N-CSRS 1 v336952_ncsrs.htm N-CSRS

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

 

Investment Company Act file number 811-22251

 

HATTERAS VC CO-INVESTMENT FUND II, LLC

(Exact name of registrant as specified in charter)

 

8540 COLONNADE CENTER DRIVE, SUITE 401

RALEIGH, NORTH CAROLINA 27615

(Address of principal executive offices) (Zip code)

 

DAVID B. PERKINS

8540 COLONNADE CENTER DRIVE, SUITE 401

RALEIGH, NORTH CAROLINA 27615

(Name and address of agent for service)

 

Registrant's telephone number, including area code: (919) 846-2324

 

Date of fiscal year end: June 30

 

Date of reporting period: December 31, 2012

 

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

 

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

 

 
 

 

ITEM 1. REPORTS TO STOCKHOLDERS.

  

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

 

Financial Statements

 

 

As of and for the period from September 1, 2012 to December 31, 2012

 

(Unaudited)

 

 
 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

 

 

Table of Contents

 

 

 

Schedule of Investments 1-5
Statement of Assets, Liabilities and Members’ Capital 6
Statement of Operations 7
Statements of Changes in Members’ Capital 8
Statement of Cash Flows 9
Notes to Financial Statements 10-21
Other Information 22

  

 
 

 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

SCHEDULE OF INVESTMENTS

December 31, 2012

(Unaudited)

 

   Initial           % of 
   Investment       Fair   Members' 
Description of Investment  Date   Cost   Value   Capital 
Private Company:                    
                     
Alternative Energy:                    
Tioga Energy, Inc. a,b                    
San Mateo, California                    
363,285 shares of                    
 Common Stock   May 2010   $150,000   $-    0.00%
                     
Tioga Energy, Inc. b                    
San Mateo, California                    
Junior Bridge Financing Note                    
Principal of $56,457,                    
 8.00%, 6/29/2013   Jul. 2011    56,457    -    0.00%
                     
Tioga Energy, Inc. b                    
San Mateo, California                    
Junior Bridge Financing Note                    
Principal of $150,000,                    
 8.00%, 6/29/2013   Nov. 2011    150,000    -    0.00%
                     
Tioga Energy, Inc. b                    
San Mateo, California                    
Senior Bridge Financing Note                    
Principal of $261,378,                    
 8.00%, 6/29/2013   May 2012    261,378    675,177    6.21%
Total Alternative Energy        617,835    675,177    6.21%
                     
Consumer:                    
Ooma, Inc. a,b                    
Palo Alto, California                    
162,287 shares of Series                    
 Alpha Preferred Stock   Oct. 2009    371,317    598,376    5.51%
                     
Sonim Technologies, Inc. a,b                    
San Mateo, California                    
180,208 shares of                    
 Series B Preferred Stock   Nov. 2009    167,180    174,160    1.60%
                     
                     
                   (continued) 

 

See notes to financial statements.

ONE

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

SCHEDULE OF INVESTMENTS

December 31, 2012

(Unaudited)

 

                 
   Initial           % of 
   Investment       Fair   Members’ 
Description of Investment  Date   Cost   Value   Capital 
Consumer (continued):                
Sonim Technologies, Inc. a,b                
San Mateo, California                
440,312 shares of                
Series A Preferred Stock   Nov. 2012   $174,794   $177,121    1.63%
Total Consumer        713,291    949,657    8.74%
                     
Healthcare:                    
Clinipace, Inc. a,b                    
Raleigh, North Carolina                    
3,816,881 shares of                    
Series C Preferred Stock   Sep. 2011    500,000    824,408    7.59%
                     
Information Technology:                    
Stoke, Inc. a,b                    
Santa Clara, California                    
76,453 shares of                    
Series E Preferred Stock   Nov. 2010    250,001    129,097    1.19%
                     
                     
Medical Technology:                    
Anulex Technologies, Inc. a,b                    
Minnetonka, Minnesota                    
150,000 shares of                    
Series E Preferred Stock   May 2010    150,000    90,987    0.84%
                     
Lineagen, Inc. b                    
Salt Lake City, Utah                    
Convertible Promissory Note                    
Principal of $300,000,                    
5.25%, 12/31/2012   Jul. 2011    300,000    323,229    2.97%
Total Medical Technology        450,000    414,216    3.81%
                     
Semiconductor:                    
GainSpan Corporation a,b                    
San Jose, California                    
312,500 shares of                    
Series C Preferred Stock   Sep. 2011    250,000    281,250    2.59%
                     
                   (continued) 

See notes to financial statements.

