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 June 30, 2015                                               



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | --------------------------------------------------------------------------------------------
|  |                                                                                             
|  | For the transition period from             to                                               



Commission File No. 0-54615










VII Peaks Co-Optivist Income BDC II,
Inc.

(Exact name of Registrant as specified
in its charter)










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



4 Orinda Way, Suite 125-A

Orinda, CA 94563

(Address of principal executive offices)



(855) 889-1778

(Registrant’s telephone number,
including area code)



Not applicable

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










Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days: 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 August 13, 2015 was 6,113,227.










VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 2015



TABLE OF CONTENTS



|           |                                                                                                             | Page
|---------- | ----------------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                             |     
|PART I.    | FINANCIAL INFORMATION                                                                                       | 3   
|           |                                                                                                             |     
|Item 1.    | Financial Statements                                                                                        | 3   
|           |                                                                                                             |     
|           | Statements of Assets and Liabilities as of June 30, 2015 (unaudited) and December 31, 2014                  | 3   
|           |                                                                                                             |     
|           | Statements of Operations for the three and six months ended June 30, 2015 (unaudited) and 2014 (unaudited)  | 4   
|           |                                                                                                             |     
|           | Statements of Changes in Net Assets for the six months ended June 30, 2015 (unaudited) and 2014 (unaudited) | 5   
|           |                                                                                                             |     
|           | Statements of Cash Flows for the six months ended June 30, 2015 (unaudited) and 2014 (unaudited)            | 6   
|           |                                                                                                             |     
|           | Schedule of Investments as of June 30, 2015 (unaudited)                                                     | 7   
|           |                                                                                                             |     
|           | Schedule of Investments as of December 31, 2014                                                             | 8   
|           |                                                                                                             |     
|           | Notes to Financial Statements (unaudited)                                                                   | 9   
|           |                                                                                                             |     
|Item 2.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations                       | 20  
|           |                                                                                                             |     
|Item 3.    | Quantitative and Qualitative Disclosures about Market Risk                                                  | 29  
|           |                                                                                                             |     
|Item 4.    | Controls and Procedures                                                                                     | 30  
|           |                                                                                                             |     
|PART II.   | OTHER INFORMATION                                                                                           | 31  
|           |                                                                                                             |     
|Item 1.    | Legal Proceedings                                                                                           | 31  
|           |                                                                                                             |     
|Item 1A.   | Risk Factors                                                                                                | 31  
|           |                                                                                                             |     
|Item 2.    | Unregistered Sales of Equity Securities and Use of Proceeds                                                 | 31  
|           |                                                                                                             |     
|Item 3.    | Defaults upon Senior Securities                                                                             | 31  
|           |                                                                                                             |     
|Item 4.    | Mine Safety Disclosures                                                                                     | 31  
|           |                                                                                                             |     
|Item 5.    | Other Information                                                                                           | 31  
|           |                                                                                                             |     
|Item 6.    | Exhibits                                                                                                    | 31  
|           |                                                                                                            
|Signatures | 32                                                                                                         



2






PART I – FINANCIAL INFORMATION



Item 1. Financial Statements



VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share and per
share data)



