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

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - VII Peaks Co-Optivist Income BDC II, Inc.	v470872_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - VII Peaks Co-Optivist Income BDC II, Inc.	v470872_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - VII Peaks Co-Optivist Income BDC II, Inc.	v470872_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - VII Peaks Co-Optivist Income BDC II, Inc.	v470872_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 March 31, 2017

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

For the transition period from to

Commission File No. 0-54615

VII Peaks Co-Optivist Income BDC II, Inc.

(Exact name of Registrant as specified in its charter)

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

4 Orinda Way, Suite 125-A

Orinda, CA 94563

(Address of principal executive offices)

(855) 889-1778

(Registrant’s telephone number, including area code)

Not applicable

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

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

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

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

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

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

The number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding as of August 3, 2017 was 6,420,284.

VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2017

TABLE OF CONTENTS

		Page

PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Statements of Assets and Liabilities as of March 31, 2017 (unaudited) and December 31, 2016	3
	Statements of Operations for the three months ended March 31, 2017 (unaudited) and 2016 (unaudited)	4
	Statements of Changes in Net Assets for the three months ended March 31, 2017 (unaudited) and 2016 (unaudited)	5
	Statements of Cash Flows for the three months ended March 31, 2017 (unaudited) and 2016 (unaudited)	6
	Schedule of Investments as of March 31, 2017 (unaudited)	7
	Schedule of Investments as of December 31, 2016	8
	Notes to Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45
Item 4.	Controls and Procedures	45
PART II.	OTHER INFORMATION	47
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	48
Item 4.	Mine Safety Disclosures	48
Item 5.	Other Information	48
Item 6.	Exhibits	49
Signatures		50

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share and per share data)

	As of
	March 31, 2017			December 31, 2016
	(unaudited)
ASSETS

Investments, at fair value
Non-controlled/non-affiliate investments (cost of $33,296 and $35,575, respectively)	$	32,765		$	30,977
Affiliate investments (cost of $5,850 and $5,850, respectively)		9,368			9,368
Investments, money market at fair value (cost of $648 and $157, respectively)		648			157
Total investments, at fair value		42,781			40,502
Interest receivable		436			402
Prepaid expenses		142			76
Origination fee receivable		30			-
Due from related party, net		210			239
Total assets		43,599			41,219

LIABILITIES
Priority credit line -Wells Fargo		5,252			6,366
Interest payable		2			3
Deferred loan fee		292			268
Prepaid interest from investments (includes prepaid interest of $246 and $333 from Nima, LLC; $138 and $258 from GeoCommerce, Inc.; $125 and $188 from Ansgar Media, LLC; and $111 and none from Digital Golf Technologies, LLC, respectively)		620			779
Accounts payable and accrued liabilities		138			121
Total liabilities		6,304			7,537

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; 6,675,107 and 6,639,019 shares issued and 6,373,694 and 6,337,606 outstanding as of March 31, 2017 and December 31, 2016, respectively		6			6
Paid-in capital in excess of par value		60,485			60,185
Treasury stock at cost, 301,413 and 301,413 shares, respectively		(2,891	)		(2,891	)
Accumulated distribution in excess of net investment income and net realized gain (loss) on investments		(23,292	)		(22,538	)
Net unrealized appreciation (depreciation) on investments		2,987			(1,080	)
Total net assets		37,295			33,682
Total liabilities and net assets	$	43,599		$	41,219

Net asset value per share	$	5.85		$	5.31

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

VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

	For the Three Months Ended March 31, 2017		For the Three Months Ended March 31, 2016

Investment income:
Interest from investments
Non-controlled/non-affiliate investments	$	753	$	503
Affiliate investments		176		113
Fee income
Non-controlled/non-affiliate investments		36		-
Affiliate investments		14		21
Total investment income		979		637

Operating expenses:
Professional fees		247		178
Directors fees		8		8
Insurance		33		27
Interest expense		48		75
Management fees - related parties		185		142
Administrative services - related parties		66		54
General and administrative (includes $46 and $30 of CFO salary (accounting) and $16 and $12 of related party travel expenses, respectively)		128		117
Transfer agent fees		38		28
Total operating expenses		753		629

Net investment income		226		8

Realized and unrealized gain (loss) on investments:
Net realized gain (loss) from investments		41		(700	)
Net unrealized appreciation on investments		4,067		1,271
Net realized and unrealized gain on investments		4,108		571

Net increase in net assets resulting from operations	$	4,334	$	579

Per share information - basic and diluted:
Net investment income	$	0.04	$	0.00
Net increase in net assets resulting from operations	$	0.68	$	0.09
Weighted average common shares outstanding		6,350,239		6,196,289

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

VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

STATEMENTS OF CHANGES IN NET ASSETS

(in thousands, except share and per share data)

(unaudited)

	For the Three Months Ended March 31, 2017			For the Three Months Ended March 31, 2016

Operations:
Net investment income	$	226		$	8
Net realized gain (loss) from investments		41			(700	)
Net unrealized appreciation on investments		4,067			1,271
Net increase in net assets from operations		4,334			579
Stockholder distributions:
Distributions from net investment income		(226	)		(8	)
Distributions from net realized gain on investments		(41	)		-
Distributions from paid in capital		(754	)		(1,045	)
Net decrease in net assets from stockholder distributions		(1,021	)		(1,053	)
Capital share transactions:
Reinvestment of stockholder distributions		300			369
Net increase in net assets from capital share transactions		300			369

Total increase (decrease) in net assets		3,613			(105	)
Net assets at beginning of period		33,682			28,490
Net assets at end of period	$	37,295		$	28,385

Net asset value per common share	$	5.85		$	4.56
Common shares outstanding at end of period		6,373,694			6,223,414

Accumulated distribution in excess of net investment income and net realized gain (loss) on investments	$	(23,292	)	$	(7,742	)

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

VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	For the Three Months Ended March 31, 2017			For the Three Months Ended March 31, 2016

Operating activities:
Net increase in net assets from operations	$	4,334		$	579
Adjustments to reconcile net increase in net assets from operations to net cash provided by (used in) operating activities:
Paid-in-kind interest income		(8	)		-
Net accretion of discounts and amortization of premiums		(289	)		(14	)
Repayments of investments		5,817			4,408
Purchase of investments		(3,200	)		(13,583	)
Repayments of investments - money market		7,072			7,156
Purchase of investments - money market		(7,563	)		(1,385	)
Net realized (gain) loss from investments		(41	)		700
Net unrealized (appreciation) depreciation on investments		(4,067	)		(1,271	)
Proceeds from loan fees received		74			-
Accretion of deferred loan fees		(50	)		(8	)
(Increase) decrease in operating assets:
Interest receivable		(34	)		(232	)
Prepaid expenses		(66	)		(4	)
Due from related party, net		29			(102	)
Origination fee receivable		(30	)		-
Increase (decrease) in operating liabilities:
Prepaid interest from investments		(159	)		-
Accounts payable and accrued liabilities		17			69
Interest payable		(1	)		2
Net cash provided by (used in) operating activities		1,835			(3,685	)

Financing activities:
Stockholder distributions		(721	)		(682	)
Borrowings - priority credit line		2,189			7,567
Repayments - priority credit line		(3,303	)		(3,200	)
Net cash provided by (used in) financing activities		(1,835	)		3,685

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

Supplemental disclosure of non-cash information:
Distribution reinvestment plan distribution payable	$	-		$	121
Cash distribution payable	$	-		$	231
Distribution reinvestment plan distribution paid	$	300		$	369

Supplemental disclosure of cash flow information:
Cash interest paid during the period	$	49		$	73

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

VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

SCHEDULE OF INVESTMENTS

(dollars and shares in thousands)

(unaudited)

March 31, 2017

Portfolio Company	Industry	Investment Coupon Rate, Maturity Date	Principal / No. of Shares		Amortized Cost		Fair Value		% of Net Assets
Senior Secured First Lien Debt - 48.9% ^(b)
Ansgar Media, LLC ^(e)	Media: Broadcasting & Subscription	12.00%, 1/11/2018	$	2,000	$	2,000	$	2,000		5.4	%
Ansgar Media, LLC ^(e)	Media: Broadcasting & Subscription	12.00%, 9/18/2017		2,000		2,000		2,000		5.4	%
Ansgar Media, LLC ^(e)	Media: Broadcasting & Subscription	12.00%, 10/24/2018		310		310		310		0.8	%
Ansgar Media, LLC ^(e)	Media: Broadcasting & Subscription	12.00%, 10/27/2018		1,540		1,540		1,540		4.1	%
APX Group, Inc.	Services: Consumer	6.38%, 12/1/2019		481		481		495		1.3	%
Claire's Stores, Inc. Term Loan	Retail	9.00%, 9/20/2021		126		263		125		0.2	%
CLSIP LLC Term Loan	Retail	9.00%, 9/20/2021		407		856		407		1.1	%
Digital Golf Technologies, LLC	Services: Consumer	13.00%, 1/11/2020		1,000		913		1,000		2.7	%
GeoCommerce, Inc.	Technology	12.00%, 5/15/2018		1,000		780		1,000		2.7	%
GeoCommerce, Inc.	Technology	12.00%, 4/27/2018		1,500		988		1,500		4.0	%
GeoCommerce, Inc.	Technology	12.00%, 10/14/2018		750		422		750		2.0	%
GeoCommerce, Inc.	Technology	12.00%, 12/21/2018		750		398		750		2.0	%
Nima, LLC	Consumer Electronics	12.00%, 5/20/2018		2,000		1,307		2,000		5.4	%
Nima, LLC	Consumer Electronics	12.00%, 8/11/2018		1,000		1,000		1,000		2.7	%
Nima, LLC	Consumer Electronics	12.00%, 11/2/2018		750		750		750		2.0	%
Nima, LLC	Consumer Electronics	12.00%, 12/21/2018		750		750		750		2.0	%
Nima, LLC	Consumer Electronics	12.00%, 2/16/2019		450		450		450		1.2	%
Goodman Networks, Inc. ^(c)	Telecommunications	12.13%, 7/1/2018		800		850		316		0.9	%
Kratos Defense & Security Solutions, Inc.	Aerospace and Defense	7.00%, 5/15/2019		1,112		1,024		1,112		3.0	%
Sub Total Senior Secured First Lien Debt			$	18,726	$	17,082	$	18,255		48.9	%

Senior Secured Second Lien Debt - 1.5% ^(b)
Nuverra Environmental Solutions, Inc.	Environmental Industries	12.50%, 4/15/2021	$	1,325	$	1,361	$	299		0.8	%
Logan's Roadhouse, Inc.^{(c) (f)}	Beverage, Food & Tobacco	10.75%, 10/15/2017		674		632		87		0.2	%
Logan's Roadhouse, Inc. PIK Exit Facility Term Loan ^(f)	Beverage, Food & Tobacco	9.50% PIK, 11/23/2020		166		151		165		0.5	%
Saratoga Resources, Inc. ^(c)	Energy: Oil & Gas	12.50%, 7/1/2016		885		912		2		0.0	%
Sub Total Senior Secured Second Lien Debt			$	3,050	$	3,056	$	553		1.5	%

Senior Unsecured Debt - 7.5% ^(b)
Claire’s (Gibraltar) Holdings Limited Term Loan	Retail	9.00%, 9/20/2021	$	188	$	395	$	188		0.5	%
Colt Defense, LLC	Aerospace and Defense	8.00%, 12/15/2020		143		1,034		142		0.4	%
DynCorp International Inc.	Aerospace and Defense	11.88%, 11/30/2020		1,027		1,039		981		2.6	%
Gymboree Corp.	Retail	9.13%, 12/1/2018		810		788		45		0.1	%
iHeart Communications, Inc.	Media: Broadcasting & Subscription	11.25%, 3/1/2021		1,400		1,330		1,099		2.9	%
UCI International, Inc. ^{(c) (g)}	Automobile	8.63%, 2/15/2019		1,400		1,354		357		1.0	%
Sub Total Senior Unsecured Debt			$	4,968	$	5,940	$	2,812		7.5	%

Senior Subordinated Debt - 2.8% ^(b)
DJO Finance, LLC	Healthcare & Pharmaceuticals	10.75%, 4/15/2020	$	1,265	$	1,316	$	1,028		2.8	%
Sub Total Senior Subordinated Debt			$	1,265	$	1,316	$	1,028		2.8	%

Equity Securities - 37.2%^(b)
Affinion Group, Inc. ^(c)	Media: Advertising, Printing & Publishing			13	$	689	$	114		0.3	%
Aspire Holdings ^(c)	Energy: Oil & Gas			26		551		40		0.1	%
Aspect Software, Inc. ^(c)	Telecommunications			8		244		331		0.9	%
Education Management, LLC ^(c)	Services: Consumer			2,530		5		-		0.0	%
NII Holdings, Inc. ^{(a) (c)}	Telecommunications			16		768		22		0.1	%
Total Common Stock						2,257		507		1.4	%

Ansgar Media, LLC- Class B Units ^{(c) (d) (e)}	Media: Broadcasting & Subscription			-		-		3,518		9.4	%
Total Preferred Stock						-		3,518		9.4	%