TWO

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

SCHEDULE OF INVESTMENTS

December 31, 2012

(Unaudited)

 

                 
   Initial           % of 
   Investment       Fair   Members’ 
Description of Investment  Date   Cost   Value   Capital 
Semiconductor (continued):                    
GainSpan Corporation a,b                    
San Jose, California                    
156,292 shares of                    
Series D Preferred Stock   Jun. 2012   $140,663   $140,663    1.29%
                     
Luxtera, Inc. a,b                    
Carlsbad, California                    
2,203,310 shares of                    
Series C Preferred Stock   Apr. 2012    301,413    301,413    2.77%
                     
Magnum Semiconductor, Inc. a,b                    
Milpitas, California                    
134,219 shares of                    
Series E-1 Preferred Stock   Jun. 2010    161,063    201,329    1.85%
                     
Quantenna Communications, Inc. a,b                    
Fremont, California                    
1,893,223 shares of                    
Series D Preferred Stock   Apr. 2010    150,000    293,156    2.70%
                     
Quantenna Communications, Inc. a,b                    
Fremont, California                    
673,734 shares of                    
Series E Preferred Stock   Oct. 2010    75,000    104,324    0.96%
                     
Quantenna Communications, Inc. a,b                    
Fremont, California                    
256,158 shares of                    
Series F-1 Preferred Stock   Nov. 2011    39,084    39,665    0.37%
Total Semiconductor        1,117,223    1,361,800    12.53%
                     
Software:                    
Clustrix, Inc. a,b                    
San Francisco, California                    
248,663 shares of                    
Series B Preferred Stock   Dec. 2010    250,001    250,001    2.30%
                     
                     
                     
                     
                   (continued) 

See notes to financial statements.

THREE
 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

SCHEDULE OF INVESTMENTS

December 31, 2012

(Unaudited)

 

                 
   Initial           % of 
   Investment       Fair   Members’ 
Description of Investment  Date   Cost   Value   Capital 
Software (continued):                    
KnowledgeTree, Inc. a,b                    
Raleigh, North Carolina                    
35,817 shares of                    
Series B Preferred Stock   Jun. 2012   $150,001   $150,001    1.38%
                     
Kontiki, Inc. a,b                    
Sunnyvale, California                    
45,670 shares of                    
Common Stock   Jan. 2012    -    -    0.00%
                     
Kontiki, Inc. a,b                    
Sunnyvale, California                    
333,334 shares of                    
 Series B Preferred Stock   Jul. 2010    250,001    250,001    2.30%
                     
Kontiki, Inc. a,b                    
Sunnyvale, California                    
234,522 shares of                    
Series C Preferred Stock   Jan. 2012    91,464    114,329    1.05%
                     
Posit Science Corporation a,b                    
San Francisco, California                    
2,415,460 shares of                    
Common Stock   Dec. 2009    200,000    34,759    0.32%
                     
Posit Science Corporation a,b                    
San Francisco, California                    
642,875 shares of                    
Series AA Preferred Stock   Sep. 2010    11,893    11,893    0.11%
                     
Sailthru, Inc. a,b                    
New York, New York                    
57,047 shares of                    
Series A Preferred Stock   Sep. 2011    299,999    460,301    4.24%
                     
SugarSync, Inc. a,b                    
San Mateo, California                    
278,500 shares of                    
Series BB Preferred Stock   Dec. 2009    150,000    326,945    3.01%
                   (continued) 

See notes to financial statements.

FOUR
 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

SCHEDULE OF INVESTMENTS

December 31, 2012

(Unaudited)

 

   Initial           % of 
   Investment       Fair   Members’ 
Description of Investment  Date   Cost   Value   Capital 
Software (continued):                    
SugarSync, Inc. a,b                    
San Mateo, California                    
579,375 shares of                    
 Series CC Preferred Stock   Feb. 2011   $350,000   $718,106    6.61%
                     
SugarSync, Inc. a,b                    
San Mateo, California                    
73,119 shares of                    
Series DD Preferred Stock   Dec. 2011    68,000    114,457    1.05%
                     
Univa Corporation a,b                    
Austin, Texas                    
939,541 shares of                    
Series I Preferred Stock   Oct. 2010    432,114    836,619    7.70%
Total Software        2,253,473    3,267,412    30.07%
                     
Total Private Company        5,901,823    7,621,767    74.14%
                     
Short-Term Investments:                    
                     
Federated Prime Obligations Fund #10, 0.10% c        3,224,578    3,224,578    29.67%
                     
Total Short-Term Investments        3,224,578    3,224,578    29.67%
                     
Total Investments (United States)        9,126,401    10,846,345    99.81%
                     
Other Assets in Excess of Liabilities             20,535    0.19%
                     
Members' Capital            $10,866,880    100.00%
                     

    a Non-income producing.        
    b Portfolio holdings are subject to substantial restrictions as to resale.  
    c The rate shown is the annualized 7-day yield as of December 31, 2012.  