|                                                                                                                                          |  | As
    of         |       
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------
|                                                                                                                                          |  | June
    30, 2015 |       
|                                                                                                                                          |  | (Unaudited)       |       
|ASSETS                                                                                                                                    |  |                   |       
|                                                                                                                                          |  |                   |       
|Investments, at fair value (amortized cost of $47,065 and $44,302, respectively)                                                          |  | $                 | 39,641
|Investments, money market at fair value  (cost of $5,267 and $3,104,
    respectively)                                                    |  |                   | 5,267 
|Total investments, at fair value                                                                                                          |  |                   | 44,908
|Interest receivable                                                                                                                       |  |                   | 890   
|Prepaid expenses                                                                                                                          |  |                   | 42    
|Origination fee receivable                                                                                                                |  |                   | 263   
|Due from related party                                                                                                                    |  |                   | 9     
|Receivable for common stock purchased                                                                                                     |  |                   | -     
|Total assets                                                                                                                              |  | $                 | 46,112
|                                                                                                                                          |  |                   |       
|LIABILITIES                                                                                                                               |  |                   |       
|Payable for unsettled trades                                                                                                              |  | $                 | -     
|Management fees payable                                                                                                                   |  |                   | -     
|Accounts payable and accrued liabilities                                                                                                  |  |                   | 74    
|Stockholder distributions payable                                                                                                         |  |                   | 188   
|Total liabilities                                                                                                                         |  | $                 | 262   
|                                                                                                                                          |  |                   |       
|NET ASSETS                                                                                                                                |  |                   |       
|Preferred stock, par value, $.001 per share, 50,000,000 authorized, none issued and outstanding                                           |  | $                 | -     
|Common stock, par value, $.001 per share, 200,000,000 authorized; 6,313,300
    and 5,546,292 shares issued and outstanding, respectively |  |                   | 6     
|Paid-in capital in excess of par value                                                                                                    |  |                   | 57,934
|Treasury stock at cost, 85,478 and 79,667 shares, respectively                                                                            |  |                   | (837  
|Accumulated distribution in excess of net investment income and net realized gain on investments                                          |  |                   | (3,829
|Net unrealized depreciation on investments                                                                                                |  |                   | (7,424
|Total net assets                                                                                                                          |  |                   | 45,850
|Total liabilities and net assets                                                                                                          |  | $                 | 46,112
|                                                                                                                                          |  |                   |       
|Net asset value per share                                                                                                                 |  | $                 | 7.26  



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



3






VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



STATEMENTS OF OPERATIONS

(in thousands, except share and per
share data)

(Unaudited)



|                                                                |  | For
    theThree Months 
EndedJune 30, 2015 |           |   | For
    theThree MonthsEndedJune
    30, 2014 |   |           | For
    theSix MonthsEndedJune 30, 2015 |  |   | For
    theSix MonthsEndedJune
    30, 2014 |  
|--------------------------------------------------------------- |  | ------------------------------------------- | --------- | - | --------------------------------------------- | - | --------- | --------------------------------------- |  | - | ------------------------------------------- | -
|                                                                |  |                                             |           |   |                                               |   |           |                                         |  |   |                                             |  
|Investment income:                                              |  |                                             |           |   |                                               |   |           |                                         |  |   |                                             |  
|Interest from investments                                       |  | $                                           | 854       |   |                                               | $ | 848       |                                         |  | $ | 1,768                                       |  
|Other income                                                    |  |                                             | 558       |   |                                               |   | 103       |                                         |  |   | 558                                         |  
|Total investment income                                         |  | $                                           | 1,412     |   |                                               | $ | 951       |                                         |  | $ | 2,326                                       |  
|                                                                |  |                                             |           |   |                                               |   |           |                                         |  |   |                                             |  
|Operating expenses:                                             |  |                                             |           |   |                                               |   |           |                                         |  |   |                                             |  
|Professional fees                                               |  |                                             | 134       |   |                                               |   | 78        |                                         |  |   | 230                                         |  
|Directors fees                                                  |  |                                             | 12        |   |                                               |   | 13        |                                         |  |   | 30                                          |  
|Insurance                                                       |  |                                             | 24        |   |                                               |   | 24        |                                         |  |   | 48                                          |  
|Management fees                                                 |  |                                             | 229       |   |                                               |   | 168       |                                         |  |   | 444                                         |  
|Administrative services - related parties                       |  |                                             | 54        |   |                                               |   | 12        |                                         |  |   | 108                                         |  
|General and administrative                                      |  |                                             | 214       |   |                                               |   | 262       |                                         |  |   | 512                                         |  
|Offering expense                                                |  |                                             | 40        |   |                                               |   | 22        |                                         |  |   | 96                                          |  
|Total operating expenses                                        |  |                                             | 707       |   |                                               |   | 579       |                                         |  |   | 1,468                                       |  
|                                                                |  |                                             |           |   |                                               |   |           |                                         |  |   |                                             |  
|Net investment income                                           |  | $                                           | 705       |   |                                               | $ | 372       |                                         |  | $ | 858                                         |  
|                                                                |  |                                             |           |   |                                               |   |           |                                         |  |   |                                             |  
|Realized and unrealized gain (loss)
    on investments:         |  |                                             |           |   |                                               |   |           |                                         |  |   |                                             |  
|Net realized gain from investments                              |  |                                             | 163       |   |                                               |   | -         |                                         |  |   | 215                                         |  
|Net unrealized depreciation on investments                      |  |                                             | (526      | ) |                                               |   | (951      | )                                       |  |   | (550                                        | )
|Net realized and unrealized gain (loss) on investments          |  |                                             | (363      | ) |                                               |   | (951      | )                                       |  |   | (335                                        | )
|                                                                |  |                                             |           |   |                                               |   |           |                                         |  |   |                                             |  
|Net increase (decrease) in net assets resulting from operations |  | $                                           | 342       |   |                                               | $ | (579      | )                                       |  | $ | 523                                         |  
|                                                                |  |                                             |           |   |                                               |   |           |                                         |  |   |                                             |  
|Per share information - basic and diluted:                      |  |                                             |           |   |                                               |   |           |                                         |  |   |                                             |  
|Net investment income                                           |  | $                                           | 0.11      |   |                                               | $ | 0.09      |                                         |  | $ | 0.14                                        |  
|Net increase (decrease) in net assets resulting from operations |  | $                                           | 0.06      |   |                                               | $ | (0.14     | )                                       |  | $ | 0.09                                        |  
|Weighted average common shares outstanding                      |  |                                             | 6,199,493 |   |                                               |   | 4,054,473 |                                         |  |   | 5,965,660                                   |  



