UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549










Form 10-Q












|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------
|  |                                                                                        
|  | For the quarterly period ended March 31, 2014                                          



| ̈ | 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 | (I.R.S. Employer      
|incorporation or organization)  | Identification Number)



100 Pine Street, Suite 500

San Francisco, California 94111

(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: YesxNo ̈



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



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



|Large
    accelerated filero | Accelerated filero | Non-accelerated filerx                        | Smaller reporting companyo
|---------------------------- | ------------------ | --------------------------------------------- | --------------------------
|                             |                    | (Do not check if a smaller reporting company)



Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ̈Nox



The number of shares
of the Registrant’s common stock, par value $0.001 per share, outstanding as of May 14, 2014 was 4,087,113.











VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.

FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2014



TABLE OF CONTENTS



|           |                                                                                                    | Page
|---------- | -------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                    |     
|PART I.    | FINANCIAL INFORMATION                                                                              | 1   
|           |                                                                                                    |     
|Item 1.    | Financial Statements                                                                               | 1   
|           |                                                                                                    |     
|           | Statements of Assets and Liabilities as of March 31, 2014 (unaudited) and December 31, 2013        | 1   
|           |                                                                                                    |     
|           | Statements of Operations for the three months ended March 31, 2014 and 2013 (unaudited)            | 2   
|           |                                                                                                    |     
|           | Statements of Changes in Net Assets for the three months ended March 31, 2014 and 2013 (unaudited) | 3   
|           |                                                                                                    |     
|           | Statements of Cash Flows for the three months ended March 31, 2014 and 2013 (unaudited)            | 4   
|           |                                                                                                    |     
|           | Schedule of Investments as of March 31, 2014 (unaudited)                                           | 5   
|           |                                                                                                    |     
|           | Schedule of Investments as of December 31, 2013                                                    | 6   
|           |                                                                                                    |     
|           | Notes to Financial Statements (unaudited)                                                          | 7   
|           |                                                                                                    |     
|Item 2.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations              | 16  
|           |                                                                                                    |     
|Item 3.    | Quantitative and Qualitative Disclosures About Market Risk                                         | 24  
|           |                                                                                                    |     
|Item 4.    | Controls and Procedures                                                                            | 24  
|           |                                                                                                    |     
|PART II.   | OTHER INFORMATION                                                                                  | 25  
|           |                                                                                                    |     
|Item 1.    | Legal Proceedings                                                                                  | 25  
|           |                                                                                                    |     
|Item 1A.   | Risk Factors                                                                                       | 25  
|           |                                                                                                    |     
|Item 2.    | Unregistered Sales of Equity Securities and Use of Proceeds                                        | 25  
|           |                                                                                                    |     
|Item 3.    | Defaults upon Senior Securities                                                                    | 25  
|           |                                                                                                    |     
|Item 4.    | Mine Safety Disclosures                                                                            | 25  
|           |                                                                                                    |     
|Item 5.    | Other Information                                                                                  | 25  
|           |                                                                                                    |     
|Item 6.    | Exhibits                                                                                           | 25  
|           |                                                                                                    |     
|Signatures |                                                                                                    | 26  











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)

(Unaudited)



|                                                                                                                                      |  | As of              |       
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------
|                                                                                                                                      |  | March 31,
    2014 |       
|                                                                                                                                      |  |                    |       
|ASSETS                                                                                                                                |  |                    |       
|                                                                                                                                      |  |                    |       
|Investments, at fair value (amortized cost of $30,236 and $23,769)                                                                    |  | $                  | 29,355
|Investments, money market at fair value (cost of $2,503 and $1,644)                                                                   |  |                    | 2,503 
|Total investments, at fair value                                                                                                      |  | $                  | 31,858
|Interest receivable                                                                                                                   |  |                    | 857   
|Prepaid expenses                                                                                                                      |  |                    | 41    
|Due from related party                                                                                                                |  |                    | 1,337 
|Receivable for common stock purchased                                                                                                 |  |                    | 996   
|Total assets                                                                                                                          |  | $                  | 35,089
|                                                                                                                                      |  |                    |       
|LIABILITIES                                                                                                                           |  |                    |       
|Payable for unsettled trades                                                                                                          |  | $                  | 1,030 
|Management fees payable                                                                                                               |  |                    | 30    
|Accounts payable and accrued liabilities                                                                                              |  |                    | 115   
|Stockholder distributions payable                                                                                                     |  |                    | 119   
|Total liabilities                                                                                                                     |  | $                  | 1,294 
|                                                                                                                                      |  |                    |       
|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; 3,931,578 and 3,151,376 shares issued and outstanding, respectively |  |                    | 4     
|Paid-in capital in excess of par value                                                                                                |  |                    | 35,766
|Treasury stock at cost, 1,098 shares                                                                                                  |  |                    | (11   
|Accumulated distribution in excess of net investment income                                                                           |  |                    | (1,083
|Net unrealized depreciation on investments                                                                                            |  |                    | (881  
|Total net assets                                                                                                                      |  |                    | 33,795
|Total liabilities and net assets                                                                                                      |  | $                  | 35,089
|                                                                                                                                      |  |                    |       
|Net asset value per share                                                                                                             |  | $                  | 8.60  



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










(1) Derived from the Company’s audited Financial Statements
as of December 31, 2013.



1







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, 2014 |           |   | For the Three Months Ended March 31, 2013 |  
|--------------------------------------------------------------- |  | ----------------------------------------- | --------- | - | ----------------------------------------- | -
|                                                                |  |                                           |           |   | (Restated)                                |  
|Investment income:                                              |  |                                           |           |   |                                           |  
|Interest from investments                                       |  | $                                         | 710       |   |                                           | $
|Total investment income                                         |  |                                           | 710       |   |                                           |  
|                                                                |  |                                           |           |   |                                           |  
|Operating expenses:                                             |  |                                           |           |   |                                           |  
|Professional fees                                               |  |                                           | 85        |   |                                           |  
|Directors fees                                                  |  |                                           | 14        |   |                                           |  
|Insurance                                                       |  |                                           | 23        |   |                                           |  
|Management fees                                                 |  |                                           | 167       |   |                                           |  
|Incentive fees                                                  |  |                                           | -         |   |                                           |  
|General and administrative                                      |  |                                           | 139       |   |                                           |  
|Offering expense                                                |  |                                           | 158       |   |                                           |  
|Organizational expense                                          |  |                                           | -         |   |                                           |  
|Operating expenses before expense reimbursements                |  |                                           | 586       |   |                                           |  
|Expense reimbursement                                           |  |                                           | -         |   |                                           |  
|Total operating expenses net of expense reimbursements          |  |                                           | 586       |   |                                           |  
|                                                                |  |                                           |           |   |                                           |  
|Net investment income                                           |  |                                           | 124       |   |                                           |  
|                                                                |  |                                           |           |   |                                           |  
|Realized and unrealized gain (loss) on investments:             |  |                                           |           |   |                                           |  
|Net realized gain from investments                              |  |                                           | 85        |   |                                           |  
|Net unrealized appreciation (depreciation) on investments       |  |                                           | (266      | ) |                                           |  
|Net realized and unrealized gain (loss) on investments          |  |                                           | (181      | ) |                                           |  
|                                                                |  |                                           |           |   |                                           |  
|Net increase (decrease) in net assets resulting from operations |  | $                                         | (57       | ) |                                           | $
|                                                                |  |                                           |           |   |                                           |  
|Per share information - basic and diluted:                      |  |                                           |           |   |                                           |  
|Net investment income                                           |  | $                                         | 0.04      |   |                                           | $
|Net increase (decrease) in net assets resulting from operations |  | $                                         | (0.02     | ) |                                           | $
|Weighted average common shares outstanding                      |  |                                           | 3,442,074 |   |                                           |  



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



2







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, 2014 |           |   | For the Three Months Ended March 31, 2013 |  
|------------------------------------------------------------------------------------------------ |  | ----------------------------------------- | --------- | - | ----------------------------------------- | -
|                                                                                                 |  |                                           |           |   | (Restated)                                |  
|Operations:                                                                                      |  |                                           |           |   |                                           |  
|Net investment income                                                                            |  | $                                         | 124       |   |                                           | $
|Net realized gain from investments                                                               |  |                                           | 85        |   |                                           |  
|Net unrealized appreciation (depreciation) on investments                                        |  |                                           | (266      | ) |                                           |  
|Net increase (decrease) in net assets from operations                                            |  |                                           | (57       | ) |                                           |  
|Stockholder distributions:                                                                       |  |                                           |           |   |                                           |  
|Distributions from net investment income                                                         |  |                                           | (124      | ) |                                           |  
|Distributions from net realized gain on investments                                              |  |                                           | (85       | ) |                                           |  
|Distributions from paid in capital                                                               |  |                                           | (423      | ) |                                           |  
|Net decrease in net assets from stockholder distributions                                        |  |                                           | (632      | ) |                                           |  
|Capital share transactions:                                                                      |  |                                           |           |   |                                           |  
|Issuance of common stock, net of issuance costs                                                  |  |                                           | 6,144     |   |                                           |  
|Reinvestment of stockholder distributions                                                        |  |                                           | 221       |   |                                           |  
|Total investment contributions transferred in-kind                                               |  |                                           | 757       |   |                                           |  
|Treasury capital/redemptions                                                                     |  |                                           | (11       | ) |                                           |  
|Net increase in net assets from capital share transactions                                       |  |                                           | 7,111     |   |                                           |  
|                                                                                                 |  |                                           |           |   |                                           |  
|Total increase in net assets                                                                     |  |                                           | 6,422     |   |                                           |  
|Net assets at beginning of period                                                                |  |                                           | 27,373    |   |                                           |  
|Net assets at end of period                                                                      |  | $                                         | 33,795    |   |                                           | $
|                                                                                                 |  |                                           |           |   |                                           |  
|Net asset value per common share                                                                 |  | $                                         | 8.60      |   |                                           | $
|Common shares outstanding at end of period                                                       |  |                                           | 3,931,578 |   |                                           |  
|                                                                                                 |  |                                           |           |   |                                           |  
|Accumulated distribution in excess of net investment income and net realized gain on investments |  | $                                         | (1,083    | ) |                                           | $