 

 

The cost and fair value of restricted private company investments are $5,901,823 and $7,621,767, respectively.

 

See notes to financial statements.

FIVE
 

 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

STATEMENT OF ASSETS, LIABILITIES AND MEMBERS’ CAPITAL

 

December 31, 2012

(Unaudited)

 

Assets     
Investments in private companies, at fair value (cost $5,901,823)  $7,621,767 
Short-term investments, at fair value (cost $3,224,578)   3,224,578 
Receivable for investment sold   115,829 
Interest receivable   315 
Total assets   10,962,489 
Liabilities and members’ capital     
Management fee payable   61,033 
Professional fees payable   22,169 
Accounting and administration fees payable   10,000 
Custodian fees payable   940 
Other expenses payable   1,467 
Total liabilities   95,609 
      
Members’ capital   10,866,880 
Total liabilities and members’ capital  $10,962,489 
      
Components of members’ capital:     
   Capital contributions  $10,514,912 
   Accumulated net investment loss   (1,367,976)
   Accumulated net unrealized appreciation on investments   1,719,944 
Members’ capital  $10,866,880 
      

Net asset value per unit  $94.76 
Number of authorized units   Unlimited 
Number of outstanding units   114,678.93 
      

See notes to financial statements. 


SIX
 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

STATEMENT OF OPERATIONS

 

For the period from September 1, 2012 to December 31, 2012

(Unaudited)

 

Investment income    
   Interest  $2,333 
Total investment income   2,333 
Operating expenses     
   Management fee   71,409 
   Professional fees   32,349 
   Managers’ fees   11,667 
   Accounting and administration fees   11,334 
   Custodian fees   1,833 
Total operating expenses, before management fee waiver   128,592 
      
Management fee waived   10,376 
Net investment loss   (115,883)
 
Net change in unrealized appreciation on investments in private companies		     
Net change in unrealized appreciation on investments in private companies   1,052,709 
Net change in unrealized appreciation on investments in private companies   1,052,709 
      
Net increase in members’ capital resulting from operations  $936,826 

 

See notes to financial statements. 

SEVEN
 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL

 

For the period from September 1, 2012 to December 31, 2012 and the year ended August 31, 2012

(Unaudited)

 

   Members’
Capital		 
Members’ capital, at August 31, 2011  $9,925,408 
    Net investment loss   (319,008)
    Net change in unrealized appreciation on investments in private companies   323,654 
Members’ capital, at August 31, 2012  9,930,054 
    Net investment loss   (115,883)
    Net change in unrealized appreciation on investments in private companies   1,052,709 
Members’ capital, at December 31, 2012  $10,866,880 

 

See notes to financial statements. 

EIGHT
 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

STATEMENT OF CASH FLOWS

 

For the period from September 1, 2012 to December 31, 2012

(Unaudited)

 

Cash flows from operating activities:     
Net increase in members’ capital resulting from operations  $936,826 
   Adjustments to reconcile net increase in members’ capital resulting from operations to net cash used in operating activities:   

 
Net purchases of investments   (224,068)
Net purchases of short-term investments   (31,461)
Net change in unrealized appreciation on investments in private companies   (1,052,709)
Decrease in receivable for investment sold   378,994 
Decrease in interest receivable   91 
Increase  in management fee payable   16,718 
Decrease in professional fees payable   (26,501)
Increase in accounting and administration fees payable   3,333 
Increase in custodian fees payable   56 
Decrease in other expenses payable   (1,279)
           Net cash from operating activities   - 
 
Net change in cash		   - 
 
Cash at beginning of period		   - 
Cash at end of period  $- 
      

 

See notes to financial statements. 

NINE
 

 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

NOTES TO FINANCIAL STATEMENTS

 

As of and for the period ended December 31, 2012

(Unaudited)

 

1.ORGANIZATION

 

Hatteras VC Co-Investment Fund II, LLC (the “Fund”) was organized as a limited liability company under the laws of the State of Delaware on November 7, 2008 and commenced operations on September 1, 2009. The Fund is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a closed-end, non-diversified management investment company. The Fund is managed by Hatteras Capital Investment Management, LLC (the “Adviser”), an investment adviser registered with the Securities and Exchange Commission (the “SEC”) under the Investment Advisers Act of 1940, as amended. The Fund’s placement agent, an affiliate of the Adviser, is Hatteras Capital Distributors, LLC. The Fund had an initial closing on September 1, 2009 (“Initial Closing”) and a final closing August 31, 2010 (“Final Closing”), as determined by the Board of Managers (the “Board”) of the Fund. The Fund’s investment period (the “Investment Period”) is three years following the Initial Closing of the Fund. The Fund will continue until the date that is six years from the date of the Initial Closing, unless terminated earlier pursuant to applicable terms of the Fund’s limited liability company agreement (“LLC Agreement”). The term may be extended for two one-year periods at the discretion of the Board.