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



4






VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



STATEMENTS OF CHANGES IN NET ASSETS

(in thousands, except share and per
share data)

(Unaudited)



|                                                                                                     |  | For
    the Six Months EndedJune 30, 2015 |           |   | For
    the Six Months EndedJune 30, 2014 |  
|---------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | --------- | - | ----------------------------------------- | -
|                                                                                                     |  |                                           |           |   |                                           |  
|Operations:                                                                                          |  |                                           |           |   |                                           |  
|Net investment income                                                                                |  | $                                         | 858       |   |                                           | $
|Net realized gain from investments                                                                   |  |                                           | 215       |   |                                           |  
|Net unrealized depreciation on investments                                                           |  |                                           | (550      | ) |                                           |  
|Net increase (decrease) in net assets from operations                                                |  |                                           | 523       |   |                                           |  
|Stockholder distributions:                                                                           |  |                                           |           |   |                                           |  
|Distributions from net investment income                                                             |  |                                           | (858      | ) |                                           |  
|Distributions from net realized gain on investments                                                  |  |                                           | (215      | ) |                                           |  
|Distributions from paid in capital                                                                   |  |                                           | (1,067    | ) |                                           |  
|Net decrease in net assets from stockholder distributions                                            |  |                                           | (2,140    | ) |                                           |  
|Capital share transactions:                                                                          |  |                                           |           |   |                                           |  
|Issuance of common stock, net of issuance costs                                                      |  |                                           | 6,072     |   |                                           |  
|Reinvestment of stockholder distributions                                                            |  |                                           | 766       |   |                                           |  
|Total investment contributions transferred in-kind                                                   |  |                                           | -         |   |                                           |  
|Treasury capital/redemptions                                                                         |  |                                           | (59       | ) |                                           |  
|Net increase in net assets from capital share transactions                                           |  |                                           | 6,779     |   |                                           |  
|                                                                                                     |  |                                           |           |   |                                           |  
|Total increase
    in net assets                                                                     |  |                                           | 5,162     |   |                                           |  
|Net assets at
    beginning of period                                                                |  |                                           | 40,688    |   |                                           |  
|Net assets at
    end of period                                                                      |  | $                                         | 45,850    |   |                                           | $
|                                                                                                     |  |                                           |           |   |                                           |  
|Net asset value per common share                                                                     |  | $                                         | 7.26      |   |                                           | $
|Common shares outstanding at end of period                                                           |  |                                           | 6,313,300 |   |                                           |  
|                                                                                                     |  |                                           |           |   |                                           |  
|Accumulated distribution in excess of net investment
    income and net realized gain on investments |  | $                                         | (3,829    | ) |                                           | $



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



5






VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



STATEMENTS OF CASH FLOWS

(in thousands, except share and per
share data)