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



3







VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



STATEMENTS OF CASH FLOWS

(in thousands, except share and per share
data)

(Unaudited)



|                                                                                                                         |  | For the Three Months Ended March 31, 2014 |         |   | For the Three Months Ended March 31, 2013 |  
|------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------- | ------- | - | ----------------------------------------- | -
|                                                                                                                         |  |                                           |         |   | (Restated)                                |  
|Operating activities:                                                                                                    |  |                                           |         |   |                                           |  
|Net increase (decrease) in net assets from operations                                                                    |  | $                                         | (57     | ) |                                           | $
|Adjustments to reconcile net increase (decrease) in net assets from operations to net cash used in operating activities: |  |                                           |         |   |                                           |  
|Net accretion of discount on investments                                                                                 |  |                                           | (19     | ) |                                           |  
|Repayments of investments                                                                                                |  |                                           | 4,320   |   |                                           |  
|Purchase of investments                                                                                                  |  |                                           | (9,945  | ) |                                           |  
|Repayments of investments - money market                                                                                 |  |                                           | 9,873   |   |                                           |  
|Purchase of investments - money market                                                                                   |  |                                           | (10,732 | ) |                                           |  
|Net realized gain from investments                                                                                       |  |                                           | (85     | ) |                                           |  
|Paid-in-kind interest receivable                                                                                         |  |                                           | (13     | ) |                                           |  
|Net unrealized (appreciation) depreciation on investments                                                                |  |                                           | 266     |   |                                           |  
|(Increase) decrease in operating assets:                                                                                 |  |                                           |         |   |                                           |  
|Interest receivable                                                                                                      |  |                                           | (265    | ) |                                           |  
|Prepaid expenses                                                                                                         |  |                                           | (33     | ) |                                           |  
|Due from related party                                                                                                   |  |                                           | 17      |   |                                           |  
|Receivable for common stock purchased                                                                                    |  |                                           | (22     | ) |                                           |  
|Increase (decrease) in operating liabilities:                                                                            |  |                                           |         |   |                                           |  
|Payable for unsettled trades                                                                                             |  |                                           | 926     |   |                                           |  
|Stockholder distributions payable                                                                                        |  |                                           | 20      |   |                                           |  
|Management fees payable                                                                                                  |  |                                           | 22      |   |                                           |  
|Accounts payable and accrued liabilities                                                                                 |  |                                           | (14     | ) |                                           |  
|Net cash used in operating activities                                                                                    |  |                                           | (5,741  | ) |                                           |  
|                                                                                                                         |  |                                           |         |   |                                           |  
|Financing activities:                                                                                                    |  |                                           |         |   |                                           |  
|Proceeds from issuance of shares of common stock, net                                                                    |  |                                           | 6,144   |   |                                           |  
|Stockholder distributions                                                                                                |  |                                           | (392    | ) |                                           |  
|Treasury Stock                                                                                                           |  |                                           | (11     | ) |                                           |  
|Net cash provided by financing activities                                                                                |  |                                           | 5,741   |   |                                           |  
|                                                                                                                         |  |                                           |         |   |                                           |  
|Net increase in cash and cash equivalents                                                                                |  |                                           | -       |   |                                           |  
|Cash and cash equivalents, beginning of period                                                                           |  |                                           | -       |   |                                           |  
|Cash and cash equivalents, end of period                                                                                 |  | $                                         | -       |   |                                           | $
|                                                                                                                         |  |                                           |         |   |                                           |  
|Supplemental non-cash information:                                                                                       |  |                                           |         |   |                                           |  
|DRIP distribution payable                                                                                                |  | $                                         | 42      |   |                                           | $
|Cash distribution payable                                                                                                |  | $                                         | 77      |   |                                           | $
|DRIP distribution paid                                                                                                   |  | $                                         | 221     |   |                                           | $
|Investment contributions transferred in-kind                                                                             |  | $                                         | 757     |   |                                           | $



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



4







VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



SCHEDULE OF INVESTMENTS

(dollars in thousands)

March 31, 2014

(Unaudited)





|Portfolio Company (a)                        |  | Industry                                  |  | Investment Coupon Rate, Maturity Date    |  | Principal |        |  | Amortized Cost |   |        | Fair Value |  |   | % of Net Assets | 
|-------------------------------------------- |  | ----------------------------------------- |  | ---------------------------------------- |  | --------- | ------ |  | -------------- | - | ------ | ---------- |  | - | --------------- | 
|                                             |  |                                           |  |                                          |  |           |        |  |                |   |        |            |  |   |                 | 
|Senior Secured First Lien Debt - 10.6% (b)   |  |                                           |  |                                          |  |           |        |  |                |   |        |            |  |   |                 | 
|Accuride Corp.                               |  | Consumer Goods: Durable                   |  | 9.50%, 8/1/2018                          |  | $         | 825    |  |                | $ | 836    |            |  | $ | 846             | 
|Cambrium Learning Group, Inc.                |  | Services: Consumer                        |  | 9.75%, 2/15/2017                         |  |           | 1,000  |  |                |   | 1,017  |            |  |   | 1,010           | 
|Endeavour International Corp.                |  | Energy: Oil & Gas                         |  | 12.00%, 3/1/2018                         |  |           | 525    |  |                |   | 550    |            |  |   | 510             | 
|EuraMax International, Inc.                  |  | Metals & Mining                           |  | 9.50%, 4/1/2016                          |  |           | 775    |  |                |   | 779    |            |  |   | 783             | 
|Toys R Us Property Co II LLC                 |  | Retail                                    |  | 8.50%, 12/1/2017                         |  |           | 425    |  |                |   | 436    |            |  |   | 433             | 
|Sub Total Senior Secured First Lien Debt     |  |                                           |  |                                          |  |           | 3,550  |  |                |   | 3,618  |            |  |   | 3,582           | 
|                                             |  |                                           |  |                                          |  |           |        |  |                |   |        |            |  |   |                 | 
|Senior Secured Second Lien  Debt - 16.3% (b) |  |                                           |  |                                          |  |           |        |  |                |   |        |            |  |   |                 | 