 

The Board has overall responsibility for the management and supervision of the business operations of the Fund on behalf of the members of the Fund (“Members”), subject to the laws of the State of Delaware and the Fund’s LLC Agreement, including authority to oversee and establish policies regarding the management, conduct and operation of the Fund’s business. The Fund’s investment objective is to seek superior risk-adjusted returns by investing in venture-backed companies. The Fund intends to achieve its investment objective by investing all or substantially all of its assets in venture-backed companies alongside of top-tier venture capital firms.

 

At a Board meeting held on August 23, 2012, the Board approved the change in fiscal year-end for the Fund from August 31 to June 30 effective as of the end of the fiscal year ended August 31, 2012.

 

2.Significant Accounting Policies

 

The following is a summary of significant accounting and reporting policies used in preparing the financial statements.

 

a.Basis of Accounting

 

The Fund’s accounting and reporting policies conform to accounting principles generally accepted within the United States of America (“U.S. GAAP”).

 

TEN
 

 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

NOTES TO FINANCIAL STATEMENTS

 

As of and for the period ended December 31, 2012

(Unaudited) (CONTINUED)

 

2.Significant Accounting Policies (CONTINUED)

 

b.Cash

 

Cash, if any, includes short-term interest bearing deposit accounts. At times, such deposits may be in excess of federally insured limits. The Fund has not experienced any losses in such accounts and does not believe it is exposed to significant credit risk on such accounts. At December 31, 2012, the Fund held no cash balances in deposit accounts.

 

c.Valuation of Portfolio Investments

 

All portfolio investments are recorded at fair value in accordance with the Fund’s valuation procedures. The Fund's valuation procedures have been approved by the Fund's Board. The valuation procedures are implemented by the Adviser and the Fund's third-party administrator, which report to the Board. For third-party information, the Fund's administrator monitors and reviews the methodologies of the various pricing services employed by the Fund.

 

Investments in Private Companies – Investments for which observable market prices in active markets do not exist are reported at fair value, as determined in good faith by the Adviser. Fair value is based on the best information available and is determined by reference to information including, but not limited to, the following: projected sales, net earnings, earnings before interest, taxes, depreciation and amortization (“EBITDA”), balance sheets, public or private transactions, valuations for publicly traded comparable companies, recent rounds of financing in the company’s stock, and/or other measures, and consideration of any other pertinent information including the types of securities held and restrictions on disposition. The amount determined to be fair value may incorporate the Adviser’s own assumptions (including appropriate risk adjustments for nonperformance and/or lack of marketability). The methods used to estimate the fair value of private companies include: (1) the market approach (whereby fair value is derived by reference to observable valuation measures for comparable companies or assets – e.g., multiplying a key performance metric of the investee company or asset, such as projected revenue or EBITDA, by a relevant valuation multiple observed in the range of comparable companies or transactions – adjusted by the Adviser for differences between the investment and the referenced comparables and in some instances by reference to option pricing models or other similar methods), (2) the income approach (e.g., the discounted cash flow method), and (3) cost for a period of time after an acquisition (where such amount is determined by the Adviser to be the best indicator of fair value). These valuation methodologies involve a significant degree of judgment. Due to the absence of readily determinable fair values and the inherent uncertainty of valuations, the estimated fair values for private companies may differ significantly from values that would have been used had a ready market for the securities existed, and the differences could be material.

 

ELEVEN
 

 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

NOTES TO FINANCIAL STATEMENTS

 

As of and for the period ended December 31, 2012

(Unaudited) (CONTINUED)

 

2.Significant Accounting Policies (CONTINUED)

 

c.Valuation of Portfolio Investments (Continued)

 

The Fund classifies its assets into three levels based on the lowest level of input that is significant to the fair value measurement. The three-tier hierarchy distinguishes between (1) inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes. Various inputs are used in determining the value of the Fund’s investments.

 

The inputs are summarized in the three broad levels listed below:

 

Valuation of Investments

·Level 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities
·Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
·Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

 

The following table presents the Fund’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2012:

 

   Level 1   Level 2   Level 3   Total 
Private Company1                    
  Bridge Financing Notes  $-   $-   $675,177   $675,177 
  Convertible Promissory Note   -    -    323,229    323,229 
  Preferred Stock   -    -    6,588,602    6,588,602 
  Common Stock   -    -    34,759    34,759 
 Total Private Company   -    -    7,621,767    7,621,767 
Short-Term Investments   3,224,578    -    -    3,224,578 
Total  $3,224,578   $-   $7,621,767   $10,846,345 

1 All private companies held in the Fund are Level 3 securities. For a detailed break-out of private companies by industry classification, please refer to the Schedule of Investments.