(Unaudited)



|                                                                                                                             |  | For the Six MonthsEndedJune
    30, 2015 |         |   | For the Six MonthsEndedJune
    30, 2014 |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---------------------------------------- | -
|                                                                                                                             |  |                                          |         |   |                                          |  
|Operating activities:                                                                                                        |  |                                          |         |   |                                          |  
|Net increase (decrease) in net assets from operations                                                                        |  | $                                        | 523     |   |                                          | $
|Adjustments to reconcile net increase (decrease)
    in net assets from operations to net cash used in operating activities: |  |                                          |         |   |                                          |  
|Paid-in-kind interest income                                                                                                 |  |                                          | -       |   |                                          |  
|Net accretion of premium/discount on investments                                                                             |  |                                          | 49      |   |                                          |  
|Repayments of investments                                                                                                    |  |                                          | 12,295  |   |                                          |  
|Purchase of investments                                                                                                      |  |                                          | (14,892 | ) |                                          |  
|Repayments of investments - money market                                                                                     |  |                                          | 15,310  |   |                                          |  
|Purchase of investments - money market                                                                                       |  |                                          | (17,473 | ) |                                          |  
|Net realized gain from investments                                                                                           |  |                                          | (215    | ) |                                          |  
|Net unrealized depreciation on investments                                                                                   |  |                                          | 550     |   |                                          |  
|(Increase) decrease in operating assets:                                                                                     |  |                                          |         |   |                                          |  
|Interest receivable                                                                                                          |  |                                          | 160     |   |                                          |  
|Prepaid expenses                                                                                                             |  |                                          | (24     | ) |                                          |  
|Due from related party                                                                                                       |  |                                          | 158     |   |                                          |  
|Origination fee receivable                                                                                                   |  |                                          | (263    | ) |                                          |  
|Receivable for common stock purchased                                                                                        |  |                                          | 614     |   |                                          |  
|Increase (decrease) in operating liabilities:                                                                                |  |                                          |         |   |                                          |  
|Payable for unsettled trades                                                                                                 |  |                                          | (1,340  | ) |                                          |  
|Management fees Payable                                                                                                      |  |                                          | (7      | ) |                                          |  
|Accounts payable and accrued liabilities                                                                                     |  |                                          | (109    | ) |                                          |  
|Net cash used in operating activities                                                                                        |  |                                          | (4,664  | ) |                                          |  
|                                                                                                                             |  |                                          |         |   |                                          |  
|Financing activities:                                                                                                        |  |                                          |         |   |                                          |  
|Proceeds from issuance of shares of common stock, net                                                                        |  |                                          | 6,072   |   |                                          |  
|Redemption of common stock                                                                                                   |  |                                          | -       |   |                                          |  
|Stockholder distributions                                                                                                    |  |                                          | (1,349  | ) |                                          |  
|Treasury stock                                                                                                               |  |                                          | (59     | ) |                                          |  
|Net cash provided by financing activities                                                                                    |  |                                          | 4,664   |   |                                          |  
|                                                                                                                             |  |                                          |         |   |                                          |  
|Net increase in cash and cash equivalents                                                                                    |  |                                          | -       |   |                                          |  
|Cash and cash
    equivalents, beginning of period                                                                           |  |                                          | -       |   |                                          |  
|Cash and cash
    equivalents, end of period                                                                                 |  | $                                        | -       |   |                                          | $
|                                                                                                                             |  |                                          |         |   |                                          |  
|Supplemental non-cash information:                                                                                           |  |                                          |         |   |                                          |  
|DRIP distribution payable                                                                                                    |  | $                                        | 66      |   |                                          | $
|Cash distribution payable                                                                                                    |  | $                                        | 122     |   |                                          | $
|DRIP distribution paid                                                                                                       |  | $                                        | 766     |   |                                          | $



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



6






VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



SCHEDULE OF INVESTMENTS

(dollars and shares in
thousands)

June 30, 2015

(Unaudited)



|Portfolio
    Company                                |  | Industry                                      |        | InvestmentCouponRate, MaturityDate |  | Principal
    No. of Shares |        |  | Amortized