GeoCommerce, Inc. ^(c)	Technology			875		1,883		7,718		20.7	%
Digital Golf Technologies, LLC ^(c)	Services: Consumer			22		91		100		0.3	%
Nuverra Environmental Solutions, Inc. ^(c)	Environmental Industries			71		-		16		0.0	%
Nima, LLC^(c)	Consumer Electronics			2,000		1,000		2,000		5.4	%
Education Management, LLC^(c)	Services: Consumer			1,554		876		-		0.0	%
Total Warrants						3,850		9,834		26.4	%

Sub Total Equity Securities					$	6,107	$	13,859		37.2	%

U.S. Government Securities - 15.1% ^(b)
U.S. Treasury Bill		0.75%, 04/15/2018	$	1,400	$	1,399	$	1,395		3.7	%
U.S. Treasury Bill		0.63%, 08/31/2017		800		799		799		2.2	%
U.S. Treasury Bill		0.63%, 11/30/2017		450		449		449		1.2	%
U.S. Treasury Bill		0.75%, 12/31/2017		700		699		699		1.9	%
U.S. Treasury Bill		0.75%, 08/15/2019		1,710		1,700		1,686		4.5	%
U.S. Treasury Bill		0.75%, 03/31/2018		600		599		598		1.6	%
Sub Total U.S. Government Securities			$	5,660	$	5,645	$	5,626		15.1	%

Investments - Money Market - 1.7% ^(b)
Investments - U.S. Bank Money Market		0.15%	$	266	$	266	$	266		0.7	%
Investments - Wells Fargo Money Market		0.01%		382		382		382		1.0	%
Sub Total Investments - Money Market			$	648	$	648	$	648		1.7	%

TOTAL INVESTMENTS - 114.7% ^(b)					$	39,794	$	42,781		114.7	%

(a)

Represents a non-qualifying investment as defined under Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying investments represent 0.1% of the Fund's (VII Peaks Co-OptivistTM Income BDC, II, Inc.) portfolio at fair value. As a BDC, the Fund can only invest 30% of its portfolio in non-qualifying assets.

(b)

Percentages are based on net assets of $37,295 as of March 31, 2017.

(c)

Non-income producing as of March 31, 2017.

(d)

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

(e)

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

(f)

The company filed for bankruptcy in Delaware on August 8, 2016 and is in the final stages of restructuring. The Fund participated in DIP financing as part of the company’s restructuring process during bankruptcy and has received a PIK Second Lien Exit Facility T/L in exchange. On April 28, 2017, the remaining unexchanged bonds were converted to equity.

(g)

On December 31, 2016, the bankruptcy court entered an order confirming the plan of reorganization of UCI International, LLC according to which the holders of senior unsecured notes will receive new common stock at the rate of $21.94 per $1,000 par value of notes. The Fund received notification of delivery of the shares on April 10, 2016.

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

VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

SCHEDULE OF INVESTMENTS

(dollars and shares in thousands)

December 31, 2016

Portfolio Company	Industry	Investment Coupon Rate, Maturity Date	Principal / No. of Shares		Amortized Cost		Fair Value		% of Net Assets
Senior Secured First Lien Debt -50.6% ^(b)
Ansgar Media, LLC ^(e)	Media: Broadcasting & Subscription	12.00%, 1/11/2018	$	2,000	$	2,000	$	2,000		5.9	%
Ansgar Media, LLC ^(e)	Media: Broadcasting & Subscription	12.00%, 9/18/2017		2,000		2,000		2,000		5.9	%
Ansgar Media, LLC ^(e)	Media: Broadcasting & Subscription	12.00%, 10/24/2018		310		310		310		0.9	%
Ansgar Media, LLC ^(e)	Media: Broadcasting & Subscription	12.00%, 10/27/2018		1,540		1,540		1,540		4.6	%
APX Group, Inc.	Services: Consumer	6.38%, 12/1/2019		825		825		849		2.6	%
Claire's Stores, Inc. Term Loan ^(h)	Retail	9.00%, 9/20/2021		125		263		125		0.4	%
CLSIP LLC Term Loan ^(h)	Retail	9.00%, 9/20/2021		407		856		407		1.2	%
GeoCommerce, Inc.	Technology	12.00%, 5/15/2018		1,000		745		1,000		3.0	%
GeoCommerce, Inc.	Technology	12.00%, 4/27/2018		1,500		898		1,500		4.5	%
GeoCommerce, Inc.	Technology	12.00%, 10/14/2018		750		390		750		2.2	%
GeoCommerce, Inc.	Technology	12.00%, 12/21/2018		750		368		750		2.2	%
Nima, LLC	Consumer Electronics	12.00%, 5/20/2018		2,000		1,201		2,000		5.9	%
Nima, LLC	Consumer Electronics	12.00%, 8/11/2018		1,000		1,000		1,000		3.0	%
Nima, LLC	Consumer Electronics	12.00%, 11/2/2018		750		750		750		2.2	%
Nima, LLC	Consumer Electronics	12.00%, 12/21/2018		750		750		750		2.2	%
Goodman Networks, Inc.	Telecommunications	12.13%, 7/1/2018		800		823		240		0.7	%
Kratos Defense & Security Solutions, Inc.	Aerospace and Defense	7.00%, 5/15/2019		1,112		1,015		1,079		3.2	%
Sub Total Senior Secured First Lien Debt			$	17,619	$	15,734	$	17,050		50.6	%

Senior Secured Second Lien Debt - 1.5% ^(b)
Nuverra Environmental Solutions, Inc.	Environmental Industries	12.50%, 4/15/2022	$	1,408	$	1,362	$	269		0.8	%
Logan's Roadhouse, Inc.^{(c) (f)}	Beverage, Food & Tobacco	10.75%, 10/15/2017		674		633		87		0.2	%
Logan's Roadhouse, Inc. PIK Exit Facility Term Loan ^(f)	Beverage, Food & Tobacco	9.50% PIK, 11/23/2020		162		146		162		0.5	%
Saratoga Resources, Inc. ^(c)	Energy: Oil & Gas	12.50%, 7/1/2016		885		912		2		0.0	%
Sub Total Senior Secured Second Lien Debt			$	3,129	$	3,053	$	520		1.5	%

Senior Unsecured Debt - 14.5% ^(b)
APX Group, Inc.	Services: Consumer	8.75%, 12/1/2020	$	575	$	559	$	579		1.7	%
Claire’s (Gibraltar) Holdings Limited Term Loan ^(h)	Retail	9.00%, 9/20/2021		188		395		188		0.6	%
Clear Channel Communications	Media: Broadcasting & Subscription	10.00%, 1/15/2018		1,400		1,375		1,050		3.1	%
Colt Defense, LLC	Aerospace and Defense	8.00%, 7/12/2021		137		1,033		137		0.4	%
DynCorp International Inc.	Aerospace and Defense	11.88%, 11/30/2020		1,020		1,032		908		2.7	%
Gymboree Corp.	Retail	9.13%, 12/1/2018		810		785		364		1.1	%
Seitel, Inc.	Energy: Oil & Gas	9.50%, 4/15/2019		1,575		1,575		1,418		4.2	%
UCI International, Inc. ^{(c) (i)}	Automobile	8.63%, 2/15/2019		1,400		1,354		238		0.7	%
Sub Total Senior Unsecured Debt			$	7,105	$	8,108	$	4,882		14.5	%

Senior Subordinated Debt - 3.1% ^(b)
DJO Finance, LLC	Healthcare & Pharmaceuticals	10.75%, 4/15/2020		1,265		1,320		1,050		3.1	%
Sub Total Senior Subordinated Debt			$	1,265	$	1,320	$	1,050		3.1	%

Equity Securities - 28.7%^(b)
Affinion Group, Inc. ^(c)	Media: Advertising, Printing & Publishing			13	$	689	$	50		0.2	%
Aspire Holdings ^(c)	Energy: Oil & Gas			26		551		40		0.1	%
Aspect Software, Inc. ^{(c) (g)}	Telecommunications			8		244		331		1.0	%
Education Management, LLC ^(c)	Services: Consumer			2,530		4		-		0.0	%
NII Holdings, Inc. ^{(a) (c)}	Telecommunications			17		768		36		0.1	%
Total Common Stock						2,256		457		1.4	%

Ansgar Media, LLC- Class B Units ^{(c) (d) (e)}	Media: Broadcasting & Subscription			-		-		3,519		10.4	%
Total Preferred Stock						-		3,519		10.4	%

GeoCommerce, Inc. ^(c)	Technology			875		1,883		3,684		11.0	%
Nuverra Environmental Solutions, Inc. ^(c)	Environmental Industries			61		-		10		0.0	%
Nima, LLC^(c)	Consumer Electronics			2,000		1,000		2,000		5.9	%
Education Management, LLC^(c)	Services: Consumer			1,554		876		-		0.0	%
Total Warrants						3,759		5,694		16.9	%

Sub Total Equity Securities					$	6,015	$	9,670		28.7	%

U.S. Government Securities - 21.3% ^(b)
U.S. Treasury Bill		0.63%, 8/31/2017	$	800	$	799	$	799		2.4	%
U.S. Treasury Bill		0.75%, 10/31/2017		1,600		1,599		1,598		4.8	%
U.S. Treasury Bill		0.75%, 8/15/2019		1,710		1,700		1,684		5.0	%
U.S. Treasury Bill		0.63%, 11/30/2017		1,700		1,699		1,696		5.0	%
U.S. Treasury Bill		0.75%, 4/15/2018		1,400		1,398		1,396		4.1	%
Sub Total U.S. Government Securities			$	7,210	$	7,195	$	7,173		21.3	%

Investments - Money Market - 0.5% ^(b)
Investments - U.S. Bank Money Market		0.10%	$	34	$	34	$	34		0.1	%
Investments - Wells Fargo Money Market		0.01%		123		123		123		0.4	%
Sub Total Investments - Money Market			$	157	$	157	$	157		0.5	%

TOTAL INVESTMENTS - 120.2% ^(b)					$	41,582	$	40,502		120.2	%

(a)

(b)

Percentages are based on net assets of $33,682 as of December 31, 2016.

(c)

Non-income producing as of December 31, 2016.

(d)

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

(e)

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

(f)

The company filed for bankruptcy in Delaware on August 8, 2016 and is in the final stages of restructuring. The Fund participated in DIP financing as part of company’s restructuring process during bankruptcy and has received PIK Second Lien Exit Facility T/L in exchange. Equity exchange is still in process.

(g)

On November 25, 2016, 3.00% PIK senior unsecured convertible notes were exchanged out for mandatory conversion to shares of common stock of Aspect Software Parent, Inc. at a rate of 1/30 i.e. one common share per $30.00 in principal amount of notes outstanding.

(h)

On September 20, 2016, Claire's Stores 10.50% senior subordinated notes and 8.875% senior secured second lien notes were exchanged out for mandatory conversion to Claire's Stores, Inc. First Lien Term Loan, CLSIP LLC Term Loan and Claire's (Gibraltar) Holdings Limited Term Loan.

(i)

On December 31, 2017, the bankruptcy court entered an order confirming the plan of reorganization of UCI International, LLC according to which the holders of senior unsecured notes will receive new common stock at the rate of $21.94 per $1,000 par value of notes. The Fund received notification of delivery of shares on April 10, 2017.

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

VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

NOTES TO FINANCIAL STATEMENTS

March 31, 2017

(unaudited)

Note 1. Nature of Operations

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

We invest in discounted corporate debt, senior secured term loan and equity-linked debt securities of public and private companies that trade on the secondary loan market for institutional investors and provide distributions to investors. The debt is generally high-yield and non-investment grade. At the same time, we actively work with the target company’s management to restructure the underlying securities and improve the liquidity position of the target company’s balance sheet. We employ a proprietary “Co-Optivist” ^TM approach (“cooperative activism”) in executing our investment strategy, which entails proactively engaging the target company management on average 24 months prior to a redemption event (typically a put or maturity event) to create an opportunity for growth in the investments. Co-Optivist ^TM is a registered trademark of VII Peaks Capital, LLC, or (“VII Peaks” or the “Manager”), and is being used with their permission. Our strategy is not dependent on restructuring to generate distributions. Capital appreciation on securities is generally not realized evenly over the holding period. In some instances market prices for securities may continue to reflect a discount until a relatively short time period prior to a redemption event. The potential capital gain typically occurs during the end of the holding period of a bond in our portfolio when securities are either called by the company or exchanged for new securities during refinance. In addition, we also provide direct loans with equity warrant coverage to portfolio companies to help facilitate corporate expansion.

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

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

We make investments in target companies that meet our investment criteria. The size of an individual investment will vary based on numerous factors, including the amount of funds raised in our offering. However, assuming we raise the maximum offering amount of $750.0 million, we expect to hold at least 50 investments, and we anticipate that the minimum investment size will be approximately $250,000. We do not anticipate being heavily invested in any one industry, and generally, we do not expect to invest in more than two different classes of debt of the same target company. We invest in debt and equity-linked debt of target companies with a minimum enterprise value of $200.0 million and whose debt and equity-linked debt is actively traded in the secondary loan market. We also make senior secured direct loan investments in companies with a minimum enterprise value of $5.0 million. For such senior secured direct loan investments, we may receive equity securities to boost overall returns. We expect our portfolio to be predominantly composed of fixed-rate high-yield, senior secured term loan and equity-linked corporate debt securities. However, we may also purchase senior secured corporate debt securities which may have variable interest rates. We currently anticipate that the portion of our portfolio composed of variable rate corporate debt securities, if any, will not exceed 20%, but we may increase that to 33% of our aggregate portfolio at the time of any purchase depending on market opportunities.