|Aspect Software, Inc.                        |  | Telecommunications                        |  | 10.63%, 5/15/2017                        |  | $         | 727    |  |                | $ | 732    |            |  | $ | 769             | 
|Bon-ton Department Stores, Inc.              |  | Retail                                    |  | 10.63%, 7/15/2017                        |  |           | 40     |  |                |   | 41     |            |  |   | 40              | 
|Caesar's Entertainment Corp.                 |  | Hotel, Gaming & Leisure                   |  | 10.00%, 12/15/2015                       |  |           | 535    |  |                |   | 510    |            |  |   | 471             | 
|Cenveo Corp.                                 |  | Services: Business                        |  | 8.88%, 2/1/2018                          |  |           | 605    |  |                |   | 608    |            |  |   | 617             | 
|Claire's Stores, Inc.                        |  | Retail                                    |  | 8.88%, 3/15/2019                         |  |           | 800    |  |                |   | 780    |            |  |   | 744             | 
|Endeavour International Corp.                |  | Energy: Oil & Gas                         |  | 12.00%, 6/1/2018                         |  |           | 725    |  |                |   | 709    |            |  |   | 558             | 
|Logan's Roadhouse, Inc.                      |  | Beverage, Food & Tobacco                  |  | 10.75%, 10/15/2017                       |  |           | 770    |  |                |   | 731    |            |  |   | 587             | 
|Radiation Therapy Services, Inc.             |  | Healthcare & Pharmaceuticals              |  | 8.88%, 1/15/2017                         |  |           | 960    |  |                |   | 949    |            |  |   | 998             | 
|Saratoga Resources, Inc.                     |  | Energy: Oil & Gas                         |  | 12.50%, 7/1/2016                         |  |           | 885    |  |                |   | 903    |            |  |   | 708             | 
|Sub Total Senior Secured Second Lien Debt    |  |                                           |  |                                          |  |           | 6,047  |  |                |   | 5,963  |            |  |   | 5,492           | 
|                                             |  |                                           |  |                                          |  |           |        |  |                |   |        |            |  |   |                 | 
|Senior Unsecured Debt - 40.4% (b)            |  |                                           |  |                                          |  |           |        |  |                |   |        |            |  |   |                 | 
|Alion Science and Technology Corp.           |  | Aerospace and Defense                     |  | 10.0% cash; 2% PIK, 11/1/2014            |  | $         | 1,055  |  |                | $ | 1,058  |            |  | $ | 1,050           | 
|Armored Autogroup, Inc.                      |  | Consumer Goods: Durable                   |  | 9.25%, 11/1/2018                         |  |           | 925    |  |                |   | 912    |            |  |   | 970             | 
|Avaya, Inc.                                  |  | Telecommunications                        |  | 9.75%, 11/1/2015                         |  |           | 675    |  |                |   | 660    |            |  |   | 673             | 
|Avaya, Inc.                                  |  | Telecommunications                        |  | 10.13%, 11/1/2015                        |  |           | 485    |  |                |   | 469    |            |  |   | 484             | 
|Caesar's Entertainment Corp.                 |  | Hotel, Gaming & Leisure                   |  | 10.75%, 2/1/2016                         |  |           | 495    |  |                |   | 462    |            |  |   | 413             | 
|Cenveo Corp.                                 |  | Services: Business                        |  | 11.50%, 5/15/2017                        |  |           | 545    |  |                |   | 528    |            |  |   | 541             | 
|Ceridian Corporation                         |  | Services: Business                        |  | 11.25%, 11/15/15                         |  |           | 410    |  |                |   | 420    |            |  |   | 413             | 
|Ceridian Corporation                         |  | Services: Business                        |  | 12.25%, 11/15/15                         |  |           | 595    |  |                |   | 609    |            |  |   | 600             | 
|Clear Channel Communications                 |  | Media: Broadcasting & Subscription        |  | 10.75%, 8/1/2016                         |  |           | 400    |  |                |   | 411    |            |  |   | 409             | 
|Clear Channel Communications                 |  | Media: Broadcasting & Subscription        |  | 11.00%, 8/1/2016                         |  |           | 400    |  |                |   | 412    |            |  |   | 409             | 
|Colt Defense LLC                             |  | Aerospace and Defense                     |  | 8.75%, 11/15/2017                        |  |           | 928    |  |                |   | 792    |            |  |   | 854             | 
|DynCorp International, Inc.                  |  | Aerospace and Defense                     |  | 10.38%, 7/1/2017                         |  |           | 810    |  |                |   | 846    |            |  |   | 846             | 
|Education Management LLC (d)                 |  | Services: Consumer                        |  | 15.00% cash; 1% PIK, 7/1/2018            |  |           | 270    |  |                |   | 235    |            |  |   | 292             | 
|Gentiva Health Services, Inc.                |  | Healthcare & Pharmaceuticals              |  | 11.50%, 9/1/2018                         |  |           | 925    |  |                |   | 973    |            |  |   | 977             | 
|Gymboree Corp.                               |  | Retail                                    |  | 9.13%, 12/1/2018                         |  |           | 810    |  |                |   | 757    |            |  |   | 685             | 
|Hutchinson Technology, Inc.                  |  | High Tech Industries                      |  | 8.50%, 1/15/2026, puttable on 01/15/2015 |  |           | 858    |  |                |   | 817    |            |  |   | 824             | 
|NII Cap Corp.                                |  | Telecommunications                        |  | 10.00%, 8/15/2016                        |  |           | 960    |  |                |   | 926    |            |  |   | 389             | 
|QuickSilver Resources, Inc.                  |  | Energy: Oil & Gas                         |  | 7.13%, 4/1/2016                          |  |           | 690    |  |                |   | 665    |            |  |   | 643             | 
|Seitel, Inc.                                 |  | Energy: Oil & Gas                         |  | 9.50%, 4/15/2019                         |  |           | 825    |  |                |   | 847    |            |  |   | 854             | 
|Suntech Power Holdings Company, Ltd. (c)     |  | Environmental Industries                  |  | 3.00%, 5/15/13                           |  |           | 100    |  |                |   | 103    |            |  |   | 10              | 
|Travelport LLC                               |  | Services: Consumer                        |  | 11.38% cash; 2% PIK, 3/1/2016            |  |           | 340    |  |                |   | 311    |            |  |   | 359             | 
|Visant Corp.                                 |  | Media: Advertising, Printing & Publishing |  | 10.00%, 10/1/2017                        |  |           | 950    |  |                |   | 932    |            |  |   | 946             | 
|Sub Total Senior Unsecured Debt              |  |                                           |  |                                          |  |           | 14,451 |  |                |   | 14,145 |            |  |   | 13,641          | 
|                                             |  |                                           |  |                                          |  |           |        |  |                |   |        |            |  |   |                 | 
|Senior Subordinated Debt -19.6% (b)          |  |                                           |  |                                          |  |           |        |  |                |   |        |            |  |   |                 | 
|Affinion Group, Inc.                         |  | Media: Advertising, Printing & Publishing |  | 13.50%, 8/15/2018                        |  | $         | 816    |  |                | $ | 693    |            |  | $ | 828             | 
|American Media, Inc.                         |  | Media: Advertising, Printing & Publishing |  | 11.50%, 12/15/2017                       |  |           | 995    |  |                |   | 1,053  |            |  |   | 1,082           | 
|Central Garden and Pet Co.                   |  | Retail                                    |  | 8.25%, 3/1/2018                          |  |           | 825    |  |                |   | 849    |            |  |   | 851             | 
|Claires Stores, Inc                          |  | Retail                                    |  | 10.50%, 6/1/2017                         |  |           | 215    |  |                |   | 219    |            |  |   | 218             | 
|DJO Finance, LLC.                            |  | Healthcare & Pharmaceuticals              |  | 9.75%, 10/15/2017                        |  |           | 860    |  |                |   | 898    |            |  |   | 912             | 
|Ryerson Inc./Joseph T Ryerson & Son, Inc.    |  | Metals & Mining                           |  | 9.00%, 10/15/2017                        |  |           | 490    |  |                |   | 513    |            |  |   | 529             | 
|Serena Software, Inc.                        |  | High Tech Industries                      |  | 10.38%, 3/15/2016                        |  |           | 840    |  |                |   | 854    |            |  |   | 844             | 
|Toys R Us, Inc.                              |  | Retail                                    |  | 10.38%, 8/15/2017                        |  |           | 860    |  |                |   | 821    |            |  |   | 718             | 
|Travelport LLC                               |  | Services: Consumer                        |  | 11.88%, 9/1/2016                         |  |           | 645    |  |                |   | 610    |            |  |   | 658             | 
|Sub Total Senior Subordinated Debt           |  |                                           |  |                                          |  |           | 6,546  |  |                |   | 6,510  |            |  |   | 6,640           | 
|                                             |  |                                           |  |                                          |  |           |        |  |                |   |        |            |  |   |                 | 
|Investments - Money Market -7.4% (b)         |  |                                           |  |                                          |  |           |        |  |                |   |        |            |  |   |                 | 
|Investments - U.S. Bank Money Market         |  |                                           |  | 0.03%                                    |  | $         | 2,503  |  |                |   | 2,503  |            |  |   | 2,503           | 
|Sub Total Investments - Money Market         |  |                                           |  |                                          |  |           |        |  |                |   | 2,503  |            |  |   | 2,503           | 
|                                             |  |                                           |  |                                          |  |           |        |  |                |   |        |            |  |   |                 | 
|TOTAL INVESTMENTS - 94.3% (b)                |  |                                           |  |                                          |  |           |        |  |                | $ | 32,739 |            |  | $ | 31,858          | 