    Cost |   |        | Fair
    Value |  |   | %
    ofNetAssets |  
|---------------------------------------------------- |  | --------------------------------------------- | ------ | ---------------------------------- |  | --------------------------- | ------ |  | ------------------- | - | ------ | -------------- |  | - | ----------------- | -
|Senior Secured First Lien
    Debt - 22.7% (b)       |  |                                               |        |                                    |  |                             |        |  |                     |   |        |                |  |   |                   |  
|American Media, Inc.                                 |  | Media: Advertising, Printing
    & Publishing |        | 11.50%, 12/15/2017                 |  | $                           | 1,320  |  |                     | $ | 1,373  |                |  | $ | 1,356             |  
|APX Group, Inc.                                      |  | Services: Consumer                            |        | 6.38%, 12/1/2019                   |  |                             | 825    |  |                     |   | 825    |                |  |   | 800               |  
|Caesars Entertainment Operating Co., Inc.
    (a)(d) |  | Hotel, Gaming & Leisure                       |        | 11.25%, 6/1/2017                   |  |                             | 860    |  |                     |   | 751    |                |  |   | 675               |  
|EarthLink Holdings Corp. (a)                         |  | Telecommunications                            |        | 7.38%, 6/1/2020                    |  |                             | 40     |  |                     |   | 41     |                |  |   | 42                |  
|Endeavour International Corp. (d)                    |  | Energy: Oil & Gas                             |        | 12.00%, 3/1/2018                   |  |                             | 525    |  |                     |   | 551    |                |  |   | 578               |  
|EuraMax International, Inc.                          |  | Metals & Mining                               |        | 9.50%, 4/1/2016                    |  |                             | 1,475  |  |                     |   | 1,468  |                |  |   | 1,453             |  
|Goodman Networks, Inc.                               |  | Telecommunications                            |        | 12.13%, 7/1/2018                   |  |                             | 800    |  |                     |   | 843    |                |  |   | 664               |  
|Kratos Defense & Security Solutions,
    Inc. (a)    |  | Aerospace and Defense                         |        | 7.00%, 5/15/2019                   |  |                             | 1,550  |  |                     |   | 1,346  |                |  |   | 1,412             |  
|Ryerson Inc./Joseph T Ryerson & Son,
    Inc.        |  | Metals & Mining                               |        | 9.00%, 10/15/2017                  |  |                             | 1,315  |  |                     |   | 1,366  |                |  |   | 1,325             |  
|Titan International Inc. (a)                         |  | Automobile                                    |        | 6.88%, 10/1/2020                   |  |                             | 1,500  |  |                     |   | 1,381  |                |  |   | 1,378             |  
|Toys R Us Property
    Co II LLC                     |  | Retail                                        |        | 8.50%, 12/1/2017                   |  |                             | 725    |  |                     |   | 734    |                |  |   | 728               |  
|Sub
    Total Senior Secured First Lien Debt         |  | $                                             | 10,935 |                                    |  | $                           | 10,679 |  |                     | $ | 10,411 |                |  |   | 22.7              | %
|                                                     |  |                                               |        |                                    |  |                             |        |  |                     |   |        |                |  |   |                   |  
|                                                     |  |                                               |        |                                    |  |                             |        |  |                     |   |        |                |  |   |                   |  
|Senior Secured Second Lien
    Debt - 5.4% (b)       |  |                                               |        |                                    |  |                             |        |  |                     |   |        |                |  |   |                   |  
|Aspect Software, Inc.                                |  | Telecommunications                            |        | 10.63%, 5/15/2017                  |  | $                           | 1,302  |  |                     | $ | 1,318  |                |  | $ | 1,247             |  
|Claire's Stores, Inc.                                |  | Retail                                        |        | 8.88%, 3/15/2019                   |  |                             | 825    |  |                     |   | 807    |                |  |   | 367               |  
|Endeavour International Corp. (d)                    |  | Energy: Oil & Gas                             |        | 12.00%, 6/1/2018                   |  |                             | 725    |  |                     |   | 708    |                |  |   | 239               |  
|Logan's Roadhouse, Inc.                              |  | Beverage, Food & Tobacco                      |        | 10.75%, 10/15/2017                 |  |                             | 770    |  |                     |   | 743    |                |  |   | 570               |  
|Saratoga Resources,
    Inc. (d)                     |  | Energy: Oil &
    Gas                         |        | 12.50%, 7/1/2016                   |  |                             | 885    |  |                     |   | 912    |                |  |   | 105               |  
|Sub