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

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

On August 9, 2011, we filed a registration statement on Form N-2 to sell up to 75,000,000 shares of common stock, $0.001 par value per share, at an initial public offering price of $10.00 per share. The registration statement was declared effective by the SEC on March 1, 2012. We commenced operations when we raised gross offering proceeds of over $1.0 million, all of which was from persons who were not affiliated with us or our Manager by one year from the date the registration statement was declared effective by the SEC. Prior to the successful satisfaction of that condition, all subscription payments were placed in an account held by the escrow agent, UMB Bank, N.A., in trust for the benefit of our subscribers, pending release to us. We achieved the minimum offering requirement on July 10, 2012 and commenced operations on such date. As of March 31, 2017, we issued 6.7 million shares of common stock, including 0.6 million shares under our distribution reinvestment plan (“DRIP”), less 0.3 million shares redeemed under our tender offer. Gross proceeds from our common stock issuances total $65.8 million, including $5.0 million under our DRIP less $2.9 million paid to redeem shares in our prior quarterly tender offers.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The financial statements of the Fund included herein were prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments and accruals, necessary for a fair presentation of the results for the interim period. This Form 10-Q should be read in conjunction with the Fund’s Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the SEC on June 2, 2017. 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, 2017.

Use of Estimates in the Preparation of Financial Statements

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

Investments – Money Market

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

Investment Classification

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

Organizational and Offering Costs

The Fund is a closed-end fund with a continuous offering period. Under the investment advisory agreement between the Fund and the Manager, our Manager fronts the initial cost of the organizational and offering expenses, but the Fund is obligated to reimburse the Manager for such costs to the extent of 1.5% of the gross offering proceeds in our continuous offering. The Fund also agreed to reimburse the Manager for organization and offering expenses incurred by a prior manager in consideration for the Manager’s agreement to pay $1.3 million owed to the Fund by the prior manager under an expense reimbursement agreement, which amount the Manager paid in full during the year ended December 31, 2014. The Fund expenses organizational and offering costs as they become payable under the investment advisory agreement.

U.S. Federal Income Taxes

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

The Fund has evaluated the implications of Accounting Standards Codification (“ASC”) Topic 740, Accounting for Income Taxes, (“ASC Topic 740”) for all tax years and in all major tax jurisdictions, and determined that there is no material impact on the financial statements.

New Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that the statements of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The new guidance is effective for annual and interim periods, beginning after December 15, 2017, and early adoption is permitted and is to be applied on a retrospective basis. Management is currently evaluating the impact this guideline will have on the Fund's financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted for public business entities. Management is currently evaluating the impact this guideline will have on the Fund's financial statements.

In August 2014, FASB issued ASU No. 2014-15, Presentation of Financial Statements- Going Concern (Subtopic 205-40) ("ASU 2014-15"). ASU 2014-15 requires management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period, including interim periods, (3) provide principles for considering the mitigating effect of Management's plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of Management's plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for any annual periods and interim periods thereafter. We adopted the provisions of ASU 2014-15 in 2016. The adoption of ASU 2014-15 did not require any additional disclosures in our financial statements for the year ended December 31, 2016.

In May 2014, the FASB issued ASU No. 2014-09, Revenue with Contracts from Customers (Topic 606). ASU No. 2014-09 provides clarification on the principles to recognize revenue and to develop a common standard between GAAP and IFRS. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09, Revenue with Contracts from Customers , to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Management continues to review the requirements and believes the adoption of the ASU will not have a material impact on its financial statements.

Revenue Recognition

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

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

In connection with our debt investments, we may receive warrants or similar equity-related securities ("Warrants"). We determine the cost basis of Warrants based upon their fair values on the date of receipt relative to the total fair value of the debt and Warrants received. Any resulting difference between the face amount of the debt and its recorded cost resulting from the assignment of value to the Warrants is treated as original issue discount (“OID”), and accreted into interest income over the life of the debt investment using a method that approximates the effective interest method. Similarly, loan origination fees are capitalized and amortized as other income over the life of the loan.

Our total investment income was $1.0 million for the three months ended March 31, 2017, as compared to $0.6 million for the three months ended March 31, 2016. The increase in total investment income for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016 was primarily due to the increase in interest income and fee income from direct lending investments in senior secured notes. At March 31, 2017, the weighted average coupon yield was 9.3%, as compared to 7.1% at March 31, 2016. This coupon yield is for the non-defaulted and non-equity positions. Based on current and prior three quarters’ net assets, average net assets as of March 31, 2017 were $34.1 million, as compared to $35.4 million as of March 31, 2016.

For the three months ended March 31, 2017, fourteen of the investments in the portfolio did not accrue interest as either the investment is an equity security or the issuers were in default of the coupon payment for more than the thirty-day grace period. Interest income was accrued through the date of the last coupon payment received for the debt investments. The following table presents those fourteen investments:

Portfolio Company	Asset Type	Investment Coupon Rate			Maturity Date
Affinion Group, Inc.⁽²⁾	Equity – Common Stock		-			-
Ansgar Media, LLC - Class B Units	Equity – Preferred Stock		-			-
Aspect Software, Inc. ⁽³⁾	Equity – Common Stock		-			-
Aspire Holdings ⁽¹⁾	Equity – Common Stock		-			-
Education Management, LLC	Equity – Common Stock		-			-
Education Management, LLC ⁽⁴⁾	Warrant		-			-
Digital Golf Technologies, LLC	Warrant		-			-
GeoCommerce, Inc.	Warrant		-			-
Logan's Roadhouse, Inc. ⁽⁷⁾	Senior Secured Second Lien Debt		10.75	%		October 15, 2017
NII Holdings, Inc.⁽⁵⁾	Equity – Common Stock		-			-
Nima, LLC	Warrant		-			-
Nuverra Environmental Solutions, Inc. ⁽⁶⁾	Warrant		-			-
Saratoga Resources, Inc.	Senior Secured Second Lien Debt		12.50	%		July 1, 2016
UCI International, Inc.	Senior Unsecured Debt		8.63	%		February 15, 2019

(1)	Converted from exchange of 12.00% Endeavour International Corp first lien bonds.
(2)	Received in exchange of 13.50% senior subordinated bonds.
(3)	Converted from exchange of 3.00% PIK senior unsecured convertible notes.
(4)	Received in exchange of 15.00% Cash/PIK bonds.
(5)	Received in exchange of 10.00% senior unsecured debt.
(6)	Received early exchange fees in form of warrants for participating in the exchange offer.

(7)

Note 3. Valuation of Portfolio Investments

The Fund has adopted FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”), which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements.

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

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

Level 3: Unobservable inputs for the asset or liability.

The investment portfolio is recorded on a trade date basis. The Fund determines the net asset value of its investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Nineteen investments were valued using the closing market price at period end March 31, 2017.

Due to the inherent uncertainty of determining the fair value of Level 3 investments, the fair value of the investments may differ significantly from the values that would have been used had a ready market or observable inputs existed for such investments and may differ materially from the values that may ultimately be received or settled. If the Company were required to liquidate a portfolio in a forced or liquidation sale, the Company might realize significantly less than the value at which such investment had previously been recorded.

The following table presents investments that are not publically-traded or have no closing market price, as of March 31, 2017.

Portfolio Company	Asset Type	Investment Coupon Rate			Maturity Date
Ansgar Media, LLC - Class B Units	Equity – Preferred Stock		-			-
Ansgar Media, LLC	Senior Secured First Lien Debt		12.00	%		January 11, 2018
Ansgar Media, LLC	Senior Secured First Lien Debt		12.00	%		September 18, 2017
Ansgar Media, LLC	Senior Secured First Lien Debt		12.00	%		October 24, 2018
Ansgar Media, LLC	Senior Secured First Lien Debt		12.00	%		October 27, 2018
Aspire Holdings ⁽¹⁾	Equity – Common Stock		-			-
Aspect Software, Inc. ⁽²⁾	Equity – Common Stock		-			-
Claire's Stores, Inc. Term Loan ⁽³⁾	Senior Secured First Lien Debt		9.00	%		September 20, 2021
CLSIP LLC Term Loan ⁽³⁾	Senior Secured First Lien Debt		9.00	%		September 20, 2021
Claire’s (Gibraltar) Holdings Limited Term Loan ⁽³⁾	Senior Unsecured Debt		9.00	%		September 20, 2021
Colt Defense, LLC ⁽⁴⁾	Senior Unsecured Debt		8.00	%		December 15, 2020
Digital Golf Technologies, LLC	Senior Secured First Lien Debt		13.00	%		January 11, 2020
Digital Golf Technologies, LLC	Warrant		-			-
Education Management LLC	Equity – Common Stock		-			-
Education Management LLC	Warrant		-			-
GeoCommerce, Inc.	Senior Secured First Lien Debt		12.00	%		April 27, 2018
GeoCommerce, Inc.	Senior Secured First Lien Debt		12.00	%		May 15, 2018
GeoCommerce, Inc.	Senior Secured First Lien Debt		12.00	%		October 14, 2018
GeoCommerce, Inc.	Senior Secured First Lien Debt		12.00	%		December 21, 2018
GeoCommerce, Inc.	Warrant		-			-
Logan's Roadhouse, Inc. ⁽⁵⁾	Senior Secured Second Lien Debt		10.75	%		October 15, 2017
Logan's Roadhouse, Inc. PIK Exit Facility Term Loan ⁽⁵⁾	Senior Secured Second Lien Debt		9.50	%		November 23, 2020
Nima, LLC	Senior Secured First Lien Debt		12.00	%		May 20, 2018
Nima, LLC	Senior Secured First Lien Debt		12.00	%		August 11, 2018
Nima, LLC	Senior Secured First Lien Debt		12.00	%		November 2, 2018
Nima, LLC	Senior Secured First Lien Debt		12.00	%		December 21, 2018
Nima, LLC	Senior Secured First Lien Debt		12.00	%		February 16, 2019
Nima, LLC	Warrant		-			-
Nuverra Environmental Solutions, Inc.	Senior Secured Second Lien Debt		12.50	%		April 15, 2021
Nuverra Environmental Solutions, Inc.	Warrant		-			-

(1)	Converted from exchange of 12.00% Endeavour International Corp, senior secured first lien debt.
(2)	The original 10.63% senior secured second lien notes due on May 15, 2017 defaulted. As part of Aspect’s bankruptcy and planned reorganization process, the Fund participated in a rights offering to purchase a new 3.00% PIK senior unsecured convertible note maturing on May 23, 2023 in an effort to facilitate recovery of its previous investment in the senior secured lien notes in Aspect. On November 25, 3.00% PIK senior unsecured convertible notes were exchanged out for mandatory conversion to shares of common stock of Aspect Software Parent, Inc. at a rate of 1/30 i.e. one common share per $30.00 in principal amount of notes outstanding.
(3)	On September 20, 2016, all of 10.50% senior subordinated notes and 8.88% senior secured second lien notes were exchanged for 9.00% of Claire’s Stores, Inc. Term Loan, CLSIP Term Loans and of Claire’s Gibralter Term Loans.
(4)	On January 19, 2016, there was a mandatory exchange offer to exchange all of the 8.75% senior unsecured notes to 8.00% PIK third lien notes.
(5)	The company filed for bankruptcy in Delaware on August 8, 2016 and is in the final stages of restructuring. The Fund participated in DIP financing as part of the company’s restructuring process during bankruptcy and has received a PIK second lien exit facility T/L in exchange. On April 28, 2017, the remaining unexchanged bonds were converted to equity.

Securities that are not publicly-traded are valued at fair value as determined in good faith by the Board of Directors, or a committee thereof. In connection with that determination, the Manager will prepare portfolio company valuations using relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, the most recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services. With respect to investments for which market quotations are not readily available, the Fund undertakes a multi-step valuation process each quarter, as described below:

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

preliminary valuation conclusions are then documented and discussed with the members of the Board of Directors, or committee thereof; and

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

In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, mergers and acquisition comparables, the principal market and enterprise values, among other factors.