| | (a) | All of our investments are issued by eligible U.S. portfolio
companies, as defined in the Investment Company Act of 1940, except for Caesar's Entertainment Corp., Education Management LLC,
NII Capital Corp., QuickSilver Resources, Inc., and Suntech Power Holdings Company, Ltd.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Percentages are based on net assets of $33,795 as of
March 31, 2014.
| | --- | --------------------------------------------------------------------

| | (c) | Non-U.S. company. The principal place of business for
Suntech Power Holdings Company, Ltd. is China. Non-income producing as of March 31, 2014.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | The notes pay cash interest at the rate of 15% per annum.
For any interest period after March 30, 2014, the notes pay additional PIK interest in the form of additional notes. PIK interest
on the notes accrues at the rate of (i) 1.0% per annum for the period from March 30, 2014 through and including March 30, 2015,
(ii) 2.0% per annum for the period from March 30, 2015 through and including March 30, 2016, (iii) 3.0% per annum for the period
from March 30, 2016 through and including March 30, 2017 and (iv) 4.0% per annum for the period from March 30, 2017 through and
including July 1, 2018.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



5







VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



SCHEDULE OF INVESTMENTS

(dollars in thousands)

December 31, 2013



|Portfolio Company (a)                        |  | Industry                                  |  | Investment Coupon Rate, Maturity Date   |  | Principal |       |  | Amortized 
Cost |   |        | Fair Value |  |   | % of  Net Assets | 
|-------------------------------------------- |  | ----------------------------------------- |  | --------------------------------------- |  | --------- | ----- |  | --------------- | - | ------ | ---------- |  | - | ---------------- | 
|                                             |  |                                           |  |                                         |  |           |       |  |                 |   |        |            |  |   |                  | 
|Senior Secured First Lien Debt - 8.4% (b)    |  |                                           |  |                                         |  |           |       |  |                 |   |        |            |  |   |                  | 
|Endeavour International Corp.                |  | Energy: Oil & Gas                         |  | 12.00%, 3/1/2018                        |  | $         | 525   |  |                 | $ | 551    |            |  | $ | 539              | 
|EuraMax International, Inc.                  |  | Metals & Mining                           |  | 9.50%, 4/1/2016                         |  |           | 775   |  |                 |   | 779    |            |  |   | 777              | 
|GSX Worldwide, Inc.                          |  | Services: Business                        |  | 9.75%, 6/15/2015                        |  |           | 940   |  |                 |   | 965    |            |  |   | 971              | 
|Sub Total Senior Secured First Lien Debt     |  |                                           |  |                                         |  |           | 2,240 |  |                 |   | 2,295  |            |  |   | 2,287            | 
|                                             |  |                                           |  |                                         |  |           |       |  |                 |   |        |            |  |   |                  | 
|Senior Secured Second Lien  Debt - 19.3% (b) |  |                                           |  |                                         |  |           |       |  |                 |   |        |            |  |   |                  | 
|Apria Healthcare Group, Inc.                 |  | Healthcare & Pharmaceuticals              |  | 12.38%, 11/1/2014                       |  | $         | 571   |  |                 | $ | 581    |            |  | $ | 576              | 
|Aspect Software, Inc.                        |  | Telecommunications                        |  | 10.63%, 5/15/2017                       |  |           | 692   |  |                 |   | 696    |            |  |   | 697              | 
|Bon-ton Department Stores, Inc.              |  | Retail                                    |  | 10.63%, 7/15/2017                       |  |           | 40    |  |                 |   | 41     |            |  |   | 40               | 
|Caesar's Entertainment Corp.                 |  | Hotel, Gaming & Leisure                   |  | 10.00%, 12/15/2015                      |  |           | 505   |  |                 |   | 481    |            |  |   | 432              | 
|Cenveo Corp.                                 |  | Services: Business                        |  | 8.88%, 2/1/2018                         |  |           | 585   |  |                 |   | 589    |            |  |   | 585              | 
|Endeavour International Corp.                |  | Energy: Oil & Gas                         |  | 12.00%, 6/1/2018                        |  |           | 700   |  |                 |   | 688    |            |  |   | 655              | 
|Logan's Roadhouse, Inc.                      |  | Beverage, Food & Tobacco                  |  | 10.75%, 10/15/2017                      |  |           | 750   |  |                 |   | 715    |            |  |   | 557              | 
|Radiation Therapy Services, Inc.             |  | Healthcare & Pharmaceuticals              |  | 8.88%, 1/15/2017                        |  |           | 935   |  |                 |   | 922    |            |  |   | 944              | 
|Saratoga Resources, Inc.                     |  | Energy: Oil & Gas                         |  | 12.50%, 7/1/2016                        |  |           | 860   |  |                 |   | 888    |            |  |   | 804              | 
|Sub Total Senior Secured Second Lien Debt    |  |                                           |  |                                         |  |           | 5,638 |  |                 |   | 5,601  |            |  |   | 5,290            | 
|                                             |  |                                           |  |                                         |  |           |       |  |                 |   |        |            |  |   |                  | 
|Senior Unsecured Debt - 30.6% (b)            |  |                                           |  |                                         |  |           |       |  |                 |   |        |            |  |   |                  | 
|Alion Science and Technology Corp.           |  | Aerospace and Defense                     |  | 10.00% cash; 2% PIK,11/1/2014           |  | $         | 1,030 |  |                 | $ | 1,038  |            |  | $ | 1,051            | 
|Avaya, Inc.                                  |  | Telecommunications                        |  | 9.75%, 11/1/2015                        |  |           | 650   |  |                 |   | 633    |            |  |   | 645              | 
|Avaya, Inc.                                  |  | Telecommunications                        |  | 10.13%, 11/1/2015                       |  |           | 460   |  |                 |   | 442    |            |  |   | 457              | 
|Caesar's Entertainment Corp.                 |  | Hotel, Gaming & Leisure                   |  | 10.75%, 2/1/2016                        |  |           | 445   |  |                 |   | 416    |            |  |   | 358              | 
|Cenveo Corp.                                 |  | Services: Business                        |  | 11.50%, 5/15/2017                       |  |           | 510   |  |                 |   | 492    |            |  |   | 502              | 
|Ceridian Corporation                         |  | Services: Business                        |  | 11.25%, 11/15/15                        |  |           | 390   |  |                 |   | 402    |            |  |   | 393              | 
|Ceridian Corporation                         |  | Services: Business                        |  | 12.25%, 11/15/15                        |  |           | 560   |  |                 |   | 576    |            |  |   | 564              | 
|Colt Defense LLC                             |  | Aerospace and Defense                     |  | 8.75%, 11/15/2017                       |  |           | 853   |  |                 |   | 718    |            |  |   | 737              | 
|DynCorp International, Inc.                  |  | Aerospace and Defense                     |  | 10.38%, 7/1/2017                        |  |           | 810   |  |                 |   | 850    |            |  |   | 828              | 
|Education Management LLC (d)                 |  | Services: Consumer                        |  | 15.00%, 6/1/2014                        |  |           | 270   |  |                 |   | 232    |            |  |   | 293              | 
|Harland Clarke Corp.                         |  | Banking, Finance, Insurance & Real Estate |  | 9.50%, 5/15/5015                        |  |           | 691   |  |                 |   | 692    |            |  |   | 694              | 
|Hutchinson Technology, Inc.                  |  | High Tech Industries                      |  | 8.50%, 1/15/2026, puttable on 1/15/2015 |  |           | 443   |  |                 |   | 406    |            |  |   | 388              | 
|NII Cap Corp.                                |  | Telecommunications                        |  | 10.00%, 8/15/2016                       |  |           | 925   |  |                 |   | 907    |            |  |   | 490              | 
|QuickSilver Resources, Inc.                  |  | Energy: Oil & Gas                         |  | 7.13%, 4/1/2016                         |  |           | 620   |  |                 |   | 594    |            |  |   | 606              | 
|Suntech Power Holdings Company, Ltd.         |  | Environmental Industries                  |  | 3.00%, 2/28/2014                        |  |           | 100   |  |                 |   | 98     |            |  |   | 8                | 
|Travelport LLC                               |  | Services: Consumer                        |  | 11.38% cash; 2% PIK, 3/1/2016           |  |           | 340   |  |                 |   | 308    |            |  |   | 361              | 
|Sub Total Senior Unsecured Debt              |  |                                           |  |                                         |  |           | 9,097 |  |                 |   | 8,804  |            |  |   | 8,375            | 
|                                             |  |                                           |  |                                         |  |           |       |  |                 |   |        |            |  |   |                  | 
|Senior Subordinated Debt - 26.3% (b)         |  |                                           |  |                                         |  |           |       |  |                 |   |        |            |  |   |                  | 
|Accelent, Inc.                               |  | Healthcare & Pharmaceuticals              |  | 10.00%, 11/1/2017                       |  | $         | 775   |  |                 | $ | 732    |            |  | $ | 800              | 
|Affinion Group, Inc.                         |  | Media: Advertising, Printing & Publishing |  | 13.50%, 8/15/2018                       |  |           | 816   |  |                 |   | 689    |            |  |   | 812              | 
|American Media, Inc.                         |  | Media: Advertising, Printing & Publishing |  | 11.50%, 12/15/2017                      |  |           | 670   |  |                 |   | 704    |            |  |   | 729              | 
|Claires Stores, Inc                          |  | Retail                                    |  | 10.50%, 6/1/2017                        |  |           | 215   |  |                 |   | 220    |            |  |   | 220              | 
|DJO Finance, LLC.                            |  | Healthcare & Pharmaceuticals              |  | 9.75%, 10/15/2017                       |  |           | 825   |  |                 |   | 864    |            |  |   | 840              | 
|First Data Corp.                             |  | Banking, Finance, Insurance & Real Estate |  | 11.25%, 3/31/2016                       |  |           | 374   |  |                 |   | 375    |            |  |   | 375              | 
|Radio One, Inc.                              |  | Media: Broadcasting & Subscription        |  | 12.50%, 5/24/16                         |  |           | 875   |  |                 |   | 889    |            |  |   | 875              | 
|Ryerson Inc./Joseph T Ryerson & Son, Inc.    |  | Metals & Mining                           |  | 9.00%, 10/15/2017                       |  |           | 420   |  |                 |   | 438    |            |  |   | 445              | 
|Serena Software, Inc.                        |  | High Tech Industries                      |  | 10.38%, 3/15/2016                       |  |           | 770   |  |                 |   | 786    |            |  |   | 770              | 
|Toys R Us, Inc.                              |  | Retail                                    |  | 10.38%, 8/15/2017                       |  |           | 825   |  |                 |   | 790    |            |  |   | 707              | 
|Travelport LLC                               |  | Services: Consumer                        |  | 11.88%, 9/1/2016                        |  |           | 620   |  |                 |   | 582    |            |  |   | 629              | 
|Sub Total Senior Subordinated Debt           |  |                                           |  |                                         |  |           | 7,185 |  |                 |   | 7,069  |            |  |   | 7,202            | 
|                                             |  |                                           |  |                                         |  |           |       |  |                 |   |        |            |  |   |                  | 
|Investments - Money Market - 6.0% (b)        |  |                                           |  |                                         |  |           |       |  |                 |   |        |            |  |   |                  | 
|Investments – U.S. Bank Money Market         |  |                                           |  | 0.03%                                   |  | $         | 1,644 |  |                 |   | 1,644  |            |  |   | 1,644            | 
|Sub Total Investments - Money Market         |  |                                           |  |                                         |  |           |       |  |                 |   | 1,644  |            |  |   | 1,644            | 
|                                             |  |                                           |  |                                         |  |           |       |  |                 |   |        |            |  |   |                  | 
|TOTAL INVESTMENTS - 90.6% (b)                |  |                                           |  |                                         |  |           |       |  |                 | $ | 25,413 |            |  | $ | 24,798           | 



| | (a) | All of our investments are issued by eligible U.S. portfolio
companies, as defined in the Investment Company Act of 1940, except for Caesar's Entertainment Corp., Education Management LLC,
NII Capital Corp., QuickSilver Resources, Inc., and Suntech Power Holdings Company, Ltd.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Percentages are based on net assets of $27,373 as of
December 31, 2013.
| | --- | -----------------------------------------------------------------------

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

| | (d) | The notes pay cash interest at the rate of 15% per annum.
For any interest period after March 30, 2014, the notes pay additional PIK interest in the form of additional notes. PIK interest
on the notes accrues at the rate of (i) 1.0% per annum for the period from March 30, 2014 through and including March 30, 2015,
(ii) 2.0% per annum for the period from March 30, 2015 through and including March 30, 2016, (iii) 3.0% per annum for the period
from March 30, 2016 through and including March 30, 2017 and (iv) 4.0% per annum for the period from March 30, 2017 through and
including July 1, 2018.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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



6







VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



NOTES TO FINANCIAL STATEMENTS

March 31, 2014



(Unaudited)



Note 1.  Nature of Operations



VII Peaks
Co-Optivist TM Income BDC II, Inc. (the “Fund” or “we”), a Maryland Corporation formed in
August 3, 2011 is an externally managed, non-diversified closed-end management investment company that has elected to be
treated as a business development company ("BDC"), under the Investment Company Act of 1940, as amended (the
“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.



As of August 20, 2013,
we are managed by VII Peaks Capital, LLC (the “Manager”), a registered investment adviser under the Investment Advisers
Act of 1940, as amended, (the “Advisers Act”). Our Manager is responsible for sourcing and conducting research on prospective
investments, analyzing opportunities, structuring our portfolio, 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 Securities Exchange
Commission (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, 2014,
we issued 3.9 million shares of common stock for gross proceeds of $39.4 million, including $0.9 million under our distribution
reinvestment plan (“DRIP”).



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, 2013, which was filed with the SEC on March 11, 2014. 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, 2014. Certain prior period amounts have been reclassified to conform with the current period presentation..



Use of Estimates in the Preparation
of Financial Statements



The preparation of
the accompanying financial statements in conformity with 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.



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 cost of the organizational and offering expenses which are reimbursable by the Fund with up to 1.5% of the gross offering proceeds.
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.



7







The Fund has evaluated
the implications of ASC Topic 740, for all open tax years and in all major tax jurisdictions, and determined that there is no material
impact on the financial statements. The Fund continues to remain subject to examination by U.S. federal and state authorities for
the years 2010 through 2013.



New Accounting Pronouncements



In June 2013, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-08, Financial Services –
Investment Companies (Accounting Standards Codification (“ASC”) Topic 946), which affects the scope, measurement and
disclosure requirements for investment companies under U.S. GAAP.  ASU 2013-08 contains new guidance on assessing whether
an entity is an investment company, requiring non-controlling ownership interest in investment companies to be measured at fair
value and requiring certain additional disclosures. This guidance became effective for us on January 1, 2014 and did not have a
material impact on our financial position or disclosures.