    Total Senior Secured Second Lien Debt        |  | $                                             | 4,507  |                                    |  | $                           | 4,488  |  |                     | $ | 2,528  |                |  |   | 5.4               | %
|                                                     |  |                                               |        |                                    |  |                             |        |  |                     |   |        |                |  |   |                   |  
|                                                     |  |                                               |        |                                    |  |                             |        |  |                     |   |        |                |  |   |                   |  
|Senior Unsecured Debt -
    25.7% (b)                |  |                                               |        |                                    |  |                             |        |  |                     |   |        |                |  |   |                   |  
|APX Group, Inc.                                      |  | Services: Consumer                            |        | 8.75%, 12/1/2020                   |  | $                           | 575    |  |                     | $ | 554    |                |  | $ | 518               |  
|Caesar's Entertainment Corp. (a)(d)                  |  | Hotel, Gaming & Leisure                       |        | 10.75%, 2/1/2016                   |  |                             | 495    |  |                     |   | 451    |                |  |   | 129               |  
|Clear Channel Communications                         |  | Media: Broadcasting & Subscription            |        | 10.00%, 1/15/2018                  |  |                             | 1,400  |  |                     |   | 1,344  |                |  |   | 1,127             |  
|Colt Defense LLC (d)                                 |  | Aerospace and Defense                         |        | 8.75%, 11/15/2017                  |  |                             | 1,253  |  |                     |   | 1,029  |                |  |   | 367               |  
|DynCorp International Inc.                           |  | Aerospace and Defense                         |        | 10.38%, 7/1/2017                   |  |                             | 1,135  |  |                     |   | 1,146  |                |  |   | 817               |  
|EarthLink Holdings Corp. (a)                         |  | Telecommunications                            |        | 8.88%, 5/15/2019                   |  |                             | 279    |  |                     |   | 273    |                |  |   | 291               |  
|Gymboree Corp.                                       |  | Retail                                        |        | 9.13%, 12/1/2018                   |  |                             | 810    |  |                     |   | 769    |                |  |   | 308               |  
|Nuverra Environmental Solutions, Inc.                |  | Environmental Industries                      |        | 9.88%, 4/15/2018                   |  |                             | 1,325  |  |                     |   | 1,356  |                |  |   | 994               |  
|Ryerson Inc./Joseph T Ryerson & Son,
    Inc.        |  | Metals & Mining                               |        | 11.25%, 10/15/2018                 |  |                             | 1,500  |  |                     |   | 1,532  |                |  |   | 1,515             |  
|Seitel, Inc.                                         |  | Energy: Oil & Gas                             |        | 9.50%, 4/15/2019                   |  |                             | 1,575  |  |                     |   | 1,574  |                |  |   | 1,437             |  
|Sitel LLC / Sitel Finance Corp                       |  | Media: Advertising, Printing & Publishing     |        | 11.50%, 4/1/2018                   |  |                             | 1,450  |  |                     |   | 1,413  |                |  |   | 1,272             |  
|Suntech Power Holdings Company, Ltd. (a)(c)          |  | Environmental Industries                      |        | 3.00%, 5/15/2013                   |  |                             | 100    |  |                     |   | 112    |                |  |   | 0                 |  
|Toys R Us Inc.                                       |  | Retail                                        |        | 10.38%, 8/15/2017                  |  |                             | 860    |  |                     |   | 820    |                |  |   | 735               |  
|UCI International Inc                                |  | Automobile                                    |        | 8.63%, 2/15/2019                   |  |                             | 1,400  |  |                     |   | 1,362  |                |  |   | 1,246             |  
|Visant Corp.                                         |  | Media: Advertising,
    Printing & Publishing |        | 10.00%, 10/1/2017                  |  |                             | 1,275  |  |                     |   | 1,237  |                |  |   | 1,016             |  
|Sub
    Total Senior Unsecured Debt                  |  | $                                             | 15,432 |                                    |  | $                           | 14,972 |  |                     | $ | 11,772 |                |  |   | 25.7              | %
|                                                     |  |                                               |        |                                    |  |                             |        |  |                     |   |        |                |  |   |                   |  
|Senior Subordinated Debt
    -7.4% (b)               |  |                                               |        |                                    |  |                             |        |  |                     |   |        |                |  |   |                   |  
|Affinion Group, Inc.                                 |  | Media: Advertising, Printing & Publishing     |        | 13.50%, 8/15/2018                  |  | $                           | 816    |  |                     | $ | 717    |                |  | $ | 359               |  