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

The following table presents fair value measurements of investments, by major class, as of March 31, 2017 per the fair value hierarchy (dollars in thousands):

	Level 1		Level 2		Level 3		Total
Investments – Money Market	$	648	$	—	$	—	$	648
U.S. Government Securities		—		5,626		—		5,626
Senior Secured First Lien Debt		—		1,923		16,332		18,255
Senior Secured Second Lien Debt		—		2		551		553
Senior Unsecured Debt		—		2,482		330		2,812
Senior Subordinated Debt		—		1,028		—		1,028
Equity Securities		—		136		13,723		13,859
Total	$	648	$	11,197	$	30,936	$	42,781

The following table presents fair value measurements of investments, by major class, as of December 31, 2016 according to the fair value hierarchy (dollars in thousands):

	Level 1		Level 2		Level 3		Total
Investments – Money Market	$	157	$	—	$	—	$	157
U.S. Government Securities		—		7,173		—		7,173
Senior Secured First Lien Debt		—		2,168		14,882		17,050
Senior Secured Second Lien Debt		—		2		518		520
Senior Unsecured Debt		—		4,557		325		4,882
Senior Subordinated Debt		—		1,050		—		1,050
Equity Securities		—		86		9,584		9,670
Total	$	157	$	15,036	$	25,309	$	40,502

There were no transfers between levels for the three months ended March 31, 2017. There were five transfers from Level 2 to Level 3 for the year ended December 31, 2016. Transfers were Claire’s Stores, Inc. Term Loan 9.00% senior secured first lien debt, due September 20, 2021; CLSIP, LLC Term Loan 9.00% senior secured first lien debt, due September 20, 2021; Claire’s (Gibraltar) Holdings Limited Term Loan 9.00% senior unsecured debt, due September 20, 2021; Nuverra Environmental Solutions, Inc. senior secured second lien debt 12.50%, due April 15, 2022; and Logan’s Roadhouse, Inc. 10.75% senior secured second lien debt, due October 15, 2017, which will be converted to senior secured term loans once the company’s restructuring completes. There was one transfer from Level 3 to Level 2 for the year ended December 31, 2016. The transfer was Affinion Group, Inc. common stock equity.

During the year ended December 31, 2016, the following were the transfers in or out of levels (dollars in thousands):

	Level 1		Level 2			Level 3			Total
Senior Secured First Lien Debt	$	—	$	(533	)	$	533		$	—
Senior Secured Second Lien Debt		—		(356	)		356			—
Senior Unsecured Debt		—		(188	)		188			—
Equity Securities		—		51			(51	)		—
Total	$	—	$	(1,026	)	$	1,026		$	—

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

Changes in Level 3 assets measured at fair value for the three months March 31, 2017 are as follows (dollars in thousands):

	Fair Value at December 31, 2016		Transfers in / (out)		Reclassification		Purchases (Sales and Settlement)⁽¹⁾		Amortization and Accretion of Fixed Income Premiums and Discounts			Realized and Unrealized Gains (Losses)			Fair Value at March 31, 2017		Change in Unrealized appreciation (depreciation) for Investments held as of March 31, 2017
Senior Secured First Lien Debt	$	14,882	$	-	$	-	$	1,359	$	297		$	(206	)	$	16,332	$	(206	)
Senior Secured Second Lien Debt		518		-		-		4		(1	)		30			551		31
Senior Unsecured Debt		325		-		-		-		2			3			330		4
Equity Securities		9,584		-		-		91		-			4,048			13,723		4,048
Total	$	25,309	$	-	$	-	$	1,454	$	298		$	3,875		$	30,936	$	3,877

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

Realized and unrealized gains and losses are included in net realized gain (loss) from investments and net unrealized appreciation (depreciation) on investments in the statements of operations. The change in unrealized appreciation for Level 3 investments still held as of March 31, 2017 of $3.9 million is included in net unrealized appreciation on investments in the statements of operations for the three months March 31, 2017.

Changes in Level 3 assets measured at fair value for the year ended December 31, 2016 are as follows (dollars in thousands):

	Fair Value at December 31, 2015		Transfers in / (out)			Reclassification			Purchases (Sales and Settlement)⁽¹⁾		Amortization and Accretion of Fixed Income Premiums and Discounts		Realized and Unrealized Gains (Losses)		Fair Value at December 31, 2016		Change in Unrealized appreciation (depreciation) for Investments held as of December 31, 2016
Senior Secured First Lien Debt	$	2,525	$	533		$	(525	)	$	12,349	$	-	$	-	$	14,882	$	(586	)
Senior Secured Second Lien Debt		8		356			-			139		-		15		518		(513	)
Senior Unsecured Debt		132		188			-			-		4		1		325		(205	)
Equity Securities		3,126		(51	)		525			244		-		5,740		9,584		5,740
Total	$	5,791	$	1,026		$	-		$	12,732	$	4	$	5,756	$	25,309	$	4,436

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

Realized and unrealized gains and losses are included in net realized gain (loss) from investments and net unrealized appreciation (depreciation) on investments in the statements of operations. The change in unrealized appreciation for Level 3 investments still held as of December 31, 2016 of $4.4 million is included in net unrealized appreciation on investments in the statements of operations for the year ended December 31, 2016.

The following table provides quantitative information regarding Level 3 fair value measurements as of March 31, 2017 (dollars in thousands):

							Range
	Fair Value		Valuation Technique	Unobservable Input	Mean		Minimum		Maximum
Senior Secured First Lien Debt	$	16,332	Discounted Cash Flow analysis / EBITDA multiples / Enterprise Value	Transaction Value Market premium for loan interest rate	$	16,332	$	16,332	$	16,332
Senior Secured Second Lien Debt		551	Liquidation	Transaction Value		551		551		551
Senior Unsecured Debt		330	Liquidation	Transaction Value		330		330		330
Equity Securities		13,723	Income Approach/Market Approach	Transaction Value / Discounted Cash Flows		16,964		13,160		20,768
Total	$	30,936

As part of liquidation analysis, the Fund performs a leveraged buyout analysis of its portfolio companies and calculates asset coverage and recovery value for each individual loan.

The following table provides quantitative information regarding Level 3 fair value measurements as of December 31, 2016 (dollars in thousands):

							Range
	Fair Value		Valuation Technique	Unobservable Input	Mean		Minimum		Maximum
Senior Secured First Lien Debt	$	14,882	Discounted Cash Flow analysis / EBITDA multiples / Enterprise Value	Transaction Value Market premium for loan interest rate	$	14,882	$	14,882	$	14,882
Senior Secured Second Lien Debt		518	Liquidation	Transaction Value		518		518		518
Senior Unsecured Debt		325	Liquidation	Transaction Value		325		325		325
Equity Securities		9,584	Income Approach/ Market Approach	Transaction Value / Discounted Cash Flows		12,825		9,584		16,066
Total	$	25,309

The primary significant unobservable inputs used in the fair value measurement of the Fund's senior secured second lien debt and senior unsecured debt were the fair value of the exchanged bonds/equity offered by the issuer or the price as evidenced by trades in the secondary market (Colt Defense, LLC, Claire's Stores Gibraltar T/L, two Logan's Roadhouse, Inc. and Nuverra Environmental Co.).

The composition of the Fund’s investments as of March 31, 2017, at amortized cost and fair value were as follows (dollars in thousands):

	Investments at Amortized Cost		Investments at Fair Value		Fair Value Percentage of Total Portfolio
Investments – Money Market	$	648	$	648		1.5	%
U.S. Government Securities		5,645		5,626		13.1
Senior Secured First Lien Debt		17,082		18,255		42.7
Senior Secured Second Lien Debt		3,056		553		1.3
Senior Unsecured Debt		5,940		2,812		6.6
Senior Subordinated Debt		1,316		1,028		2.4
Equity Securities		6,107		13,859		32.4
Total	$	39,794	$	42,781		100.0	%

The composition of the Fund’s investments as of December 31, 2016, at amortized cost and fair value were as follows (dollars in thousands):

	Investments at Amortized Cost		Investments at Fair Value		Fair Value Percentage of Total Portfolio
Investments – Money Market	$	157	$	157		0.4	%
U.S. Government Securities		7,195		7,173		17.7
Senior Secured First Lien Debt		15,734		17,050		42.1
Senior Secured Second Lien Debt		3,053		520		1.3
Senior Unsecured Debt		8,108		4,882		12.0
Senior Subordinated Debt		1,320		1,050		2.6
Equity Securities		6,015		9,670		23.9
Total	$	41,582	$	40,502		100.0	%

Note 4. Related Party Transactions

We have entered agreements with the Manager, whereby we pay it certain fees and reimbursements. These include payments to our Manager for reimbursement of organization and offering costs, as well as payments for certain services that include, but are not limited to, the identification, execution, and management of our investments and also the management of our day-to-day operations provided to us by our Manager.

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

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

Due from related party consists of $51,000 of true up for management fees from writing down certain portfolio investments at the end of a quarter in prior quarters, $51,000 in Blue Sky state filing fees by the Fund instead of our Manager, $17,000 in allocation of the Directors and Officers insurance policy costs to our Manager, and $90,000 in expenses related to legal and other operational costs allocated to our Manager instead of the Fund.

At March 31, 2017, $25,000 of the $141,441 of prepaid expenses was prepaid management fees for the second quarter of 2017.

Due diligence fees received by the Fund from the borrowers related to the Fund’s direct lending transactions are remitted to our Manager, VII Peaks Capital, LLC, as the collateral and administrative agent for the loans. Due diligence fees received are not revenues or expenses of the Fund and therefore are not reflected in the financial statements. Fees for the three months ended March 31, 2017 and 2016 totaled $80,000 and $475,000, respectively.

Investment Advisory Agreement

The Fund has entered into an investment advisory agreement with the Manager to manage the Fund’s investment activities. Pursuant to the investment advisory agreement, the Manager implements the Fund’s business strategy on a day-to-day basis and performs certain services for us, subject to oversight by our Board of Directors, or a committee thereof. The Manager is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties. The initial investment advisory agreement was signed on August 20, 2013 and was effective for two years. The agreement must be re-approved annually thereafter by a majority of the non-interested members of the Board of Directors. On August 22, 2016, the non-interested members of the Board of Directors re-approved the agreement between the Manager and the Fund under the agreement’s existing terms.

Under the investment advisory agreement, the Manager is entitled to a base management and incentive fee as outlined in the investment advisory agreement with the Fund. The base management fee is 2% of net assets below $100.0 million; 1.75% of net assets between $100.0 million and $250.0 million; and 1.5% of net assets over $250.0 million. For the three months ended March 31, 2017 and 2016, the Fund incurred $0.2 million and $0.1 million of base management fees, respectively.

The incentive fee has two parts. The first part, the subordinated incentive fee on income, is calculated and payable quarterly in arrears based upon the Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter. The subordinated incentive fee on income is 20% of pre-incentive net investment income subject to a quarterly return to investors, expressed as a rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 2.0% (8.0% annualized). The second part of the incentive fee, the incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated investments from the portfolio and is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement). This fee equals 20% of the Fund’s incentive fee capital gains, which will equal the Fund’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains and incentive fees. For the three months ended March 31, 2017 and 2016, the Fund did not incur any incentive fees related to net investment income or capital gains.

Under U.S. GAAP, the Fund calculates capital gains incentive fees as if the Fund had realized all assets at their fair values and liabilities at their settlement amounts as of the reporting date. U.S. GAAP requires that the capital gains incentive fee accrual assume the cumulative aggregate unrealized capital appreciation is realized, even though such unrealized capital appreciation is not payable under the investment advisory agreement. Accordingly, the Fund accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. There can be no assurance that such unrealized capital appreciation will be realized in the future and that the provisional capital gains incentive fee will become payable.

Under the investment advisory agreement, the Manager bears all offering and organizational expenses. Pursuant to the terms of the investment advisory agreement, the Fund has agreed to reimburse the Manager for any such organizational and offering expenses incurred by the Manager not to exceed 1.5% of the gross subscriptions raised by the Fund over the course of the offering period. From each sale of common stock, the Fund pays the Manager the lesser of 1.5% of the gross offering proceeds or the amount of unreimbursed offering and organizational expenses incurred by the Manager. The Fund expenses organizational and offering costs as they become payable to the Manager under the investment advisory agreement.

Administration Agreement

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

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

Note 5. Common Stock

Initially, the Manager purchased 111 and 22,222 shares of common stock on August 31, 2011 and December 31, 2011, respectively. These shares were purchased at a price of $9.00 per share, which represents the initial public offering (“IPO”) price of $10.00 per share, net of selling commissions and dealer manager fees. The Manager sold these shares on June 27, 2014.

On July 10, 2012, the Fund had raised sufficient proceeds to break escrow on its IPO and through March 31, 2017, the Fund has sold 6.7 million shares of common stock for gross proceeds of $65.8 million including the purchases made by the Manager.

During the three months ended March 31, 2017, the Fund did not sell any shares of common stock as its prospectus was not effective. Also, for the three months ended March 31, 2017, there were no treasury shares repurchased.

Note 6. Borrowings

Wells Fargo Credit Facility

On August 4, 2015, the Fund entered an agreement with Wells Fargo Advisors, LLC for a revolving line of credit. The amount the Fund can borrow is based upon the value of cash deposited in an account at Wells Fargo Advisors, LLC and the treasury notes that Wells Fargo purchases, which serve as collateral for the loan. On August 27, 2015, the Fund initially drew down $2.0 million. As of March 31, 2017 and December 31, 2016, the outstanding balance under this credit line was $5.3 million and $6.4 million, respectively. The interest rate on the outstanding balance is a negotiated rate based on the Fund’s assets under management with Wells Fargo Advisors, LLC and is 3.5% and 3.25% at March 31, 2017 and December 31, 2016, respectively. The term of the line of credit is indefinite and may be terminated by the Fund or Wells Fargo Advisors, LLC at any time.