 

The Fund adopted the Financial Accounting Standards Board (“FASB”) amendments to authoritative guidance which require the Fund to disclose details of transfers in and out of Level 1 and Level 2 measurements and Level 2 and Level 3 measurements and the reasons for the transfers. There were no transfers among

 

TWELVE
 

 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

NOTES TO FINANCIAL STATEMENTS

 

As of and for the period ended December 31, 2012

(Unaudited) (CONTINUED)

 

2.Significant Accounting Policies (CONTINUED)

 

c.Valuation of Portfolio Investments (Continued)

 

Levels 1, 2 and 3 during the period ended December 31, 2012. Should a transfer between Levels occur, the Fund would recognize the transfer at the beginning of the reporting period following the actual date of the event or change in circumstance that caused the transfer.

 

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

 

   Bridge
Financing
Notes		   Convertible
Promissory
Note		   Preferred
Stock		   Common
Stock		   Total 
Balance as of September 1, 2012  $1,001,166   $317,748   $4,980,756   $45,320   $6,344,990 
Net Realized Gain (Loss)   -    -    -    -    - 
Change in Unrealized                         
 Appreciation/(Depreciation)   (325,989)   5,481    1,383,778    (10,561)   1,052,709 
Gross Purchases   -    -    224,068    -    224,068 
Gross Sales   -    -    -    -    - 
Balance as of December 31, 2012  $675,177   $323,229   $6,588,602   $34,759   $7,621,767 

Change in unrealized appreciation included in the statement of operations attributable to Level 3 investments held as of the reporting date is $1,052,709.

 

Accounting Standards Update (“ASU”) No. 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”)” (“ASU 2011-04”) includes common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 requires reporting entities to disclose quantitative information about the unobservable inputs used in the fair value measurements categorized within Level 3 of the fair value hierarchy. In addition, ASU 2011-04 requires reporting entities to make disclosures about amounts and reasons for all transfers in and out of Levels 1 and 2 of the fair value hierarchy.

 

 

THIRTEEN
 

 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

NOTES TO FINANCIAL STATEMENTS

 

As of and for the period ended December 31, 2012

(Unaudited) (CONTINUED)

 

2.Significant Accounting Policies (CONTINUED)

 

c.Valuation of Portfolio Investments (Continued)

 

The following is a summary of quantitative information about significant unobservable inputs used for Level 3 fair value measurements for investments held as of December 31, 2012:

 

Type of Investment   Fair Value as
of December
31, 2012		 Valuation Technique Unobservable Input Range
Bridge Financing $ 675,177 Privately Negotiated Transaction Private Financing N/A
  Notes          
           
Convertible   323,229 Most Recent Capitalization Private Financing N/A
  Promissory Note        Discount Rate 0%
           
Preferred Stock   3,277,810 Market Comparable Companies Forward Revenue Multiple 0.61x-2.18x
        Discount Rate 15%
    3,310,792 Most Recent Capitalization Private Financing N/A
           
Common Stock   34,759 Market Comparable Companies Forward Revenue Multiple 0.17x
        Discount Rate 15%
    - Most Recent Capitalization Private Financing N/A
    - Privately Negotiated Transaction Private Financing N/A
Total Investments $ $7,621,767      

 

The significant unobservable inputs used in the fair value measurement of the Fund's bridge financing notes and the convertible promissory note are the likelihood that cash flows or shares will not be received in the future. Significant increases in the probability of default for these securities would result in a lower fair value measurement. The significant unobservable inputs used in the fair value measurement of the Fund's preferred and common stock are generally the financial results of privately held entities. If the financial condition of these companies were to deteriorate, or if market comparables were to fall, the value of the preferred stock or common stock in these private companies held by the Fund would be lower.

 

d.Investment Income

 

Interest income is recorded when earned. Interest income is not recognized when collection is doubtful, but instead, such amounts are tracked in a memorandum account. At December 31, 2012, all interest was deemed collectable. Disbursements received from investments in private companies are ordinarily accounted for as a reduction of cost. Investments in short-term investments are recorded on a trade-date basis. Investments in private companies are recorded on a subscription effective date basis, which is generally the first day of the calendar month in which the investment is effective. Realized gains and losses are determined on a specific identified cost basis.

 

FOURTEEN
 

 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

NOTES TO FINANCIAL STATEMENTS

 

As of and for the period ended December 31, 2012

(Unaudited) (CONTINUED)

 

2.Significant Accounting Policies (CONTINUED)

 

e.Fund Expenses

 

Fund expenses that are specifically attributed to the Fund are charged to the Fund and recorded on an accrual basis. Expenses of the Fund include, but are not limited to, the following: all costs and expenses related to portfolio transactions, legal fees, accounting, auditing, and tax preparation fees, custodial fees, fees for data and software providers, costs of insurance, registration expenses, management fee, and expenses of meetings of the Board.