Revenue Recognition



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



Expense Reimbursement Agreement





We entered into an
expense reimbursement agreement with VII Peaks-KBR BDC Advisor II, LLC (the “prior manager”), under which the prior
manager agreed to reimburse us for certain GAAP compliant expenses recognized on our quarterly financial statements for 2012, retroactive
to the date of formation on August 3, 2011. In 2013, the expense reimbursement agreement was modified to exclude management fees
and incentive fees payable to the prior manager effective as of January 1, 2013. We recognized a receivable on our books for the
amount due from the prior manager under the expense reimbursement agreement, and the prior manager recognized a liability on its
books in the same amount.



On August 20, 2013,
we terminated our investment management agreement with our prior manager, and entered into a new investment management agreement
with our current Manager. Our current Manager has not entered into an expense reimbursement agreement with us, but has agreed to
assume the prior manager’s obligation to pay us the $1.3 million which had accrued under the prior manager’s expense
reimbursement agreement. In consideration for such assumption, we have agreed to pay our current Manager any amounts otherwise
due our prior manager for organization and offering expenses funded by our prior manager, subject to the limitation that such organization
and offering costs may only be reimbursed to the extent of 1.5% of offering proceeds.





Note 3. Valuation of Portfolio Investments



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



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



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



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





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



8







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



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



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



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



Level 3:  Unobservable
inputs for the asset or liability.



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



The following table presents fair value
measurements of investments, by major class, as of March 31, 2014, according to the fair value hierarchy (dollars in thousands):



|                                     |  | Level 1 |       |  | Level 2 |   |        | Total | 
|------------------------------------ |  | ------- | ----- |  | ------- | - | ------ | ----- | 
|Investments – U.S. Bank money market |  | $       | 2,503 |  |         | $ | —      |       | 
|Senior Secured First Lien Debt       |  |         | —     |  |         |   | 3,582  |       | 
|Senior Secured Second Lien Debt      |  |         | —     |  |         |   | 5,492  |       | 
|Senior Unsecured Debt                |  |         | —     |  |         |   | 13,641 |       | 
|Senior Subordinated Debt             |  |         | —     |  |         |   | 6,640  |       | 
|Total                                |  | $       | 2,503 |  |         | $ | 29,355 |       | 



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



|                                     |  | Level 1 |       |  | Level 2 |   |        | Total | 
|------------------------------------ |  | ------- | ----- |  | ------- | - | ------ | ----- | 
|Investments – U.S. Bank money market |  | $       | 1,644 |  |         | $ | —      |       | 
|Senior Secured First Lien Debt       |  |         | —     |  |         |   | 2,287  |       | 
|Senior Secured Second Lien Debt      |  |         | —     |  |         |   | 5,290  |       | 
|Senior Unsecured Debt                |  |         | —     |  |         |   | 8,375  |       | 
|Senior Subordinated Debt             |  |         | —     |  |         |   | 7,202  |       | 
|Total                                |  | $       | 1,644 |  |         | $ | 23,154 |       | 



No transfers between levels have occurred
during the periods presented.



The composition of the Fund’s investments
as of March 31, 2014, 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 – U.S. Bank money market |  | $                             | 2,503  |  |                           | $ | 2,503  |                                          | 
|Senior Secured First Lien Debt       |  |                               | 3,618  |  |                           |   | 3,582  |                                          | 
|Senior Secured Second Lien Debt      |  |                               | 5,963  |  |                           |   | 5,492  |                                          | 
|Senior Unsecured Debt                |  |                               | 14,145 |  |                           |   | 13,641 |                                          | 
|Senior Subordinated Debt             |  |                               | 6,510  |  |                           |   | 6,640  |                                          | 
|Total                                |  | $                             | 32,739 |  |                           | $ | 31,858 |                                          | 



9







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



|                                     |  | Investments at Amortized Cost |        |  | Investments at Fair Value |   |        | Fair Value Percentage of Total Portfolio | 
|------------------------------------ |  | ----------------------------- | ------ |  | ------------------------- | - | ------ | ---------------------------------------- | 
|Investments – U.S. Bank money market |  | $                             | 1,644  |  |                           | $ | 1,644  |                                          | 
|Senior Secured First Lien Debt       |  |                               | 2,295  |  |                           |   | 2,287  |                                          | 
|Senior Secured Second Lien Debt      |  |                               | 5,601  |  |                           |   | 5,290  |                                          | 
|Senior Unsecured Debt                |  |                               | 8,804  |  |                           |   | 8,375  |                                          | 
|Senior Subordinated Debt             |  |                               | 7,069  |  |                           |   | 7,202  |                                          | 
|Total                                |  | $                             | 25,413 |  |                           | $ | 24,798 |                                          | 



Note 4.  Related Party Transactions



As of August 20,
2013, the Fund is managed by the Manager. Prior to August 20, 2013 the Fund was managed by VII Peaks-KBR BDC Advisor II, LLC
which was wholly-owned by VII Peaks-KBR, LLC which was a joint venture between VII Peaks Capital, LLC and KBR Capital
Advisors, LLC (“KBR”).



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. 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.
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 million; 1.75% of net assets between $100
million and $250 million; and 1.5% of net assets over $250 million. For the three months ended March 31, 2014 and 2013, the Fund
incurred $0.2 million and $0.08 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 incentive fees. For the three months ended March 31, 2014, the Fund did not incur any incentive fees
related to net investment income or capital gains. For the three months ended March 31, 2013, the Fund incurred no incentive fees
related to net investment income and $0.02 million in incentive fees on 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, which is currently scheduled
to terminate two years from the initial offering date, unless extended. 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.





VII Peaks agreed to
assume and pay the Fund all amounts due the Fund from the Prior Manager as reflected in the Fund’s books and records as
of August 20, 2013, including any amounts due under the Expense Reimbursement Agreement between the Fund and the Prior Manager.
The Fund agreed to pay VII Peaks any reimbursable organization and offering expenses incurred by the Prior Manager which the Fund
would otherwise be obligated to reimburse the Prior Manager from future sales of the Company’s securities, beginning with
any sales of securities occurring after Augusts 20, 2013, subject to the limitation that such organization and offering costs
may only be reimbursed to the extent of 1.5% of offering proceeds.



10









From time to time,
the Fund has paid directly certain expenses that were classified as organization or offering expenses that should have been borne
by the Prior Manager and for which the Prior Manager is obligated to reimburse the Fund. As of March 31, 2014 and December 31,
2013, the unreimbursed amount of organization and offering expenses was $0.04 million and $0.1 million, respectively, which amount
is included in “Due from related party” on the Fund’s balance sheet as of that date.



Expense Reimbursement Agreement



We entered into an
expense reimbursement agreement with our prior manager under which the prior manager agreed to reimburse us for certain operating
expenses recognized on our quarterly financial statements for 2012, retroactive to the date of formation on August 3, 2011. In
2013, the expense reimbursement agreement was modified to exclude management fees and incentive fees payable to the prior manager
effective as of January 1, 2013. We recognized a receivable on our books for the amount due from the prior manager under the expense
reimbursement agreement, and the prior manager recognized a liability on its books in the same amount.



On August 20, 2013, we terminated our investment
management agreement with our prior manager, and entered into a new investment management agreement with our current Manager.
Our current Manager has not entered into an expense reimbursement agreement with us, but has agreed to assume the prior manager’s
obligation to pay us the $1.3 million which had accrued under the prior manager’s expense reimbursement agreement. In consideration
for such assumption, we have agreed to pay our current Manager any amounts otherwise due our prior manager for organization and
offering expenses funded by our prior manager, subject to the limitation that such organization and offering costs may only be
reimbursed to the extent of 1.5% of offering proceeds.



Administration Agreement



The Fund has
also entered into an administration agreement with the Manager under which the Manager provides the Fund with office facilities,
equipment and clerical, bookkeeping and record keeping services at such facilities and provides or oversees the performance of
the Fund’s required administrative services, which include, among other things, being responsible for the financial records
which the Fund is required to maintain and preparing reports to its stockholders. Under the administration agreement, we are obligated
to reimburse our Manager for our allocable portion of overhead cost incurred by the Manager. During the three months ended March
31, 2014 and 2013, the Fund reimbursed the Manager for $0.01 million and $0.05 million in administration expenses under the administration
agreement, respectively. These expenses are  included in General and Administrative on the Statement of Operations.



Note 5.  Common Stock



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



On July 10, 2012, the Fund had raised sufficient
proceeds to break escrow on its IPO and through March 31, 2014, the Fund has sold 3.9 million shares of common stock for gross
proceeds of $39.4 million, including the purchases made by the Manager.



During the three months ended March 31,
2014, the Fund sold 757,298 shares of common stock in its offering for net proceeds of $6.9 million, including shares issued under
the distribution reinvestment plan (“DRIP”).



Note 6.  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 (decrease) in net assets per share from operations
for the three months ended March 31, 2014 and 2013 (dollars in thousands except share and per share amounts):



|                                                                          |  | For the  three months ended March 31, 2014 |           |   | For the three months ended March 31, 2013 |  
|------------------------------------------------------------------------- |  | ------------------------------------------ | --------- | - | ----------------------------------------- | -
|Basic and diluted                                                         |  |                                            |           |   |                                           |  
|Net increase (decrease) in net assets resulting from operations           |  | $                                          | (57       | ) |                                           | $
|Weighted average common shares outstanding                                |  |                                            | 3,442,074 |   |                                           |  
|Net increase (decrease) in net assets resulting from operations per share |  | $                                          | (0.02     | ) |                                           | $



11







The Fund had no potentially
dilutive securities as of March 31, 2014 or March 31, 2013, resulting in the same number of shares for basic and diluted.



Note 7. Tender Offer Program



We do not currently
intend to list our shares on any securities exchange and do not expect a public market for them to develop in the foreseeable future.
Therefore, shareholders should not expect to be able to sell their shares promptly or at a desired price. Beginning with fourth
calendar quarter of 2013 and on a quarterly basis thereafter, we intend to offer to repurchase shares of our common stock at a
price equal to 90% of our offering price on the date of repurchase. We currently intend to limit the number of shares to be repurchased
during any calendar year to 20% of the weighted average number of shares outstanding in the prior calendar year, or 5.0% in each
quarter, though the actual number of shares that we offer to repurchase may be less in light of the limitations noted above. We
will offer to repurchase such shares on each date of repurchase at a price equal to 90% of our offering price.