At the end of March, the Fund began selling the treasury notes that Wells Fargo held as collateral for the line of credit. The line was paid off in April and the remaining securities held at Wells Fargo were transferred to US Bank, the Fund’s administrator. In May, the accounts at Wells Fargo were closed.

Note 7. Earnings (Loss) Per Share

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

The following information sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for the three months ended March 31, 2017 and 2016 (dollars in thousands, except share and per share amounts):

	For the Three Months Ended March 31,		For the Three Months Ended March 31,
	2017		2016
Basic and diluted:
Net increase in net assets resulting from operations	$	4,334	$	579
Weighted average common shares outstanding		6,350,239		6,196,289
Net increase in net assets resulting from operations per share	$	0.68	$	0.09

The Fund had no potentially dilutive securities as of March 31, 2017 and March 31, 2016, resulting in the same number of shares for basic and diluted.

Note 8. Tender Offer Program

We do not currently intend to list our shares on any securities exchange and do not expect a public market for them to develop in the foreseeable future. Therefore, shareholders should not expect to be able to sell their shares promptly or at a desired price. Beginning with the fourth calendar quarter of 2013, and on a quarterly basis through June 30, 2015, the Board of Directors approved a tender offer to repurchase shares of our common stock at a price equal to 90% of our offering price on the date of repurchase. In the third quarter of 2015, the Board of Directors decided to suspend the repurchase program, as the Fund was not raising any new capital. When a tender offer is approved by the Board of Directors, we intend to limit the number of shares to be repurchased during any calendar year to 20% of the weighted average number of shares outstanding in the prior calendar year, or 5.0% in each quarter, though the actual number of shares that we offer to repurchase may be less considering the limitations noted above. We will offer to repurchase such shares on each date of repurchase at a price equal to 90% of our offering price. For the three months ended March 31, 2017, no tender offer was approved by the Board of Directors.

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

For the period ended	Repurchase Date	Shares Repurchased		Percent of Shares Tendered that were Repurchased			Repurchase Price Per Share		Aggregate Consideration For Repurchased Shares (‘000s)*
December 13, 2013	December 12, 2013		548		100	%	$	9.135	$	5
March 31, 2014	March 14, 2014		550		100	%	$	9.135		5
June 30, 2014	June 27, 2014		34,025		100	%	$	9.135		319
September 30, 2014	September 30, 2014		38,482		100	%	$	9.000		346
December 31, 2014	December 30, 2014		6,061		100	%	$	8.775		55
March 31, 2015	March 30, 2015		5,811		100	%	$	8.775		51
June 30, 2015	June 29, 2015		215,935		69	%	$	8.775		1,895
September 30, 2015	September 30, 2015**		—		—			—		—
December 31, 2015	December 31, 2015**		—		—			—		—
March 31, 2016	March 31, 2016**		—		—			—		—
June 30, 2016	June 30, 2016**		—		—			—		—
September 30, 2016	September 30, 2016**		—		—			—		—
December 31, 2016	December 31, 2016**		—		—			—		—
March 31, 2017	March 31, 2017**		—		—			—		—
									$	2,676

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

**The Board of Directors did not declare a tender offer for the quarters ended September 30, 2015, December 31, 2015, March 31, 2016, June 30, 2016, September 30, 2016, December 31, 2016, and March 31, 2017.

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

Note 9. Distributions

Subject to our Board of Director’s discretion and applicable legal restrictions, we have historically declared and paid ordinary cash distributions at a rate equal to 7.35% of our latest offering price per share of $8.75. Since the distribution paid to shareholders on September 30, 2015, with a record date of August 30, 2015, we have paid distributions monthly. Prior to the September 30, 2015, we paid distributions on a semi-monthly basis. We changed to paying distributions monthly in order to reduce costs. We may fund our cash distributions to shareholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, and dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies. We have not established limits on the amount of funds we may use from available sources to make distributions.

Our distributions historically have not been based on our investment performance. Prior to September 2013, our distributions were supported by our Manager in the form of operating expense support payments to us, and a portion of our distributions constituted a return of capital. Since September 2013, we have not had an expense support agreement with our Manager and as a result a greater portion of our distributions have constituted a return of capital. A return of capital generally is a return of your investment rather than a return of earnings or gains derived from our investment activities.

As of March 31, 2017 and December 31, 2016, the Fund has not accrued any stockholder distributions that were unpaid.

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

Source of Distribution by Cash vs. DRIP:

			Net		Realized
			Investment		Gain From		Return of				Paid in
Period	Per Share		Income		Investments		Capital		Total		Cash		DRIP
July 12, 2012 - September 30, 2012	$	0.183750	$	32	$	-	$	18	$	50	$	34	$	16
October 1, 2012 - December 31, 2012*		0.260750		118		-		82		200		123		77
January 1, 2013 - March 31, 2013*		0.262586		247		47		75		369		221		148
April 1, 2013 - June 30, 2013		0.186504		235		43		27		305		186		119
July 1, 2013 - September 30, 2013		0.186504		244		47		183		474		274		200
October 1, 2013 - December 31, 2013		0.186504		72		258		219		549		345		204
January 1, 2014 - March 31, 2014		0.186504		168		85		379		632		405		227
April 1, 2014 - June 30, 2014		0.186504		372		-		382		754		491		263
July 1, 2014 - September 30, 2014		0.184668		135		29		644		808		511		297
October 1, 2014 - December 31, 2014		0.181467		144		52		748		944		584		360
January 1, 2015 - March 31, 2015		0.179154		153		52		824		1,029		654		375
April 1, 2015 - June 30, 2015		0.179154		705		163		243		1,111		719		392
July 1, 2015 - September 30, 2015		0.209015		240		142		904		1,286		836		450
October 1, 2015 - December 31, 2015**		0.170315		—		68		996		1,064		685		379
January 1, 2016 – March 31, 2016 ***		0.169969		8		—		1,045		1,053		684		369
April 1, 2016 - June 30, 2016****		0.107188		—		—		669		669		452		217
July 1, 2016 - September 30, 2016*****		0.214372		305		—		1,042		1,347		934		413
October 1, 2016 - December 31, 2016		0.107186		160		78		439		677		473		204
January 1, 2017 – March 31, 2017		0.160779		226		41		754		1,021		721		300
TOTAL	$	3.502873	$	3,564	$	1,105	$	9,673	$	14,342	$	9,332	$	5,010

* Includes a special distribution of $0.077 per share.

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

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

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

***** For the period from July 1, 2016 to September 30, 2016, the Fund had a realized loss from investments of approximately $0.04 million. That amount is reflected on the source of distributions table below in the distributions from paid in capital amount.

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

Percentage of Distributions by Source:

			Net			Realized			Return
			Investment			Gain From			of
Period	Per Share		Income			Investments			Capital
July 12, 2012 - September 30, 2012	$	0.183750		64	%		0	%		36	%
October 1, 2012 - December 31, 2012 *		0.260750		59	%		0	%		41	%
January 1, 2013 - March 31, 2013*		0.262586		67	%		13	%		20	%
April 1, 2013 - June 30, 2013		0.186504		77	%		14	%		9	%
July 1, 2013 - September 30, 2013		0.186504		51	%		10	%		39	%
October 1, 2013 - December 31, 2013		0.186504		4	%		47	%		49	%
January 1, 2014 - March 31, 2014		0.186504		27	%		13	%		60	%
April 1, 2014 - June 30, 2014		0.186504		49	%		0	%		51	%
July 1, 2014 - September 30, 2014		0.184668		17	%		3	%		80	%
October 1, 2014 - December 31, 2014		0.181467		15	%		6	%		79	%
January 1, 2015 - March 31, 2015		0.179154		15	%		5	%		80	%
April 1, 2015 - June 30, 2015		0.179154		63	%		15	%		22	%
July 1, 2015 - September 30, 2015		0.209015		19	%		11	%		70	%
October 1, 2015 - December 31, 2015		0.170315		—	%		6	%		94	%
January 1, 2016 – March 31, 2016		0.169969		1	%		—	%		99	%
April 1, 2016 - June 30, 2016		0.107188		—	%		—	%		100	%
July 1, 2016 - September 30, 2016		0.214372		23	%		—	%		77	%
October 1, 2016 – December 31, 2016		0.107186		24	%		11	%		65	%
January 1, 2017 – March 31, 2017		0.160779		22	%		4	%		74	%

* Includes a special distribution of $0.077 per share.

The following table reflects the sources of the cash distributions on a tax basis that the Fund has paid on its common stock (dollars in thousands) during the three months ended March 31, 2017 and the fiscal years ended December 31, 2016, 2015 and 2014:

Source of Distributions:	Three months ended March 31, 2017				Year ended December 31, 2016				Year ended December 31, 2015				Year ended December 31, 2014
Distributions from net investment income	$	226	22.1	%	$	473	12.6	%	$	830	18.5	%	$	819	26.1	%
Distributions from realized gains		41	4.0			78	2.1			425	9.5			166	5.3
Distributions from paid In capital		754	73.9			3,195	85.3			3,235	72.0			2,153	68.6
Total	$	1,021	100.0	%	$	3,746	100.0	%	$	4,490	100.0	%	$	3,138	100.0	%

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

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

When the Fund is able to raise new capital, it incurs offering expenses of 1.5% of the gross offering proceeds. However, the Fund has not be able to raise additional capital since April 2015. The chart below shows the percentages of distributions from net investment income excluding offering costs: (dollars in thousands)

	Offering Expenses		Distribution from Net Investment Income excluding offering costs		% Distribution from Net Investment Income excluding offering costs			% Distributions from Realized Gains excluding offering costs			% Distributions from Paid In Capital excluding offering costs
2017 (January 1-March 31)	$	—	$	226		22	%		4	%		74	%
2016	$	—	$	473		13	%		2	%		85	%
2015	$	96	$	926		21	%		9	%		70	%
2014	$	352	$	1,171		37	%		5	%		58	%
2013	$	322	$	1,120		66	%		23	%		11	%
2012	$	142	$	292		100	%		—	%		—	%

Note 10. Financial Highlights

The following is a schedule of financial highlights for the three months ended March 31, 2017 and 2016:

	For the three months ended March 31, 2017			For the three months ended March 31, 2016

Per share data:
Net asset value, beginning of period	$	5.31		$	4.61

Results of operations ⁽¹⁾
Net investment income		0.04			-
Net realized (loss) on investments		0.01			(0.11	)
Net unrealized appreciation on investments		0.63			0.20
Net increase in net assets resulting from operations		0.68			0.09

Stockholder distributions ⁽²⁾
Distributions from net investment income		(0.04	)		-
Distributions from realized gains		(0.01	)		-
Distributions from capital		(0.11	)		(0.17	)

Net decrease in net assets resulting from stockholder distributions		(0.16	)		(0.17	)

Capital share transactions
Impact from issuance of common stock ⁽³⁾		-			-
Impact from reinvestment of stockholder distributions ⁽⁴⁾		0.02			-

Net increase in net assets resulting from capital share transactions		0.02			-
Other ⁽⁵⁾		-			0.03
Net asset value, end of period	$	5.85		$	4.56

Shares outstanding at end of period	$	6,373,694		$	6,223,414
Total return ⁽⁷⁾		12.31	%		0.84	%

Ratio/Supplemental data:
Net assets, end of period (in thousands)	$	37,295		$	28,384
Average net assets (in thousands)	$	34,059		$	35,422
Ratio of net investment income to average net assets ^{(6) (9)}		2.70	%		0.08	%
Ratio of operating expenses to average net assets ^{(6) (9)}		8.96	%		7.15	%
Portfolio turnover ratio ⁽⁸⁾		8.43	%		12.87	%

(1)	The per share amounts were derived by using the weighted average shares outstanding during the period. There was no expense waiver and reimbursement for the three months ended March 31, 2017 and March 31, 2016.
(2)	The per share data for distributions reflects the actual amount of distributions declared per share during the period.
(3)	The issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock in the Fund’s continuous offering.

(4)	The impact from reinvestment of stockholder distributions on a per share basis reflects the incremental net asset value changes as a result of the reinvestment of stockholder distributions.
(5)	Includes the impact of different share amounts used in calculating per share data as a result of calculating certain per share data based on weighted average shares outstanding during the period and certain per share data based on shares outstanding as of a period end or transaction date.
(6)	The ratios are after giving effect to amounts reimbursed by the Manager under an expense reimbursement agreement. See “Note 4 – Related Party Transactions.” For the three months ended March 31, 2017 and 2016, there was no expense waiver and reimbursement.
(7)	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. For the three months ended March 31, 2017 and 2016, there was no expense reimbursement.
(8)	Portfolio turnover rate is calculated using the lesser of year-to-date sales or purchases over the average of the invested assets at fair value. Not annualized.
(9)	Ratios are annualized and calculated based on average net assets using current and prior 3 quarters’ net assets.

Note 11. Subsequent Events

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

On April 7, 2017, the Fund made an investment of $1.34 million in a senior secured first lien loan to Vieste Group, LLC. In conjunction with this investment, the Fund received a Warrant to purchase 94,628.5017 Class A Units for an aggregate purchase price of $1.00 in total with an aggregate value of $0.1 million.