 

f.Income Taxes

 

The Fund is treated as a partnership for federal income tax purposes and therefore is not subject to U.S. federal income tax. For income tax purposes, the individual Members will be taxed upon their distributive share of each item of the Fund’s profit and loss.

 

The Fund has reviewed any potential tax positions as of December 31, 2012 and has determined that it does not have a liability for any unrecognized tax benefits. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statement of operations. During the period ended December 31, 2012, the Fund did not incur any interest or penalties. The Fund files income tax returns in U.S. federal jurisdictions and various states, which remain open for examination by the tax authorities for a period of three years from when they are filed. The tax years subject to evaluation by tax authorities are 2009, 2010 and 2011.

 

g.Distributions

 

The Fund may make distributions to Members at least annually, or more frequently, at the Fund’s discretion, as permitted by applicable laws, rules and regulations. Amounts distributed will be intended to represent the amounts of distributions received by the Fund from underlying investments during the period since the last distribution (or from commencement of operations in the case of the first distribution). Any distributions to Members will be made pro-rata.

 

h.Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires the Fund 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 the reported amounts of increases and decreases in Members’ capital from operations during the reporting period. Actual results could differ from those estimates.

 

FIFTEEN
 

 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

NOTES TO FINANCIAL STATEMENTS

 

As of and for the period ended December 31, 2012

(Unaudited) (CONTINUED)

 

2.Significant Accounting Policies (CONTINUED)

 

i.Recent Accounting Pronouncement

 

In December 2011, the FASB issued ASU No. 2011-11 related to disclosures about offsetting assets and liabilities (“ASU 2011-11”). The amendments in ASU 2011-11 require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The guidance requires retrospective application for all comparative periods presented. Management does not believe that ASU 2011-11 will have a material impact on the financial statement disclosures.

 

3.Management Fee AND Related Party Transactions

 

The Adviser is responsible for providing day-to-day investment management services to the Fund, subject to the ultimate supervision of and subject to any policies established by the Board, pursuant to the terms of an investment management agreement with the Fund (the "Investment Management Agreement"). Under the Investment Management Agreement, the Adviser is responsible for developing, implementing and supervising the Fund's investment program.

 

In consideration for such services, the Fund pays the Adviser a quarterly investment “management fee” equal to 2.00% on an annualized basis of the net assets of the Fund as of each quarter-end. The Adviser has committed to waive permanently a portion of its contractual fee rate under the Investment Management Agreement as of the end of any quarter at which (or month-end during the period from the Initial Closing to the Final Closing) the cost basis of the Fund’s portfolio companies plus cash and cash equivalents, including short-term investments, is less than the Fund’s net asset value (“NAV”) as of such quarter-end (or month-end during the period from the Initial Closing to the Final Closing). When this occurs, the Adviser will waive the portion of its management fee that is in excess of the annual rate equal to 2.00% of the cost basis of the Fund’s portfolio companies plus cash and cash equivalents, including short-term investments. The management fee for the period ended December 31, 2012 was $71,409. For the period ended December 31, 2012, the Adviser waived $10,376 of the management fee.

 

Each member of the Board who is not an “interested person” of the Fund, as defined by Section 2(a)(19) of the 1940 Act (each an “Independent Manager”), receives an annual retainer of $5,000 from the Fund for services on the Board and for services as a member of the audit committee of the Fund. All Board members are reimbursed by the Fund for all reasonable out-of-pocket expenses incurred by them in performing their duties. For the period ended December 31, 2012, retainers to the Independent Managers totaled $11,667 and are included in the statement of operations under Managers’ fees.

 

SIXTEEN
 

 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

NOTES TO FINANCIAL STATEMENTS

 

As of and for the period ended December 31, 2012

(Unaudited) (CONTINUED)

 

4.Accounting, Administration, and Custodial Agreement

 

In consideration for accounting, administrative, and recordkeeping services, the Fund pays J.D. Clark & Company, a division of UMB Fund Services, Inc. (the “Administrator”) a monthly administration fee based on the month-end net asset value of the Fund. The Administrator also provides regulatory administrative services, transfer agency functions, and Member services at an additional cost. For the period ended December 31, 2012, the total accounting and administration fee was $11,334, and is included in the statement of operations under accounting and administration fees.

 

UMB Bank, n.a., an affiliate of the Administrator, serves as custodian of the Fund’s assets and provides custodial services for the Fund.

