Shea
   

Cecilia Shea

Chief Financial Officer,

Treasurer and Secretary

(Principal Financial Officer and Principal Accounting Officer)

 

25