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

On April 28, 2017, all the unexchanged 10.75% notes of Logan’s Roadhouse, Inc. were converted to the new common stock of the company at the rate of 128.40 shares of new stock for every $1,000 in principal amount of unexchanged notes.

On May 1, 2017, Nuverra Environmental Solutions, Inc. announced that the company and its subsidiaries have filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware, pursuant to the terms of the previously announced restructuring support agreement between the company and the holders of 100% of the existing term loan debt and approximately 86% of the company’s 12.5%/10.0% senior secured second lien notes due 2021 to restructure the company’s outstanding indebtedness.

On May 4, 2017, the United States Bankruptcy Court for the Southern District of Texas entered the order approving Goodman Networks Incorporated’s Chapter 11 Plan of Reorganization. According to the plan, the holders of every $1,000 par value of 12.125% of senior secured first lien notes will receive 246.15 par value of 8% senior secured first lien notes maturing on May 11, 2022, and $76.92 in cash.

On May 17, 2017, in the Relativity Media case, the pending motion to convert the bankruptcy case to chapter 7 liquidation was dismissed with prejudice by the petitioning creditors. The court did not discuss the adversary case related to the Fund's matter.

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

On May 31, 2017, the Wells Fargo Priority Credit Line and corresponding collateral account were closed.

On June 20, 2017, the Fund made an additional investment of $0.5 million in a senior secured first lien loan to Nima, LLC.

On July 14, 2017, the Fund made an additional investment of $120,000 in a senior secured first lien loan to Vieste Group, LLC. In conjunction with this investment, the Fund received a Warrant to purchase 8,743 Class A Units.

On July 20, 2017, the Board of Directors of the Fund declared one monthly distribution and voted to keep the annual distribution rate at 7.35% of the current $8.75 gross offering price. The distribution was to stockholders of record on July 20, 2017 and payable on July 31, 2017.

On August 1, 2017, the Fund made an additional investment of $240,000 in a senior secured first lien loan to Vieste Group, LLC. In conjunction with this investment, the Fund received a Warrant to purchase 17,486 Class A Units.

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

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

Forward-Looking Statements

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

•

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

•

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

•

a limited pool of prospective target businesses;

•

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

•

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

•

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

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

Overview

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

Our investment activities are managed by our Manager. Our Manager is responsible for sourcing potential investments, conducting research on prospective investments, analyzing investment opportunities, structuring our investments, and monitoring our investments and portfolio companies on an ongoing basis.

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

Critical Accounting Policies

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

Investments - Money Market

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

Investment Classification

Valuation of Portfolio Investments

We have adopted Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”), Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”), which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements.

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

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices. US Bank is the Fund custodian. Through US Bank, the Fund uses FT Interactive, a third-party valuation firm, to price the notes. The prices are reviewed by the CEO.

Level 3: Unobservable inputs for the asset or liability.

The investment portfolio is recorded on a trade date basis. We determine the net asset value of our investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Nineteen of the forty-nine investments were valued using the closing market price at period end March 31, 2017.

The following table presents investments that are not publically-traded or have no closing market price, as of March 31, 2017:

Portfolio Company	Asset Type	Investment Coupon Rate			Maturity Date
Ansgar Media, LLC - Class B Units	Equity – Preferred Stock		-		-
Ansgar Media, LLC	Senior Secured First Lien Debt		12.00	%	January 11, 2018
Ansgar Media, LLC	Senior Secured First Lien Debt		12.00	%	September 18, 2017
Ansgar Media, LLC	Senior Secured First Lien Debt		12.00	%	October 24, 2018
Ansgar Media, LLC	Senior Secured First Lien Debt		12.00	%	October 27, 2018
Aspire Holdings ⁽¹⁾	Equity – Common Stock		-		-
Aspect Software, Inc. ⁽²⁾	Equity – Common Stock		-		-
Claire's Stores, Inc. Term Loan ⁽³⁾	Senior Secured First Lien Debt		9.00	%	September 20, 2021
CLSIP LLC Term Loan ⁽³⁾	Senior Secured First Lien Debt		9.00	%	September 20, 2021
Claire’s (Gibraltar) Holdings Limited Term Loan ⁽³⁾	Senior Unsecured Debt		9.00	%	September 20, 2021
Colt Defense, LLC ⁽⁴⁾	Senior Unsecured Debt		8.00	%	December 15, 2020
Digital Golf Technologies, LLC	Senior Secured First Lien Debt		13.00	%	January 11, 2020
Digital Golf Technologies, LLC	Warrant		-		-
Education Management LLC	Equity – Common Stock		-		-
Education Management LLC	Warrant		-		-
GeoCommerce, Inc.	Senior Secured First Lien Debt		12.00	%	April 27, 2018
GeoCommerce, Inc.	Senior Secured First Lien Debt		12.00	%	May 15, 2018
GeoCommerce, Inc.	Senior Secured First Lien Debt		12.00	%	October 14, 2018
GeoCommerce, Inc.	Senior Secured First Lien Debt		12.00	%	December 21, 2018
GeoCommerce, Inc.	Warrant		-		-
Logan's Roadhouse, Inc. ⁽⁵⁾	Senior Secured Second Lien Debt		10.75	%	October 15, 2017
Logan's Roadhouse, Inc. PIK Exit Facility Term Loan ⁽⁵⁾	Senior Secured Second Lien Debt		9.50	%	November 23, 2020
Nima, LLC	Senior Secured First Lien Debt		12.00	%	May 20, 2018
Nima, LLC	Senior Secured First Lien Debt		12.00	%	August 11, 2018
Nima, LLC	Senior Secured First Lien Debt		12.00	%	November 2, 2018
Nima, LLC	Senior Secured First Lien Debt		12.00	%	December 21, 2018
Nima, LLC	Senior Secured First Lien Debt		12.00	%	February 16, 2019
Nima, LLC	Warrant		-		-
Nuverra Environmental Solutions, Inc.	Senior Secured Second Lien Debt		12.50	%	April 15, 2021
Nuverra Environmental Solutions, Inc.	Warrant		-		-

(1)

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

(2)

The original 10.63% senior secured second lien notes due on May 15, 2017 defaulted. As part of Aspect’s bankruptcy and planned reorganization process, the Fund participated in a rights offering to purchase a new 3.00% PIK senior unsecured convertible note maturing on May 23, 2023 in an effort to facilitate recovery of its previous investment in the senior secured lien notes in Aspect. On November 25, 3.00% PIK senior unsecured convertible notes were exchanged out for mandatory conversion to shares of common stock of Aspect Software Parent, Inc. at a rate of 1/30 i.e. one common share per $30.00 in principal amount of notes outstanding.

(3)

On September 20, 2016, all of 10.50% senior subordinated notes and 8.88% senior secured second lien notes were exchanged for 9.00% of Claire’s Stores, Inc. Term Loan, CLSIP Term Loans and of Claire’s Gibralter Term Loans.

(4)

On January 19, 2016, there was a mandatory exchange offer to exchange all of the 8.75% senior unsecured notes to 8.00% PIK third lien notes.

(5)

The company filed for bankruptcy in Delaware on August 8, 2016, and is in the final stages of restructuring. The Fund participated in DIP financing as part of the company’s restructuring process during bankruptcy and has received a PIK second lien exit facility T/L in exchange. On April 28, 2017, the remaining unexchanged bonds were converted to equity.

Securities that are not publicly-traded are valued at fair value as determined in good faith by our Board of Directors, or a committee thereof. In connection with that determination, our Manager prepares portfolio company valuations using relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, the most recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.

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

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

	•	preliminary valuation conclusions are then documented and discussed with the members of our Board of Directors, or a committee thereof; and

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

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

Revenue Recognition

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

For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the principal balance, we generally will not accrue PIK interest for accounting purposes if the portfolio company valuation indicates that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities for accounting purposes if we have reason to doubt our ability to collect such interest. Original issue discounts, market discounts or premiums are accreted or amortized using the effective interest method as interest income. Dividend income, if any, is recognized on an accrual basis to the extent that we expect to collect such amount. We record prepayment premiums on loans and debt securities as interest income when we receive such amounts. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees generated in connection with investments will be recognized when earned.

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

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

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

Payment-in-Kind Interest

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

Organizational and Offering Costs

The Fund is a closed-end fund with a continuous offering period. Under the investment advisory agreement between the Fund and the Manager, our Manager fronts the initial cost of the organizational and offering expenses, but the Fund is obligated to reimburse the Manager for such costs to the extent of 1.5% of the gross offering proceeds in our continuous offering. The Fund also agreed to reimburse the Manager for organization and offering expenses incurred by a prior manager in consideration for the Manager’s agreement to pay $1.3 million owed to the Fund by the prior manager under an expense reimbursement agreement, which amount the Manager has paid in full. The Fund expenses organizational and offering costs as they become payable under the investment advisory agreement.

U.S. Federal Income Taxes

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

The Fund has evaluated the implications of ASC Topic 740, Accounting for Income Taxes, (“ASC Topic 740”) for all tax years and in all major tax jurisdictions, and determined that there is no material impact on the financial statements.

Portfolio and Investment Activity

During the three months ended March 31, 2017, we made $3.2 million of investments in new and existing portfolio companies and had $5.8 million in aggregate amount of exits, maturities and repayments, resulting in net repayments of $2.6 million for the period. During the three months ended March 31, 2016, we made $13.6 million of investments in new and existing portfolio companies and had $4.4 million in aggregate amount of exits and repayments, resulting in net investments of $9.2 million for the period

As of March 31, 2017, we have invested an aggregate of approximately $39.8 million in forty-nine investment positions in thirty portfolio companies. On March 31, 2017, the fair value of our investment positions was $43.2 million (including money market investments and the accrued interest of $0.4 million). As of such date, our estimated gross annual portfolio yield was 9.3% and gross annual portfolio yield to maturity was 9.3% (excluding equity investments and non-accrual investments) based on the purchase price of our investments. The average duration of our debt portfolio was approximately 1.49 years. During the three months ended March 31, 2017, two T-bills matured, we exited one portfolio company in full and one company in partial, for aggregate sales proceeds of $5.8 million.

The following table presents three debt investments that had not paid coupon interest as due beyond the thirty-day grace period, as of March 31, 2017. Interest on these investments was accrued through the date that the last coupon payment was received:

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

(1)

On August 8, 2016, filed for bankruptcy in Delaware. On November 18, 2016, a portion of these bonds were converted to 9.5% PIK second lien exit facility T/L and on April 28, 2017, the remaining unexchanged bonds were converted to equity.

The following table presents eleven equity investments that are non-income producing, as of March 31, 2017:

Portfolio Company	Asset Type	Investment Coupon Rate		Maturity Date
Affinion Group, Inc.⁽²⁾	Equity – Common Stock		-	-
Ansgar Media, LLC - Class B Units	Equity – Preferred Stock		-	-
Aspect Software, Inc. ⁽³⁾	Equity – Common Stock		-	-
Aspire Holdings ⁽¹⁾	Equity – Common Stock		-	-
Education Management, LLC	Equity – Common Stock		-	-
Education Management, LLC ⁽⁴⁾	Warrant		-	-
Digital Golf Technologies, LLC	Warrant		-	-
GeoCommerce, Inc.	Warrant		-	-
NII Holdings, Inc.⁽⁵⁾	Equity – Common Stock		-	-
Nima, LLC	Warrant		-	-
Nuverra Environmental Solutions, Inc. ⁽⁶⁾	Warrant		-	-

(1)

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

(2)

Converted from exchange of 3.00% PIK senior unsecured convertible notes.

(3)

Converted from exchange of 3.00% PIK senior unsecured convertible notes.

(4)

Received in exchange of 15.00% Cash/PIK bonds.

(5)

Received in exchange of 10.00% senior unsecured debt.

(6)

Received early exchange fees in form of warrants for participating in the exchange offer.

The following table shows the weighted average yield of our portfolio composition based on fair value at March 31, 2017:

	At March 31, 2017
	Percentage of Total Portfolio			Weighted Average Current Coupon Yield
Investments – Money Market		1.5	%		—	%
U.S. Government Securities		13.1			0.8
Senior Secured First Lien Debt		42.7			11.6
Senior Secured Second Lien Debt		1.3			11.2
Senior Unsecured Debt		6.6			11.3
Senior Subordinated Debt		2.4			9.3
Equity Securities		32.4			n/a
Total		100.0	%		9.3	%*

* 9.3% yield is on non-defaulted, non-equity positions and excludes money market investments.

As of March 31, 2017, our non-defaulted, non-equity portfolio had a yield to maturity of 9.3%, and an average duration of 1.49 years.

The following table shows the weighted average yield of our portfolio composition based on fair value at December 31, 2016:

	At December 31, 2016
	Percentage of Total Portfolio			Weighted Average Current Coupon Yield
Investments – Money Market		0.4	%		—	%
U.S. Government Securities		17.7			0.7
Senior Secured First Lien Debt		42.1			11.4
Senior Secured Second Lien Debt		1.3			11.1
Senior Unsecured Debt		12.0			10.1
Senior Subordinated Debt		2.6			9.3
Equity Securities		23.9			n/a
Total		100.0	%		8.6	%*

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

As of December 31, 2016, our non-defaulted, non-equity portfolio had a yield to maturity of 8.6%, and an average duration of 1.60 years.