 

5.Investment Transactions

 

Total purchases of investments in private companies for the period ended December 31, 2012 amounted to $224,068. There were no sales of investments in private companies for the period ended December 31, 2012. The cost of investments in private companies for U.S. federal income tax purposes is adjusted for items of taxable income allocated to the Fund from the investments in private companies. The Fund relies upon actual and estimated tax information provided by the private companies in which it invests as to the amounts of taxable income allocated to the Fund as of December 31, 2012.

 

The Fund intends to invest substantially all of its available capital in private companies. These investments will generally be restricted securities that are subject to substantial holding periods or are not traded in public markets at all, so that the Fund may not be able to resell some of its securities holdings for extended periods.

 

6.INdemnificationS

 

In the normal course of business, the Fund enters into contracts that provide general indemnifications. The Fund’s maximum exposure under these agreements is dependent on future claims that may be made against the Fund, and therefore cannot be established; however, based on experience, the risk of loss from such claims is considered remote.

 

7.commitments

 

As of December 31, 2012, the Fund had an outstanding investment commitment to private companies totaling approximately $100,000.

 

SEVENTEEN
 

 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

NOTES TO FINANCIAL STATEMENTS

 

As of and for the period ended December 31, 2012

(Unaudited) (CONTINUED)

 

8.Risk Factors

 

An investment in the Fund involves significant risks, including liquidity risk, non-diversification risk and economic conditions risk, that should be carefully considered prior to investing and should only be considered by persons financially able to maintain their investment and who can afford a loss of a substantial part or all of such investment.

 

Liquidity risk: Transfer of the units of limited liability company interests (“Units”) of the Fund is subject to significant restrictions. Because of these restrictions and the absence of a public market for the Units, a Member may be unable to liquidate his, her or its investment even though his, her or its personal financial circumstances would make liquidation advisable or desirable. The Units will not be readily acceptable as collateral for loans and the Units are not permitted to be pledged as collateral for loans. Moreover, even if a Member were able to dispose of his, her or its Units, adverse tax consequences could result.

 

Non-diversification risk: If there is an industry in which the Fund concentrates its investments, the Fund may be subject to greater investment risk as companies engaged in similar businesses are more likely to be similarly affected by any adverse market conditions and other adverse industry-specific factors.

 

Economic risk: The Fund’s investments expose Members to a range of potential economic risks that could have an adverse effect on the Fund. These may include, but are not limited to, declines in economic growth, inflation, deflation, taxation, governmental restrictions, and/or adverse regulation.

 

9.Financial Highlights

 

The financial highlights are intended to help an investor understand the Fund’s financial performance for past periods. The total return in the table represents the rate that a typical Member would be expected to have earned or lost on an investment in the Fund.

 

The ratios and total return amount are calculated based on the Member group taken as a whole. An individual Member’s results may vary from those shown below due to the timing of capital transactions.

 

The ratios are calculated by dividing total dollars of net investment income or expenses, as applicable, by the average of total monthly Members’ capital. The total return amount is calculated by geometrically linking returns based on the change in the net asset value during each accounting period.

 

 

EIGHTEEN
 

 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

NOTES TO FINANCIAL STATEMENTS

 

As of and for the period ended December 31, 2012

(Unaudited) (CONTINUED)

 

9.Financial Highlights (CONTINUED)

 

Per Unit Operating Performance:

Net Asset Value, September 1, 2009  $100.00 
Income/(loss) from investment operations:     
Net investment loss   (4.81)
Net change in unrealized depreciation on investments in private companies   (7.28)
Total from investment operations   (12.09)
Net Asset Value, August 31, 2010  $87.91 
Income/(loss) from investment operations:     
Net investment loss   (3.36)
Net change in unrealized appreciation on investments in private companies   2.00 
Total from investment operations   (1.36)
Net Asset Value, August 31, 2011  $86.55 
Income/(loss) from investment operations:     
Net investment loss   (2.78)
Net change in unrealized appreciation on investments in private companies   2.82 
Total from investment operations   0.04 
Net Asset Value, August 31, 2012  $86.59 
Income/(loss) from investment operations:     
Net investment loss   (1.01)
Net change in unrealized appreciation on investments in private companies   9.18 
Total from investment operations   8.17 
Net Asset Value, December 31, 2012  $94.76 
      

 

NINETEEN
 

 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

NOTES TO FINANCIAL STATEMENTS

 

As of and for the period ended December 31, 2012

(Unaudited) (CONTINUED)

  

 

9.FINANCIAL HIGHLIGHTS (CONTINUED)

 

                     
    