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



|                               |  |                   |  |             |     |  | Purchases of Shares |  |     | Repurchase    |  |   | Aggregate                      | 
|------------------------------ |  | ----------------- |  | ----------- | --- |  | ------------------- |  | --- | ------------- |  | - | ------------------------------ | 
|                               |  |                   |  | Shares      |     |  | Tendered that were  |  |     | Price         |  |   | Consideration for              | 
|For the Three Months
    Ended |  | Repurchase Date   |  | Repurchased |     |  | Repurchased         |  |     | Per
    Share |  |   | Repurchased
    Shares ('000s) | 
|December 31, 2013              |  | December 12, 2013 |  |             | 548 |  |                     |  | 100 | %             |  | $ | 9.135                          | 
|March 31, 2014                 |  | March 14, 2014    |  |             | 550 |  |                     |  | 100 | %             |  | $ | 9.135                          | 



Our quarterly repurchases
will be conducted on such terms as may be determined by our board of directors in its complete and absolute discretion unless,
in the judgment of the independent directors of our board of directors, 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 months in which we repurchase
shares, we will conduct repurchases on the same date that we hold our first semi-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 and
is not being made through this prospectus.



Note 8.  Distributions



The Fund has declared distributions to stockholders
with record and payment dates on a semi-monthly basis since it commenced operations. From time to time, the Fund may also pay interim
distributions at the discretion of its board of directors. The Fund may fund its distributions to stockholders from any sources
of funds available to it, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds
from the sale of assets and non-capital gains proceeds from the sale of assets. The Fund’s distributions may exceed its earnings,
especially during the period before the Fund has substantially invested the proceeds from its IPO. As a result, a portion of the
distributions may represent a return of capital for tax purposes. As of March 31, 2014, the Fund has accrued $0.1 million in stockholder
distributions that were unpaid. All amounts declared in March 2014 and paid in April 2014 have been accrued in the March 31, 2014
financial statements. As of December 31, 2013, the Fund has accrued $0.1 million in stockholder distributions that were unpaid.
All amounts declared in December 2013 and paid in January 2014 have been accrued in the December 31, 2013 financial statements.



12







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



|Quarterly Distributions:               |  | Distributions |         
|-------------------------------------- |  | ------------- | --------
|Three Months Ended                     |  | Per Share     |         
|September 30, 2012 (six record dates)  |  | $             | 0.183750
|December 31, 2012 (six record dates) * |  |               | 0.260750
|March 31, 2013 (six record dates) *    |  |               | 0.262586
|June 30, 2013 (six record dates)       |  |               | 0.186504
|September 30, 2013 (six record dates)  |  |               | 0.186504
|December 31, 2013 (six record dates)   |  |               | 0.186504
|March 31, 2014 (six record dates)      |  |               | 0.186504
|TOTAL                                  |  | $             | 1.453102



* Includes a special distribution of $0.077 per share.

In Q1, 2014, 19.6% of distributions were made from net investment
income, 13.4% were made from realized capital gains, and the balance constituted a return of capital. In fiscal year 2013, 44%
of distributions were made from net investment income, 23% from realized capital gains, and the balance constituted a return of
capital. In fiscal year 2012, 60% of distributions were made from net investment income, and the balance constituted a return of
capital.



|Annual Distributions:                  |  | Distributions |         
|-------------------------------------- |  | ------------- | --------
|For the Year Ended/Ending December 31, |  | Per Share     |         
|2012                                   |  | $             | 0.444500
|2013                                   |  |               | 0.822098
|2014                                   |  |               | 0.186504
|                                       |  | $             | 1.453102





|                                          |  |           |          |  | Net        |   |       | Realized    |  |   |           |  |  |       |       |  |         |   |       |      | 
|----------------------------------------- |  | --------- | -------- |  | ---------- | - | ----- | ----------- |  | - | --------- |  |  | ----- | ----- |  | ------- | - | ----- | ---- | 
|                                          |  |           |          |  | Investment |   |       | Gain From   |  |   | Return of |  |  |       |       |  | Paid in |   |       |      | 
|Source of Distribution and Cash vs. DRIP: |  | Per Share |          |  | Income     |   |       | Investments |  |   | Capital   |  |  | Total |       |  | Cash    |   |       | DRIP | 
|July 12, 2012 - September 30, 2012        |  | $         | 0.183750 |  |            | $ | 32    |             |  | $ | -         |  |  | $     | 18    |  |         | $ | 50    |      | 
|October 1, 2012 - December 31, 2012       |  |           | 0.260750 |  |            |   | 118   |             |  |   | -         |  |  |       | 82    |  |         |   | 200   |      | 
|January 1, 2013 -March 31. 2013           |  |           | 0.262586 |  |            |   | 248   |             |  |   | 47        |  |  |       | 75    |  |         |   | 370   |      | 
|April 1, 2013 - June 30, 2013             |  |           | 0.186504 |  |            |   | 257   |             |  |   | 83        |  |  |       | 27    |  |         |   | 367   |      | 
|July 1, 2013 - September 30, 2013         |  |           | 0.186504 |  |            |   | 242   |             |  |   | 76        |  |  |       | 183   |  |         |   | 501   |      | 
|October 1, 2013 - December 31, 2013       |  |           | 0.186504 |  |            |   | -     |             |  |   | 189       |  |  |       | 366   |  |         |   | 555   |      | 
|January 1, 2014 - March 31, 2014          |  |           | 0.186504 |  |            |   | 124   |             |  |   | 85        |  |  |       | 451   |  |         |   | 660   |      | 
|TOTAL                                     |  | $         | 1.453102 |  |            | $ | 1,021 |             |  | $ | 480       |  |  | $     | 1,202 |  |         | $ | 2,703 |      | 





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





13







The following table reflects the sources
of the cash distributions on a tax basis that the Company has paid on its common stock (dollars in thousands) during the three
months ended March 31, 2014:



|                                                    |  | For the three months ended 
March 31, 2014 |    
|--------------------------------------------------- |  | ------------------------------------------ | ---
|Source of Distributions:                            |  | Distribution 
Amount                       |    
|Distributions from net investment income            |  | $                                          | 124
|Distributions from net realized gain on investments |  |                                            | 85 
|Distributions from paid in capital                  |  |                                            | 423
|Total                                               |  | $                                          | 632



Note 9.  Financial Highlights



The following is a schedule of financial
highlights for the three months ended March 31, 2014 and 2013:



|                                                                     |  | For the three months ended  March 31, 2014 |           |   | For the three months ended March 31, 2013 |  
|-------------------------------------------------------------------- |  | ------------------------------------------ | --------- | - | ----------------------------------------- | -
|Per share data:                                                      |  |                                            |           |   |                                           |  
|Net asset value, beginning of period                                 |  | $                                          | 8.69      |   |                                           | $
|                                                                     |  |                                            |           |   |                                           |  
|Results of operations (1)                                            |  |                                            |           |   |                                           |  
|Net investment income                                                |  |                                            | 0.04      |   |                                           |  
|Net realized gain on investments                                     |  |                                            | 0.02      |   |                                           |  
|Net unrealized gain (loss) on investments                            |  |                                            | (0.08     | ) |                                           |  
|Net increase (decrease) in net assets resulting from
    operations  |  |                                            | (0.02     | ) |                                           |  
|                                                                     |  |                                            |           |   |                                           |  
|Stockholder distributions (2)                                        |  |                                            |           |   |                                           |  
|Distributions from net investment income                             |  |                                            | (0.04     | ) |                                           |  
|Distributions from realized gains                                    |  |                                            | (0.02     | ) |                                           |  
|Distributions from capital                                           |  |                                            | (0.12     | ) |                                           |  
|Net decrease in net assets resulting from stockholder distributions  |  |                                            | (0.18     | ) |                                           |  
|                                                                     |  |                                            |           |   |                                           |  
|Capital share transactions                                           |  |                                            |           |   |                                           |  
|Impact from issuance of common stock (3)                             |  |                                            | 0.11      |   |                                           |  
|Net increase in net assets resulting from capital share transactions |  |                                            | 0.11      |   |                                           |  
|Net asset value, end of period                                       |  | $                                          | 8.60      |   |                                           | $
|Shares outstanding at end of period                                  |  |                                            | 3,931,578 |   |                                           |  
|Total return (5)                                                     |  |                                            | 1.27      | % |                                           |  
|Ratio/Supplemental data:                                             |  |                                            |           |   |                                           |  
|Net assets, end of period (in thousands)                             |  | $                                          | 33,795    |   |                                           | $
|Average net assets (in thousands)                                    |  | $                                          | 26,014    |   |                                           | $
|Ratio of net investment income to average net assets (4)(7)          |  |                                            | 1.93      | % |                                           |  
|Ratio of operating expenses to average net assets (4)(7)             |  |                                            | 9.14      | % |                                           |  
|Ratio of expenses reimbursed to average net assets (7)               |  |                                            | -         | % |                                           |  
|Portfolio turnover ratio (6)                                         |  |                                            | 19.82     | % |                                           |  

___________________________



| | (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 March 31, 2014. Net investment income (loss) per share excluding the
expense reimbursements would have been ($0.08) for the three months ended March 31, 2013.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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 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, 2014 there was
no expense waiver and reimbursement. For the three months ended March 31, 2013, excluding the expense reimbursement, the ratio
of net investment income and operating expenses to average net assets is (3.32)% and 11.12%, respectively.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14







| | (5) | Total return is calculated assuming a purchase of shares at the current net asset value on the
first day and a sale at the current net asset value on the last day of the periods reported. Distributions, if any, are assumed
for purposes of this calculation to be reinvested at prices obtained under the DRIP. For the three months ended March 31, 2014
there was no expense reimbursement. The total return based on net asset value for the three months ended March 31, 2013, includes
the effect of the expense reimbursement which added 1.66% to the return.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | (7) | Ratios are annualized based on average net assets using current and prior 3 quarters net assets.
| | --- | ------------------------------------------------------------------------------------------------



Note 9.  Subsequent Events



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



From April
1, 2014 to May 14, 2014, the Fund issued  0.2 million shares of common stock for gross proceeds of $1.5 million. With the
proceeds from the Fund’s continuous offering, the Fund purchased a total of 8 debt investments for $2.8 million in
cash.