The following table shows the portfolio composition by industry grouping at fair value at March 31, 2017 (dollars in thousands):

	At March 31, 2017
	Investments at Fair Value		Percentage of Total Portfolio
Technology	$	11,718		27.4	%
Media: Broadcasting & Subscription		10,467		24.5
Consumer Electronics		6,950		16.2
U.S. Government Securities		5,626		13.2
Aerospace and Defense		2,235		5.2
Services: Consumer		1,595		3.7
Healthcare & Pharmaceuticals		1,028		2.4
Retail		765		1.8
Telecommunications		669		1.6
Investments - Money Market		648		1.5
Automobile		357		0.8
Environmental Industries		315		0.7
Beverage, Food & Tobacco		252		0.6
Media: Advertising, Printing & Publishing		114		0.3
Energy: Oil & Gas		42		0.1
Total	$	42,781		100.0	%

The following table shows the portfolio composition by industry grouping at fair value at December 31, 2016 (dollars in thousands):

	At December 31, 2016
	Investments at Fair Value		Percentage of Total Portfolio
Media: Broadcasting & Subscription	$	10,418		25.7	%
Technology		7,684		19.0
U.S. Government		7,173		17.7
Consumer Electronics		6,500		16.0
Aerospace and Defense		2,124		5.3
Energy: Oil & Gas		1,460		3.6
Services: Consumer		1,428		3.5
Retail		1,084		2.7
Healthcare & Pharmaceuticals		1,050		2.6
Telecommunications		607		1.5
Environmental Industries		279		0.7
Beverage, Food & Tobacco		249		0.6
Automobile		238		0.6
Investments – Money Market		157		0.4
Media: Advertising, Printing & Publishing		51		0.1
Total	$	40,502		100.0	%

Our fair value of total investments was $42.8 million as of March 31, 2017 as compared to $40.5 million as of December 31, 2016. The increase in the fair value of our investments was attributable to three factors: a) Almost all fixed income sectors posted positive returns in the first quarter of 2017. It was in many ways a reversal of the fourth quarter of 2016, with some election-driven trades unwinding, as longer-duration fixed income benefit from markets that may have overshot their landing in the fourth quarter of 2016; b) additional direct lending investments in the senior secured first lien notes that earn high yield; c) Increase in the valuation estimate of GeoCommerce, Inc. warrants based on investments received by GeoCommerce, Inc. from outside investors.

Discussion and Analysis of Results of Operations

Results of Operations

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

Operating results for the three ended March 31, 2017 and 2016 were as follows (dollars in thousands):

	For the Three Months Ended March 31, 2017		For the Three Months Ended March 31, 2016
Total investment income	$	979	$	637
Total operating expenses		753		629
Net investment income		226		8
Net realized gain (loss) from investments		41		(700	)
Net unrealized appreciation on investments		4,067		1,271

Net increase in net assets resulting from operations	$	4,334	$	579

Revenues

We generated investment income of $1.0 million for the three months ended March 31, 2017, as compared to $0.6 million for the three months ended March 31, 2016. Interest revenue was $0.9 million for the three months ended March 31, 2017, as compared to $0.6 million for the three months ended March 31, 2016. The increase in interest revenue in 2017 as compared to 2016 was attributable to higher yield earned on investments in senior secured notes of Ansgar Media, LLC, GeoCommerce, Inc., Nima, LLC and Digital Golf Technologies, LLC, partially offset by an increase in debt investments placed on non-accrual status and restructuring of certain debt investments into equity investments. Fee income was $0.05 million for the three months ended March 31, 2017, as compared to $0.02 million for the three months ended March 31, 2016. The increase in fee income in 2017 as compared to 2016 was attributable to higher amount of investments in direct lending deals that earn 3% origination fee, which is being amortized over the term of the loan.

Interest from debt investments is in the form of interest and fees earned on senior secured loans, senior secured notes, subordinated debt, senior unsecured debt and collateralized securities in our debt portfolio. Our debt portfolio constituted approximately 66.1% of investment portfolio at March 31, 2017 (excluding money market investments). The level of interest income we receive is directly related to the balance of collectible income producing investments multiplied by the coupon rate of our investments, offset by debt investments held in non-accrual status. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. The average balance of the debt portfolio during the three months ended March 31, 2017 was lower than the three months ended March 31, 2016, which was attributable to – 1) increase in debt investments placed on non-accrual status and restructuring of certain debt investments into equity investments.; and 2) increased investments in US Treasury Bills to keep up with the collateral requirements of the priority credit line. At March 31, 2017, the weighted average coupon yield of our debt investments was 9.3% as compared to 7.1% at March 31, 2016. Based on current and prior three quarters’ net assets, average net assets as of March 31, 2017 were $34.1 million, as compared to $35.4 million as of March 31, 2016.

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

Expenses

The composition of our operating expenses for the three months ended March 31, 2017 and 2016 was as follows (dollars in thousands):

	For the three months ended March 31, 2017		For the three months ended March 31, 2016

Professional fees	$	247	$	178
Director fees		8		8
Insurance		33		27
Interest expense		48		75
Management fees – related parties		185		142
Administrative services – related parties		66		54
General and administrative (includes CFO salary and related party travel expenses)		128		117
Transfer agent fees		38		28
Total operating expenses	$	753	$	629

For the three months ended March 31, 2017 and 2016, our operating expenses were $0.8 million and $0.6 million, respectively. Included within general and administrative expenses for the three months ended March 31, 2017 and 2016, were $0.05 million and $0.03 million, respectively, for the cost of our chief financial officer’s salary reimbursed to the Manager. Also included within general and administrative expenses for the three months ended three months ended March 31, 2017 and 2016, were $0.02 million and $0.01 million, respectively, for related party travel expenses reimbursed to the Manager.

Management fees for the three months ended March 31, 2017 and 2016, remain at 2% of the net asset value. The offering costs are consistent at 1.5% of the gross closing proceeds for the three months March 31, 2017 and 2016. However, since the Fund has not been open to new investments, there has not been any offering costs expense since June 30, 2015.

The increase in professional fees is due to increased legal fees in conjunction with the conversion of the Fund to an Interval Fund.

Net Investment Income

Our net investment income totaled $0.2 million and $0.008 million for the three months ended March 31, 2017 and 2016, respectively. For the three months ended March 31, 2017 and 2016, total investment income was $1.0 million and $0.6 million, respectively, which included $0.05 million and $0.02 million of non-recurring fees, respectively.

The increase in net investment income for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to the positive returns posted by almost all of the fixed income sectors in first quarter of 2017, and additional direct lending investments in the senior secured first lien notes that earn high yield which partially offset the increase in total expenses. For the three months ended March 31, 2017 and 2016, total operating expenses were $0.8 million and $0.6 million, respectively.

Net Realized Gains or Losses from Investments

For the three months ended March 31, 2017 and 2016, we had $5.8 million and $4.4 million of sales, maturities, write-offs and principal repayments, resulting in $0.04 million and $(0.7) million of realized gains (losses), respectively.

Net Change in Unrealized Appreciation or Depreciation on Investments

For the three months ended March 31, 2017 and 2016, we experienced $4.1 million and $1.3 million of unrealized appreciation, respectively. The increase in unrealized appreciation during fiscal 2017 was due to three main factors.

First, the fixed income market started strong in 2017 with almost all sectors returning positive returns. A flattening yield curve led to longer duration outperforming shorter duration. High yield valuations hit their richest level since mid-2014 in early March, falling to a spread of 3.4%, before widening out above 4.0%, and then moderating to end the 1st quarter at 3.8% (spreads compared to U.S. 10-year treasuries). Considering low default forecasts for the year, many still believe high yield investors could potentially realize a mid-single-digit return for 2017. Despite the optimism, valuations remain elevated and the prices of oil and equity market volatility remain important drivers of this asset class.

Second, the Fund made a new investment in a senior secured first lien note of Digital Golf Technologies, LLC at discount to par, which also provided the Fund with in-the-money warrants.

Third, there was an increase in the valuation of warrants of GeoCommerce, Inc. based on equity investments received by GeoCommerce, Inc. from outside investors.

The unrealized appreciation in fiscal year 2016 has been partially offset by a number of positions that either initiated a restructuring of their indebtedness (either in Chapter 11 bankruptcy or prepackaged bankruptcy) or announced that they were considering a restructuring. Such announcements generally reduce liquidity in the secondary market creating greater mispricing in underlying bonds. Until the bankruptcy or other restructuring process is complete, it becomes difficult to ascertain whether some of these positions will result in a loss of principal or full recovery of principal given their position in the capital structure of the issuer and the underlying asset values. Generally, we expect much higher recoveries or full payment for senior secured first lien type bonds, as compared to senior secured second lien or unsecured bonds for defaulted bonds.

Changes in Net Assets from Operations

For the three months ended March 31, 2017 and 2016, we recorded a net increase in net assets resulting from operations of $4.3 million and $0.6 million, respectively. For the three months ended March 31, 2017 and 2016, this increase is mainly due to net unrealized appreciation of $4.1 million and $1.3 million, respectively, net investment income of $0.2 million and $0.008 million, respectively, and net realized gain (loss) from investments of $0.04 million and $(0.7) million, respectively, on our portfolio investments. The increase in 2017 is largely due to increase in the valuation of warrants of GeoCommerce, Inc. and in the money warrants received through new investments in senior secured first lien notes of Digital Golf Technologies, LLC. Overall, the portfolio experienced a market value increase, with an increase in net unrealized appreciation on investments of $4.1 million for the three months ended March 31, 2017. Based on 6,350,239 and 6,196,289 weighted average common shares outstanding for the three months ended March 31, 2017 and 2016, respectively, our per share net increase in net assets resulting from operations was $0.68 and $0.09, respectively.

Liquidity and Capital Resources

On August 4, 2015, we entered an agreement with Wells Fargo Advisors, LLC for obtaining a revolving line of credit. The amount we can borrow is based upon the value of cash deposited in an account at Wells Fargo Advisors, LLC and the treasury notes that Wells Fargo purchases, which serve as collateral for the loan. On August 27, 2015, we initially drew down $2.0 million. As of March 31, 2017 and December 31, 2016, the outstanding balance under this credit line was $5.3 million and $6.4 million, respectively. The interest rate on the outstanding balance is a negotiated rate based on our assets under management with Wells Fargo Advisors, LLC and is 3.5% and 3.25% at March 31, 2017 and December 31, 2016, respectively. The term of the line of credit is indefinite and may be terminated by us or Wells Fargo Advisors, LLC at any time.

We generate cash primarily from cash flows from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. On July 10, 2012, we satisfied our minimum offering requirement of raising gross offering proceeds in excess of $1.0 million from persons who are not affiliated with us or our Manager, and commenced operations. As of March 31, 2017, we had issued 6.7 million shares of common stock, including 0.6 million shares under our distribution reinvestment plan (“DRIP”) less 0.3 million shares redeemed under our tender offer. As of March 31, 2017, we had received gross proceeds from our continuous offering of total $65.8 million, including $5.0 million under our DRIP less $2.9 million paid to redeem shares in our quarterly tenders.

When we are open to new business, we will sell our shares on a continuous basis. On May 23, 2016, our Board of Directors and the Pricing Committee of the Board made a final decision to approve a price reduction from $9.25 to $8.75 per share. On November 24, 2015, our Board of Directors and the Pricing Committee of the Board had approved a price reduction from $9.75 to $9.25 per share effective for our next closing date and next declared distribution date. To the extent that our net asset value per share increases, we will sell at a price necessary to ensure that our shares are not sold at a price, after deduction of selling commissions and dealer manager fees that is below our net asset value per share. However, since April 30, 2015, we have not been able to sell any shares in our continuous offering because our registration statement has been under review by the SEC.

For the three months ended March 31, 2017, we experienced a net increase in money market investments of $0.5 million. For the three months ended March 31, 2017, approximately $1.8 million was used for our financing activities, which primarily consisted of $3.3 million repayments of the priority credit line and $0.7 million in distributions, partially offset by $2.2 million received through the priority credit line. We generated approximately $1.8 million of cash provided by our operating activities mainly as the result of the receipt of proceeds from the sale of, repayment of and principal payments on portfolio debt investments of $5.8 million, partially offset by the purchase of new portfolio debt investments of $3.2 million.

Distributions

Subject to our Board of Director’s discretion and applicable legal restrictions, we have historically declared and paid ordinary cash distributions at a rate equal to 7.35% of our latest offering price per share. Since the distribution paid to shareholders on September 30, 2015, with a record date of August 30, 2015, we have paid distributions monthly. Prior to the September 30, 2015, we paid distributions on a semi-monthly basis. We changed to paying distributions monthly in order to reduce costs. Any distributions to our shareholders will be declared out of assets legally available for distribution. We may fund our cash distributions to shareholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, and dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies. We have not established limits on the amount of funds we may use from available sources to make distributions.