 For the period from September 1, 2012 to December 31, 2012*

    For the years ended August 31,    

For the period from

September 1, 2009 (commencement of operations)
to August 31,

 
    (Unaudited)    2012    2011    2010 
Total return 1   9.44% 3    0.05%   (1.55)%   (12.09)%
Members’ capital, end of period (000’s)  $10,867   $9,930   $9,925   $10,081 
Portfolio turnover   0.00% 3    8.00%   0.00%   0.00%
Net investment loss:                    
  Before reimbursement of placementagent fees   (3.36)% 4    (3.15)%   (3.84)%   (13.76)%
  After reimbursement of placement  agent fees   (3.36)% 4    (3.15)%   (3.84)%   (13.34)%
Total operating expenses 2:                    
  Before reimbursement of placement agent fees   3.43% 4    3.29%   3.94%   13.92%
  After reimbursement of placement agent fees   3.43% 4    3.29%   3.94%   13.50%

* At a Board meeting held on August 23, 2012, the Board approved the change in fiscal year-end for the Fund from August 31 to the June 30 effective as of the end of the fiscal year ended August 31, 2012; as a result, this report covers the period from September 1, 2012 to December 31, 2012.

 

1 Internal rate of return since inception: as of December 31, 2012 was (1.60%); As of August 31, 2012
was (4.69%); As of August 31, 2011 was (6.97%).

 

2 Total operating expenses before and after waiver of the management fee for the period ended December 31, 2012 were 3.73% and 3.43%, respectively. Total operating expenses before and after waiver of the management fee for the year ended August 31, 2012 were 3.46% and 3.29%, respectively. Total operating expenses before and after waiver of the management fee for the period from September 1, 2010 to August 31, 2011 were 3.98% and 3.94%, respectively. There was no management fee waived for the period from September 1, 2009 (commencement of operations) to August 31, 2010.

 

3 Not annualized.

 

4 Annualized.

 

TWENTY
 

 

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

NOTES TO FINANCIAL STATEMENTS

 

As of and for the period ended December 31, 2012

(Unaudited) (CONCLUDED)

 

10.Subsequent Events

 

Subsequent to the end of the reporting period, on January 31, 2013, the Fund guaranteed a $78,500 pro-rata share of a $1,750,000 secured loan for Univa Corporation which was used to refinance debt and provide additional working capital for the company.  As part of the guarantee, the Fund is required to hold cash in reserves of 2.5 times the outstanding balance of the guarantee. 

 

TWENTY-ONE
 

  

Hatteras VC Co-Investment Fund II, LLC

 

(a Delaware Limited Liability Company)

 

OTHER INFORMATION

(Unaudited)

 

Proxy Voting

 

A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities and the Fund’s record of actual proxy votes cast is available at www.sec.gov and by calling 1-800-504-9070 and may be obtained at no additional charge.

 

Availability of Quarterly Portfolio Schedules

 

The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Form N-Q is available, without charge and upon request, on the SEC’s website at http://www.sec.gov or may be reviewed and copied at the SEC’s Public Reference Room in Washington.

 

TWENTY-TWO
 

  

ITEM 2. CODE OF ETHICS.

 

Not applicable to semi-annual reports.

 

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

 

Not applicable to semi-annual reports.

 

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

Not applicable to semi-annual reports.

 

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

 

Not applicable to semi-annual reports.

 

ITEM 6. SCHEDULE OF INVESTMENTS.

 

(a)Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to members filed under Item 1 of this form.

 

(b)The registrant did not need to divest itself of securities in accordance with Section 13(c) of the Investment Company Act of 1940, as amended (the “1940 Act”), following the filing of its last report on Form N-CSR and before filing of the current report.

 

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

 

Not applicable to semi-annual reports.

 

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

 

Not applicable to semi-annual reports.

 

ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.

 

Not applicable.

 

 
 

  

ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

There have been no material changes to the procedures by which the members may recommend nominees to the registrant's board of managers, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407 (c)(2)(iv) of Regulation S-K, or this Item.

 

ITEM 11. CONTROLS AND PROCEDURES.

 

(a) The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the 1940 Act (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).

 

(b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

 

ITEM 12. EXHIBITS.

 

(a)(1) Not applicable.

 

(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.

 

(a)(3) Not applicable.

 

(b) Not applicable.

 

 
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  

(registrant) HATTERAS VC CO-INVESTMENT FUND II, LLC
  --------------------------------------------------------------------

 

   
  (Signature and Title)*
   
By /s/ David B. Perkins
  -------------------------------------------------------
  David B. Perkins, President
  (principal executive officer)
   
Date March 8, 2013
  -------------------------------------------------------

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

  (Signature and Title)*
   
By /s/ David B. Perkins
  -------------------------------------------------------
  David B. Perkins, President
  (principal executive officer)
   
Date March 8, 2013
  -------------------------------------------------------
   
   
  (Signature and Title)*
   
By /s/ R. Lance Baker
  -------------------------------------------------------
  R. Lance Baker, Treasurer
  (principal financial officer)
   
Date March 8, 2013
  -------------------------------------------------------


* Print the name and title of each signing officer under his or her signature.