UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549










Form 10-Q










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



For the quarterly period ended March 31, 2013



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



For the transition period from             to



Commission File No. 0-54615










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

(Exact name of Registrant as specified
in its charter)










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



255 Shoreline Drive, Suite 428

Redwood City, California 94065

(Address of principal executive offices)



(877) 700-0527

(Registrant’s telephone number,
including area code)



Not applicable

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










Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days: 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 filer ̈ | Accelerated filer ̈ | Non-accelerated filerx                        | Smaller reporting company ̈
|------------------------ | ------------------ | --------------------------------------------- | --------------------------
|                         |                    | (Do not check if a smaller reporting company)



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



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











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

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



TABLE OF CONTENTS



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



ii







PART I – FINANCIAL INFORMATION



Item 1. Financial Statements



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



STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share and per share data)



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



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



1







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



STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(Unaudited)



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



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



2







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



STATEMENTS OF CHANGES IN NET ASSETS

(in thousands, except share and per share data)

(Unaudited)



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



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



3







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



STATEMENTS OF CASH FLOWS

(in thousands, except share and per
share data)

(Unaudited)



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





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



4







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



SCHEDULE OF INVESTMENTS

(dollars in thousands)



March 31, 2013

(Unaudited)







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







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

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

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



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



5









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



SCHEDULE OF INVESTMENTS

(dollars in thousands)



December 31, 2012





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



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

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

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





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



6







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



NOTES TO FINANCIAL STATEMENTS

March 31, 2013



(Unaudited)



Note 1.  Nature of Operations



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



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



Note 2.  Summary of Significant
Accounting Policies



Basis of Presentation



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



Use of Estimates in the Preparation
of Financial Statements



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



Investments - money market



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



7







Note 2.  Summary of Significant
Accounting Policies (continued)



Organizational Costs



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



Offering Costs



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



U.S. Federal Income Taxes



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



New Accounting Pronouncements



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



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



Note 3. Valuation of Portfolio Investments



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



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



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



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



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



8







Note 3. Valuation of Portfolio Investments (continued)



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



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



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



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



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



Level 3:  Unobservable
inputs for the asset or liability.



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



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



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



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



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



No transfers between levels have occurred
during the periods presented.



9







Note 3. Valuation of Portfolio Investments (continued)



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



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



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



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



Note 4.  Related Party Transactions





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



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



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





10







Note 4.  Related Party Transactions
(continued)



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



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



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



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





Note 5.  Common
Stock



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



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



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



Note 6.  Earnings Per Share



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



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



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



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



11







Note 7.  Distributions



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



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



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



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



12







Note 8.  Financial
Highlights



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



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










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



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



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



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



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



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



| | (7) | Ratios are annualized.
| | --- | ----------------------



13







Note 9.  Subsequent Events



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



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





14







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



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



Forward-Looking Statements



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



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



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



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



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



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



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



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



Overview



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



15







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



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



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



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



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



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



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



Critical Accounting Policies



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



16







Valuation of Portfolio Investments



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



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



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



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



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



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



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



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



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



Level 3:  Unobservable
inputs for the asset or liability.



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



Revenue Recognition



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



17







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



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



Payment-in-Kind Interest



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



Organization and Offering Expenses



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



Federal Income Taxes



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



Portfolio and Investment Activity



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



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



|                                |  | At March 31, 2013             |       |   | At December 31, 2012                  | 
|------------------------------- |  | ----------------------------- | ----- | - | ------------------------------------- | 
|                                |  | Percentage of Total Portfolio |       |   | Weighted Average Current Coupon Yield | 
|Senior Secured First Lien Debt  |  |                               | 11.6  | % |                                       | 
|Senior Secured Second Lien Debt |  |                               | 22.0  |   |                                       | 
|Senior Unsecured Debt           |  |                               | 40.3  |   |                                       | 
|Senior Subordinated Debt        |  |                               | 12.3  |   |                                       | 
|Investments - money market      |  |                               | 13.8  |   |                                       | 
|Total                           |  |                               | 100.0 | % |                                       | 



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



18







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



|                                          |  | At March 31, 2013         |        |  | At December 31, 2012          | 
|----------------------------------------- |  | ------------------------- | ------ |  | ----------------------------- | 
|                                          |  | Investments at Fair Value |        |  | Percentage of Total Portfolio | 
|Healthcare & Pharmaceuticals              |  | $                         | 2,405  |  |                               | 
|Investments - money market                |  |                           | 1,801  |  |                               | 
|Banking, Finance, Insurance & Real Estate |  |                           | 1,264  |  |                               | 
|Beverage, Food & Tobacco                  |  |                           | 1,188  |  |                               | 
|Telecommunications                        |  |                           | 1,034  |  |                               | 
|High Tech Industries                      |  |                           | 949    |  |                               | 
|Services: Consumer                        |  |                           | 866    |  |                               | 
|Energy: Oil & Gas                         |  |                           | 792    |  |                               | 
|Services: Business                        |  |                           | 607    |  |                               | 
|Consumer Goods: Durable                   |  |                           | 602    |  |                               | 
|Hotel, Gaming & Leisure                   |  |                           | 551    |  |                               | 
|Retail                                    |  |                           | 551    |  |                               | 
|Consumer Goods: Non-durable               |  |                           | 414    |  |                               | 
|Environmental Industries                  |  |                           | 29     |  |                               | 
|Total                                     |  | $                         | 13,053 |  |                               | 



Results of Operations



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



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



Revenues



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



19







Expenses



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



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



Net Realized Gains or Losses from Investments



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



Net Change in Unrealized Appreciation or Depreciation
on Investments



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



Liquidity and Capital Resources



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



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



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



20







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



Distributions



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



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



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



Distribution Reinvestment Plan



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



Election as a RIC



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



Related-Party Transactions and Agreements



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





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



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



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



21







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



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



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



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



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



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



Contractual Obligations



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



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



Off-Balance Sheet Arrangements



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



22







Item 3. Quantitative and Qualitative
Disclosures about Market Risk



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



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



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



Item 4. Controls and Procedures



Disclosure Controls



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



Change in Internal Control Over Financial
Reporting



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



23







PART II



OTHER INFORMATION



Item 1. Legal Proceedings



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



Item 1A. Risk Factors



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



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



Not applicable.



Item 3. Defaults upon Senior Securities



Not applicable.



Item 4. Mine Safety Disclosures



Not applicable.



Item 5. Other Information



Not applicable.





Item 6. Exhibits



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



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



|* | Filed herewith.
|- | ---------------





24







SIGNATURES



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



|                   | VII Peaks-KBR Co-Optivist Income BDC II, Inc.
|------------------ | ---------------------------------------------
|                   |                                              
|Date: May 15, 2013 | By                                           
|                   |                                              
|                   |                                              



|                   | VII Peaks-KBR Co-Optivist Income BDC II, Inc.
|------------------ | ---------------------------------------------
|                   |                                              
|Date: May 15, 2013 | By                                           
|                   |                                              



25