15







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,” “our” and “us” refer to VII Peaks Co-Optivist
Income BDC II, Inc., a Maryland corporation and, as required by context to VII Peaks Advisor II, LLC (the “Manager”),
which serves as our investment adviser and administrator. We are externally managed by our Manager.





Forward-Looking Statements



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



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



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



| | • | a limited pool of prospective target businesses;
| | - | ------------------------------------------------



| | • | our ability to pay distributions on our shares of common stock;
| | - | ---------------------------------------------------------------



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



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



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



Overview



We invest in discounted
corporate debt and equity-linked debt securities of public and private companies 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” TMapproach (“cooperative activism”), Co-Optivist TM is a
registered trademark of VII Peaks Capital, LLC, or (“VII Peaks”), and is being used with their permission) in executing
our investment strategy, which entails proactively engaging the target company management on average 24 months prior to a redemption
event (typically a put or maturity event) to create an opportunity for growth in the investments. Our strategy is not dependent
on restructuring to generate distributions. Capital appreciation on securities is generally not realized evenly over the holding
period. In some instances market prices for securities may continue to reflect a discount until a relatively short time period
prior to a redemption event. The potential capital gain typically occurs during the end of the holding period of a bond in our
portfolio when securities are either called by the company or exchanged to new securities during refinance. We have tendered certain
debt securities well above the market-traded deep discount.



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



Our proprietary “Co-Optivist”
TM approach entails investment in the corporate debt and equity-linked debt securities of target companies, or Target
Investments, in conjunction with proactively engaging the target companies’ management. We acquire Target Investments whose
debt securities trade on the over-the-counter market for institutional loans at a discount to their par redemption value, and will
be subject to a “redemption event” within (on average) 24 months. We define a “redemption event” as a maturity
event or a put event (where investors in the target companies’ 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 companies’ management to effect and/or participate in a restructuring or exchange of the invested securities for new
securities.



16







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



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



Between 2001 and 2008,
corporate debt levels and the supply of leverage offered by banks and other investors steadily increased. We believe a significant
amount of this debt will be subject to a redemption event prior to 2016. Many of the companies that have outstanding issues of
such debt have not been able to proactively refinance, creating a “refinancing wall” that we believe will create a
liquidity shortfall for many issuers. The value of the debt securities of these companies as reflected in prices quoted in the
secondary loan market, may be at a significant discount to par, and represent a premium yield to maturity reflective of these liquidity
concerns, creating the opportunity for us to identify and invest in the debt securities of select companies at attractive current
market valuations. We believe that our Co-Optivist TM approach can help our target companies achieve results that are
beneficial to the long-term value of their businesses, which will in turn, result in capital gains through capital appreciation,
or the exchange of invested securities into a current security or cash at a premium to its acquisition price. Our principals collectively
have experience in principal investing, debt securities and general capital markets, and we believe we are well-positioned to capitalize
on these opportunities.



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



Our Manager has an
investment committee that is responsible for reviewing, discussing and approving each investment opportunity we seek to pursue.
Our investment committee meets routinely to discuss new and existing opportunities and developments on current investments. Our
investment committee currently is led by Mr. Chandhoke, our Chief Executive Officer, with Stephen F. Shea, a Managing Partner of
VII Peaks Capital, LLC.



Critical Accounting Policies



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



Valuation of Portfolio Investments



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



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



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



| | · | preliminary valuation conclusions are then documented and discussed with the members of our board
of directors; and
| | - | -------------------------------------------------------------------------------------------------------------------



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



17







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



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



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



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



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



Level 3:  Unobservable
inputs for the asset or liability.



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



Revenue Recognition



We record interest
income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual
payment-in-kind (“PIK”) interest, which represents contractual interest accrued and added to the principal balance,
we generally will not accrue PIK interest for accounting purposes if the portfolio company valuation indicates that such PIK interest
is not collectible. We do not accrue as a receivable interest on loans and debt securities for accounting purposes if we have reason
to doubt our ability to collect such interest. Original issue discounts, market discounts or premiums are accreted or amortized
using the effective interest method as interest income. We record prepayment premiums on loans and debt securities as interest
income. Dividend income, if any, is recognized on an accrual basis to the extent that we expect to collect such amount. Our total
interest income was $0.7 million for the three months ended March 31, 2014, as compared to $0.2 million for the three months ended
March 31, 2013. The increase is due to a larger note portfolio earning interest in 2014 as compared to 2013. At March 31, 2014,
the weighted average coupon yield was 10.3%, as compared to 10.0% as of March 31, 2013.



Expense Reimbursement



We entered into an
expense reimbursement agreement with our prior manager under which the prior manager agreed to reimburse us for certain U.S. GAAP
compliant expenses recognized on our quarterly financial statements for 2012, retroactive to the date of formation on August 3,
2011. In 2013, the expense reimbursement agreement was modified to exclude management fees and incentive fees payable to the prior
manager effective as of January 1, 2013. We recognized a receivable on our books for the amount due from the prior manager under
the expense reimbursement agreement, and the prior manager recognized a liability on its books in the same amount.



On August 20, 2013,
we terminated our investment management agreement with our prior manager, and entered into a new investment management agreement
with our current Manager. Our current Manager has not entered into an expense reimbursement agreement with us, but has agreed
to assume the prior manager’s obligation to pay us the $1.3 million which had accrued under the prior manager’s expense
reimbursement agreement. In consideration for such assumption, we have agreed to pay our current Manager any amounts otherwise
due our prior manager for organization and offering expenses funded by our prior manager, subject to the limitation that such
organization and offering costs may only be reimbursed to the extent of 1.5% of offering proceeds.



18







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



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



Payment-in-Kind Interest



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



Organization and Offering Expenses



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 cost of the organizational and offering expenses which are reimbursable by the Fund with up to 1.5% of the gross offering proceeds.
The Fund expenses organizational and offering costs as they become payable under the investment advisory agreement.



Federal Income Taxes



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



Portfolio and Investment Activity



During the three months
ended March 31, 2014, we made $9.9 million of investments in new portfolio companies and had $4.3 million in aggregate amount of
exits and repayments, resulting in net investments of $5.6 million for the period. During the three months ended March 31, 2013,
we made $7.2 million of investments in new portfolio companies and had $2.0 million in aggregate amount of exits and repayments,
resulting in net investments of $5.2 million for the period. As of March 31, 2014, we had one portfolio investment in default with
a fair value of $0.01 million which represented 0.1% of our portfolio.



The following table presents our portfolio
composition based on fair value as of March 31, 2014:



|                                     |  | As of
    March 31, 2014      |      
|------------------------------------ |  | ----------------------------- | -----
|                                     |  | Percentage of Total Portfolio |      
|Investments – U.S. Bank money market |  |                               | 7.9  
|Senior Secured First Lien Debt       |  |                               | 11.2 
|Senior Secured Second Lien Debt      |  |                               | 17.3 
|Senior Unsecured Debt                |  |                               | 42.8 
|Senior Subordinated Debt             |  |                               | 20.8 
|Total                                |  |                               | 100.0



As of March 31, 2014, our investment
portfolio had a yield to maturity of 10.77 %, and an average duration of 2.59 years.



The following table presents our portfolio
composition based on fair value as of December 31, 2013:



|                                     |  | As of
    December 31, 2013   |      
|------------------------------------ |  | ----------------------------- | -----
|                                     |  | Percentage of Total Portfolio |      
|Investments – U.S. Bank money market |  |                               | 6.6  
|Senior Secured First Lien Debt       |  |                               | 9.2  
|Senior Secured Second Lien Debt      |  |                               | 21.3 
|Senior Unsecured Debt                |  |                               | 33.8 
|Senior Subordinated Debt             |  |                               | 29.1 
|Total                                |  |                               | 100.0



19







As of December 31, 2013, our investment
portfolio had a yield to maturity of 11.16%, and an average duration of 2.36 years.



The following table shows the portfolio
composition by industry grouping at fair value as of March 31, 2014 (dollars in thousands):



|                                          |  | As of March 31, 2014      |       
|----------------------------------------- |  | ------------------------- | ------
|                                          |  | Investments at Fair Value |       
|Retail                                    |  | $                         | 3,690 
|Energy: Oil & Gas                         |  |                           | 3,274 
|Healthcare & Pharmaceuticals              |  |                           | 2,887 
|Media: Advertising, Printing & Publishing |  |                           | 2,857 
|Aerospace and Defense                     |  |                           | 2,750 
|Investments - Money Market                |  |                           | 2,503 
|Services: Consumer                        |  |                           | 2,318 
|Telecommunications                        |  |                           | 2,315 
|Services: Business                        |  |                           | 2,170 
|Consumer Goods: Durable                   |  |                           | 1,816 
|High Tech Industries                      |  |                           | 1,668 
|Metals & Mining                           |  |                           | 1,311 
|Hotel, Gaming & Leisure                   |  |                           | 884   
|Media: Broadcasting & Subscription        |  |                           | 818   
|Beverage, Food & Tobacco                  |  |                           | 587   
|Environmental Industries                  |  |                           | 10    
|Total                                     |  | $                         | 31,858



The following table shows the portfolio
composition by industry grouping at fair value as of December 31, 2013 (dollars in thousands):



|                                          |  | As of December
    31, 2013 |       
|----------------------------------------- |  | --------------------------- | ------
|                                          |  | Investments at Fair Value   |       
|Healthcare & Pharmaceuticals              |  | $                           | 3,160 
|Services: Business                        |  |                             | 3,015 
|Aerospace and Defense                     |  |                             | 2,616 
|Energy: Oil & Gas                         |  |                             | 2,604 
|Telecommunications                        |  |                             | 2,289 
|Investments – Money Market                |  |                             | 1,644 
|Media: Advertising, Printing & Publishing |  |                             | 1,541 
|Services: Consumer                        |  |                             | 1,282 
|Metals & Mining                           |  |                             | 1,222 
|High Tech Industries                      |  |                             | 1,158 
|Banking, Finance, Insurance & Real Estate |  |                             | 1,069 
|Retail                                    |  |                             | 968   
|Media: Broadcasting & Subscription        |  |                             | 875   
|Hotel, Gaming & Leisure                   |  |                             | 790   
|Beverage, Food & Tobacco                  |  |                             | 557   
|Environmental Industries                  |  |                             | 8     
|Total                                     |  | $                           | 24,798





Our fair value of total investments was $31.9 million as of
March 31, 2014 as compared to $24.8 million as of December 31, 2013. The portfolio increase in the three months ending March 31,
2014 is mainly due to invested proceeds from continuous investor closings. The additional proceeds from investor closings in the
three months ending March 31, 2014 also led to further portfolio diversification by industry, as compared to diversification as
of December 31, 2013.