Based upon our current level of operations, we estimate that about 73.9% of our distributions will constitute a return of capital. Our distributions historically have not been based on our investment performance. Prior to September 2013, our distributions were supported by our Manager in the form of operating expense support payments to us, and a portion of our distributions constituted a return of capital. Since September 2013, we have not had an expense support agreement with our Manager and as a result a greater portion of our distributions have constituted a return of capital. A return of capital generally is a return of your investment rather than a return of earnings or gains derived from our investment activities constitutes the return of capital previously paid to us for shares of our common stock.

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

			Net			Realized			Return
			Investment			Gain From			of
Period	Per Share		Income			Investments			Capital
July 12, 2012 - September 30, 2012	$	0.183750		64	%		0	%		36	%
October 1, 2012 - December 31, 2012*		0.260750		59	%		0	%		41	%
January 1, 2013 - March 31, 2013*		0.262586		67	%		13	%		20	%
April 1, 2013 - June 30, 2013		0.186504		77	%		14	%		9	%
July 1, 2013 - September 30, 2013		0.186504		51	%		10	%		39	%
October 1, 2013 - December 31, 2013		0.186504		4	%		47	%		49	%
January 1, 2014 - March 31, 2014		0.186504		27	%		13	%		60	%
April 1, 2014 - June 30, 2014		0.186504		49	%		0	%		51	%
July 1, 2014 - September 30, 2014		0.184668		17	%		3	%		80	%
October 1, 2014 - December 31, 2014		0.181467		15	%		6	%		79	%
January 1, 2015 - March 31, 2015		0.179154		15	%		5	%		80	%
April 1, 2015 - June 30, 2015		0.179154		63	%		15	%		22	%
July 1, 2015 - September 30, 2015		0.209015		19	%		11	%		70	%
October 1, 2015 - December 31, 2015 **		0.170315		—	%		6	%		94	%
January 1, 2016 – March 31, 2016 ***		0.169969		1	%		—	%		99	%
April 1, 2016 – June 30, 2016****		0.107188		—	%		—	%		100	%
July 1, 2016 – September 30, 2016*****		0.214372		23	%		—	%		90	%
October 1, 2016 – December 31, 2016		0.107186		24	%		11	%		65	%
January 1, 2017 – March 31, 2017		0.160779		22	%		4	%		74	%

* Includes a special distribution of $0.077 per share.

We expect to continue making distributions at the same distribution rate, based on the current offering price, unless our results of operations, our general financial condition, general economic conditions, or other factors prohibit us from doing so. From time to time, but not less than quarterly, we review our accounts to determine whether distributions to our shareholders are appropriate. There can be no assurance that we will be able to sustain distributions at any particular level.

Each year a statement on Internal Revenue Service Form 1099-DIV (or such successor form) identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gain on the sale of securities, or a return of capital) will be mailed to our shareholders. We expect to continue paying distributions at the same distribution rate, based on the current offering price, and that a substantial part of those distributions will constitute a return of capital for the foreseeable future. Furthermore, our ability to generate net investment income sufficient to cover our monthly dividend has been hindered by the fact that we have several investments that are on non-accrual status, and because we hold more equity investments that do not generate regular interest or dividend income. Our distributions will continue to constitute a return of capital until our net investment income is sufficient to support our distribution rate, which will probably not occur until our Manager enters an expense support agreement with us, our mix of interest and dividend paying assets increase, or our assets increase enough to lower our expense ratio, which we do not expect to occur until we have significantly more net assets than we do at present. As a result, for the foreseeable future, a significant portion of the distributions we make will represent a return of capital for tax purposes. The tax basis of shares must be reduced by the amount of any return of capital distributions, which will result in an increase in the amount of any taxable gain (or a reduction in any deductible loss) on the sale of shares.

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

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

The following table reflects the sources of the cash distributions on a tax basis that the Fund has paid on its common stock (dollars in thousands) during the three months ended March 31, 2017 and fiscal years ended December 31, 2016, 2015 and 2014:

Source of Distributions:	Three months ended March 31, 2017				Year ended December 31, 2016				Year ended December 31, 2015				Year ended December 31, 2014
Distributions from net investment income	$	226	22.1	%	$	473	12.6	%	$	830	18.5	%	$	819	26.1	%
Distributions from realized gains		41	4.0			78	2.1			425	9.5			166	5.3
Distributions from paid In capital		754	73.9			3,195	85.3			3,235	72.0			2,153	68.6
Total	$	1,021	100.0	%	$	3,746	100.0	%	$	4,490	100.0	%	$	3,138	100.0	%

Distribution Reinvestment Plan

We have adopted an “opt-in” DRIP pursuant to which shareholders may elect to have the full amount of their cash distributions reinvested in additional shares of our common stock. If shareholders wish to receive their distribution in cash, no action is required on their part to do so. If shareholders elect to participate in the DRIP program, they are not charged selling commissions, dealer manager fees or other sales charges for the purchase of DRIP shares. The purchase price of the DRIP shares is 95% of the current offering price of the shares at the time of the distribution. Shares issued pursuant to our DRIP will have the same voting rights as our shares of common stock offered pursuant to our prospectus.

	Offering Expenses		Distribution from Net Investment Income excluding offering costs		% Distribution from Net Investment Income excluding offering costs			% Distributions from Realized Gains excluding offering costs			% Distributions from Paid In Capital excluding offering costs
2017 (January 1 – March 31)	$	—	$	226		22	%		4	%		74	%
2016	$	—	$	473		13	%		2	%		85	%
2015	$	96	$	926		21	%		9	%		70	%
2014	$	352	$	1,171		37	%		5	%		58	%
2013	$	322	$	1,120		66	%		23	%		11	%
2012	$	142	$	292		100	%		0	%		0	%

Election as a RIC

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

Related-Party Transactions and Agreements

We have entered agreements with the Manager, whereby we pay certain fees and reimbursements. These include payments to our Manager for reimbursement of organization and offering costs. In addition, we make payments for certain services that include, but are not limited to, the identification, execution, and management of our investments and the management of our day-to-day operations provided to us by our Manager, pursuant to various agreements that we have entered into. See Note 4 to the financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding such contractual obligations.

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

The compensation we pay to our Manager was not entered 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 Note 4 for a discussion of the investment advisory agreement we have with the Manager.

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

As a business development company (“BDC”), we are subject to certain regulatory restrictions in making our investments. For example, we generally are not permitted to co-invest with certain entities affiliated with our Manager in transactions originated by our Manager or its affiliates unless we obtain an exemptive order from the SEC or co-invest alongside our Manager or its affiliates in accordance with existing regulatory guidance and our allocation policy. Under existing regulatory guidance, we are permitted to, and may co-invest in syndicated deals and secondary loan market transactions where price is the only negotiated point. We may seek exemptive relief from the SEC to engage in co-investment transactions with our Manager and/or its affiliates. However, there can be no assurance that we will obtain such exemptive relief, if requested. Even if we receive exemptive relief, neither our Manager nor its affiliates are obligated to offer us the right to participate in any transactions originated by them. Prior to obtaining exemptive relief, we may co-invest alongside our Manager or its affiliates only in accordance with existing regulatory guidance and our allocation policy.

Due from related party consists of $51,000 of true up for management fees from writing down certain portfolio investments at the end of a quarter in prior quarters, $51,000 in Blue Sky state filing fees paid by the Fund instead of our Manager, $17,000 in allocation of the Directors and Officers insurance policy costs to our Manager, and $90,000 in expenses related to legal and other operational costs allocated to our Manager instead of the Fund.

At March 31, 2017, $25,000 of the $141,441 of prepaid expenses was prepaid management fees for the second quarter of 2017.

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

Assuming that our current financial condition were to remain constant and no actions were taken to alter our existing interest rate sensitivity, a 100 basis point move in interest rates up or down from their March 31, 2017 levels would result in an increase or decrease in net asset value of $0.6 million or 1.5%.

Item 4. Controls and Procedures

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rules 13a-15(f) and 15d-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and effected by the Fund’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Based on our management’s evaluation under the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), management concluded that our internal controls over financial reporting were not effective as of December 31, 2016.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has concluded it has material weaknesses resulting from the following:

Subsequent to December 31, 2016, our Board of Directors elected to restate our financial statements for the three and six months ended June 30, 2016, and for the three and nine months ended September 30, 2016, in order to correct an error in the accounting for certain warrants received in connection with direct loans that we made. Specifically, we did not assign a cost to the warrants based upon their fair value on the date of receipt relative to the total fair value of the debt and warrants received. The difference between the face amount of the debt and its recorded cost resulting from the assignment of value to the warrants is to be treated as original issue discount, and accreted into interest income over the life of the loan. The change resulted in an increase in net investment income, and a decrease in unrealized appreciation in the same amount, in each period, and had no impact on our net asset value per share, as previously reported. Management previously concluded that its disclosure controls were effective for those periods. In response, in 2017 we implemented additional controls whereby officers will seek outside guidance in regard to accounting for transactions that we have not historically engaged in and which present novel issues.

In addition, we will also obtain third party valuations of certain Level III assets in certain situations to corroborate managements’ internal valuations or guide management in valuing such assets, as well as to assist us in enhancing our documentation related to valuing such investments.

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

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

Other than the additional controls noted above, there have been no additional changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended March 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II

OTHER INFORMATION

Item 1. Legal Proceedings

On July 30, 2015, Relativity Media, LLC (“Relativity”) filed a voluntary Chapter 11 case in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). We own 855,079 shares of Series E Preferred Stock of Relativity. On October 19, 2015, Relativity filed an adversary proceeding against our Manager in the Bankruptcy Court, styled Relativity Fashion, LLC, et al. v. VII Peaks Capital, LLC, Adversary No. 15-1361 (the “Adversary Proceeding”), alleging that our Manager breached a commitment to provide $30.0 million of financing as part of a proposed reorganization of Relativity. We were not named as a defendant in the Adversary Proceeding. On October 20, 2015, Relativity sought and obtained from the Bankruptcy Court an ex parte temporary restraining order (the “TRO”) that barred our Manager and “its agents, servants, officers, employees and attorneys, and all persons in active concert or participation with them from transferring, assigning, encumbering, or taking any other action with respect to any and all funds” in the US Bank and Wells Fargo accounts which belong to us. Neither us nor our Manager were provided with prior notice of the hearing on the TRO or was present at the hearing. The two accounts affected by the TRO contained substantially all of our assets. The TRO was dissolved pursuant to a Stipulation and Agreed Order entered by the Bankruptcy Court on October 28, 2015 (the “Stipulation”), pursuant to which the parties agreed to engage in negotiations to resolve their dispute. The negotiations did not result in a settlement.

Relativity then filed a reorganization plan, which provided that the Series E preferred stock would receive no consideration under the plan. We filed an objection to the plan. On February 2, 2016, at the hearing on confirmation Relativity’s plan, our Manager and Relativity reached a memorandum of understanding regarding a settlement of Relativity’s claims against our Manager and us, as well as our objection to the plan. On March 18, 2016, the Bankruptcy Court approved Relativity’s plan of reorganization, and the plan became effective on April 14, 2016.

On October 18, 2016, Relativity filed a motion with the Bankruptcy Court to approve a revised settlement with our Manager under Bankruptcy Rule 9019. Under the settlement, Relativity would dismiss all claims against our Manager and the funds it manages in consideration for the entry by Relativity into an Output Distribution Agreement with Divine Distribution, LLC, an affiliate of our Manager. Under the Output Distribution Agreement, Relativity agreed to grant two US output distribution slots per year for five years for films to be distributed by Relativity in exchange for a prescribed fee. The motion to approve the settlement agreement was withdrawn on January 23, 2017, by mutual agreement between our Manager and Relativity. Relativity’s confirmed plan provides that Relativity’s claims will be assigned to a trust established for its creditors under its plan of reorganization if they are not settled. However, on February 8, 2017, the principal secured lender to Relativity and Relativity’s co-manager filed a joint motion to convert Relativity’s case to Chapter 7 liquidation, citing an inability by Relativity to raise capital for its operations and significant defaults on its debts. A hearing on the conversion motion was held on May 17, 2017. At the hearing, the pending motion to convert the bankruptcy case to chapter 7 liquidation was dismissed with prejudice by the petitioning creditors. The court did not discuss the adversary case related to the Fund's matter.

Given the uncertainty surrounding Relativity, it is not clear if the lawsuit against our Manager will be pursued or dropped. In the event the creditors trust elects to continue the case, our Manager intends to defend the case vigorously. Our Manager contends, among other things, that the parties never reached a binding agreement on the terms of an investment and that Relativity has suffered no harm since it has obtained alternative financing to replace the financing it contends that our Manager did not provide.

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, 2016.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

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

Exhibit Number		Description of Document

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.

32.1*		Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Filed herewith.

SIGNATURES

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

	VII Peaks Co-Optivist Income BDC II, Inc.

Date: August 3, 2017	By	/s/ Gurpreet S. Chandhoke
		Gurpreet S. Chandhoke
		Chairman of the Board of Directors,
		Chief Executive Officer and President
		(Principal Executive Officer)

	VII Peaks Co-Optivist Income BDC II, Inc.

Date: August 3, 2017	By	/s/ Michelle E. MacDonald
		Michelle E. MacDonald
		Chief Financial Officer,
		Treasurer and Secretary
		(Principal Financial Officer and Principal
		Accounting Officer)

Attached files

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

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