Results of Operations



We were formed on August 3, 2011, and commenced
operations on July 10, 2012, when we raised in excess of $1,000,000 from persons who were not affiliated with us or our Manager.
Prior to satisfying the minimum offering requirement, we had no operations except for matters relating to our organization and
registration as a non-diversified, closed-end management investment company. As a result, our operating results for 2013 are not
necessarily applicable to our results in 2012. 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. Revenue is earned as interest on the
high-yield investments. Expenses include professional services, management fees, organizational and offering costs and other general
and administrative. Realized gain/loss are from investments sold or called at an advantageous price. The unrealized gain/loss is
the change in the market price on investments in the portfolio at period end. Operating results for the three months ended March
31, 2014 and 2013 are as follows (dollars in thousands):



20









|                                                                |  | For the three months ended March 31, 2014 |      |   | For the three months ended March 31, 2013 |  
|--------------------------------------------------------------- |  | ----------------------------------------- | ---- | - | ----------------------------------------- | -
|Total investment income                                         |  | $                                         | 710  |   |                                           | $
|Total expenses, net                                             |  |                                           | 586  |   |                                           |  
|Net investment income                                           |  |                                           | 124  |   |                                           |  
|Net realized gains                                              |  |                                           | 85   |   |                                           |  
|Net unrealized appreciation (depreciation)                      |  |                                           | (266 | ) |                                           |  
|Net increase (decrease) in net assets resulting from operations |  | $                                         | (57  | ) |                                           | $



Revenues



We generated investment income of $0.7
million for the three months ended March 31, 2014, as compared to $0.2 million for the three months ended March 31, 2013,
in the form of interest and fees earned on senior secured loans, senior secured bonds, subordinated debt and collateralized securities
in our portfolio. The level of income we receive is directly related to the balance of income producing investments multiplied
by the weighted average yield of our investments. 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 March 31, 2014 note portfolio was significantly
higher than the March 31, 2013 balance.



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, 2014 and 2013 was as follows (dollars in thousands):





|                                                                   |  | For the three months ended March 31, 2014 |     |  | For the three months ended March 31, 2013 |  
|------------------------------------------------------------------ |  | ----------------------------------------- | --- |  | ----------------------------------------- | -
|Professional fees                                                  |  | $                                         | 85  |  |                                           | $
|Director fees                                                      |  |                                           | 14  |  |                                           |  
|Insurance                                                          |  |                                           | 23  |  |                                           |  
|Management fees                                                    |  |                                           | 167 |  |                                           |  
|Incentive fees                                                     |  |                                           | —   |  |                                           |  
|General and administrative expenses                                |  |                                           | 139 |  |                                           |  
|Organizational and offering expense                                |  |                                           | 158 |  |                                           |  
|Operating expenses before expense reimbursements                   |  |                                           | 586 |  |                                           |  
|Expense reimbursement                                              |  |                                           | —   |  |                                           |  
|Total operating expenses net of expense waivers and reimbursements |  | $                                         | 586 |  |                                           | $



Expense Reimbursement



We entered into an
expense reimbursement agreement with our prior manager under which the prior manager agreed to reimburse us for all U.S. GAAP
compliant expenses recognized on our quarterly financial statements for 2012, retroactive to the date of formation on August 3,
2011. In 2013, the expense reimbursement agreement was modified to exclude management fees and incentive fees payable to the Manager
effective as of January 1, 2013. We recognized a receivable on our books for the amount due from the prior manager under the expense
reimbursement agreement, and the prior manager recognized a liability on its books in the same amount. Our Prior Manager was obligated
to reimburse us for $0.2 million in the three months ended March 31, 2013.







On August 20, 2013, we terminated our investment management
agreement and expense reimbursement agreement with our prior manager, and entered into a new investment management agreement with
our current Manager. Our current Manager has not entered into an expense reimbursement agreement with us, but has agreed to assume
the prior manager’s obligation to pay us $1.3 million which had accrued under the prior manager’s expense reimbursement
agreement. In consideration for such assumption, we have agreed to pay our current Manager any amounts otherwise due our prior
manager for organization and offering expenses funded by our prior manager, subject to the limitation that such organization and
offering costs may only be reimbursed to the extent of 1.5% of offering proceeds.





21







Net Investment Income



Our net
investment income totaled $0.1 million and $0.1 million for the three months ended March 31, 2014 and 2013, respectively. Of
our net investment income, $0.0 million and $0.2 million for the three months ended March 31, 2014 and 2013, respectively,
was attributable to expense reimbursements by our prior manager, and the balance was attributable to investment income less
operating expenses for the period. For the three months ended March 31, 2014 and 2013, total investment income was $0.7
million and $0.2 million, respectively.  The increase in net investment income in the three months ending March 31, 2014 as
compared to the three months ending March 31, 2013 is due to a higher earning asset average balance in the investment
portfolio. For the three months ended March 31, 2014, and 2013, total expenses before expense reimbursements were $0.6
million and $0.3 million, respectively.



Net Realized Gains or Losses from Investments



For the three months
ended March 31, 2014 and 2013, we had $4.3 million and $2.0 million of principal repayments, resulting in $0.09 million and $0.05
million of realized gains, respectively.



Net Change in Unrealized Appreciation or Depreciation
on Investments



For the three months
ended March 31, 2014 and 2013, we had $0.3 million of unrealized depreciation and $0.2 million of unrealized appreciation, respectively.



Changes in Net Assets from Operations



For the three months
ended March 31, 2014 and 2013, we recorded a net increase (decrease) in net assets resulting from operations of ($0.06) million
and $0.4 million, respectively. Based on 3,442,074 and 1,292,508 weighted average common shares outstanding for the three months
ended March 31, 2014 and 2013, respectively, our per share net increase (decrease) in net assets resulting from operations was
($0.02) and $0.29, respectively.



Liquidity and Capital Resources



We generate cash primarily
from the net proceeds of our ongoing continuous public offering and from cash flows from fees, interest and dividends earned from
our investments as well as principal repayments and proceeds from sales of our investments. 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, 2014, we issued 3.9 million shares of common stock for gross proceeds
of $39.4 million, including $1.0 million of DRIP. We currently sell our shares on a continuous basis at a current offering price
of $10.15; however, to the extent that our net asset value per share increases, we will sell at a price necessary to ensure that
our shares are not sold at a price, after deduction of selling commissions and dealer manager fees, that is below our net asset
value per share.



Prior to investing
in debt securities, we invest the net proceeds from our continuous offering primarily in money market funds that invest in U.S.
government securities and high-quality debt instruments maturing in one year or less from the time of investment. As of March 31,
2014 and December 31, 2013, we had $2.5 million and $1.6 million, respectively, invested in money market investments pending investment
in debt instruments.



For the three months
ended March 31, 2014, we experienced a net increase in money market investments of $0.9 million. For the three months ended March
31, 2014, approximately $5.7 million was generated from our financing activities, which primarily consisted of $6.1 million in
net offering proceeds received, offset by $0.4 million in distributions. We used approximately $5.7 million of cash in our operating
activities primarily as a result of increases in receivables for interest and due from related party and a decrease in receivable
for sales of common stock. Also, we received proceeds from the sale of, repayment of and principal payments on portfolio debt investments
of $4.3 million, offset by the purchase of new portfolio debt investments of $9.9 million.



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



Distributions



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



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



22







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



Distribution Reinvestment Plan



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



Election as a RIC



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



Related-Party Transactions and Agreements



We have entered into
agreements with the Manager and the Dealer Manager, whereby we pay certain fees and reimbursements to these entities. These include
payments to the Dealer Manager for selling commissions and the Dealer Manager fee and payments to our Manager for reimbursement
of organization and offering costs. In addition, we make payments for certain services that include, but are not limited to, the
identification, execution, and management of our investments and also the management of our day-to-day operations provided to us
by our Manager, pursuant to various agreements that we have entered into. See Note 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 into on an arm’s-length basis with unaffiliated third parties. As a result, the form and
amount of such compensation may be less favorable to us than they might have been had they been entered into through arm’s-length
transactions with unaffiliated parties. See “Contractual Obligations” for a discussion of the investment advisory agreement
we have with the Manager.



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



As a 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.



23







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
balance sheet was to remain constant and no actions were taken to alter our existing interest rate sensitivity, a 100 basis point
move in interest rates up or down from their March 31, 2014 levels would result in an increase or decrease in net asset value of
$0.3 million or 0.91%.



Item 4. Controls and Procedures



Disclosure Controls



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



Change in Internal Control Over Financial
Reporting



No change occurred
in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter
ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.



24







PART II



OTHER INFORMATION



Item 1. Legal Proceedings



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



Item 1A. Risk Factors



There have been no
material changes from the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2013.



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):



|ExhibitNumber |  | 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.



25







SIGNATURES



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



|                   | VII Peaks Co-Optivist Income BDC II, Inc.
|------------------ | -----------------------------------------
|                   |                                          
|Date: May 15, 2014 | By                                       
|                   |                                          
|                   |                                          
|                   |                                          
|                   |                                          



|                   | VII Peaks Co-Optivist Income BDC II, Inc.
|------------------ | -----------------------------------------
|                   |                                          
|Date: May 15, 2014 | By                                       
|                   |                                          
|                   |                                          
|                   |                                          
|                   |                                          



26