|Central Garden and Pet Co.                           |  | Retail                                        |        | 8.25%, 3/1/2018                    |  |                             | 1,246  |  |                     |   | 1,278  |                |  |   | 1,276             |  
|Claires Stores, Inc                                  |  | Retail                                        |        | 10.50%, 6/1/2017                   |  |                             | 715    |  |                     |   | 712    |                |  |   | 436               |  
|DJO Finance, LLC.                                    |  | Healthcare & Pharmaceuticals                  |        | 9.75%, 10/15/2017                  |  |                             | 1,265  |  |                     |   | 1,328  |                |  |   | 1,297             |  
|QuickSilver Resources,
    Inc. (d)                  |  | Energy: Oil &
    Gas                         |        | 7.13%, 4/1/2016                    |  |                             | 890    |  |                     |   | 843    |                |  |   | 2                 |  
|Sub
    Total Senior Subordinated Debt               |  | $                                             | 4,932  |                                    |  | $                           | 4,878  |  |                     | $ | 3,370  |                |  |   | 7.4               | %
|                                                     |  |                                               |        |                                    |  |                             |        |  |                     |   |        |                |  |   |                   |  
|Equity Securities - 25.2%
    (b)                    |  |                                               |        |                                    |  |                             |        |  |                     |   |        |                |  |   |                   |  
|Education Management LLC (d)                         |  | Services: Consumer                            |        | Common stock                       |  |                             | 2,530  |  |                     | $ | 4      |                |  | $ | 382               |  
|Education Management LLC (d)                         |  | Services: Consumer                            |        | Warrants                           |  |                             | 1,554  |  |                     |   | 876    |                |  |   | 498               |  
|NII Holdings, Inc. (d)                               |  | Telecommunications                            |        | Common stock                       |  |                             | 17     |  |                     |   | 768    |                |  |   | 280               |  
|Relativity Media,
    LLC (e)                        |  | Media: Diversified
    & Production           |        | Preferred 
stock                   |  |                             | 832    |  |                     |   | 10,400 |                |  |   | 10,400            |  
|Sub
    Total Equity Securities                      |  |                                               |        |                                    |  | $                           | 12,048 |  |                     | $ | 11,560 |                |  |   | 25.2              | %
|                                                     |  |                                               |        |                                    |  |                             |        |  |                     |   |        |                |  |   |                   |  
|Investments - Money Market
    -11.5% (b)            |  |                                               |        |                                    |  |                             |        |  |                     |   |        |                |  |   |                   |  
|Investments - U.S.
    Bank Money Market             |  |                                               |        | 0.03%                              |  |                             | 5,267  |  |                     | $ | 5,267  |                |  | $ | 5,267             |  
|Sub
    Total Investments - Money Market             |  |                                               |        |                                    |  | $                           | 5,267  |  |                     | $ | 5,267  |                |  |   | 11.5              | %
|                                                     |  |                                               |        |                                    |  |                             |        |  |                     |   |        |                |  |   |                   |  
|TOTAL
    INVESTMENTS - 97.9% (b)                    |  |                                               |        |                                    |  | $                           | 52,332 |  |                     | $ | 44,908 |                |  |   | 97.9              | %



|(a) Represents a non-qualifying
    investment as defined under Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent
    8.7% of the Company's portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying
    asstes.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) Percentages are based on net assets
    of $45,850 as of June 30, 2015.                                                                                                                                                                                                                                  
|(c) Non-U.S. company. The principal place
    of business for Suntech Power Holdings Company, Ltd. Is China. Non-income producing as of June 30, 2015.                                                                                                                                                       
|(d) Non-income producing as of June 30,
    2015.                                                                                                                                                                                                                                                            

(e) The Class E Units
are entitled to PIK dividends at the rate of 12.5% per annum, payable in additional Class E Units. The PIK dividends accrue quarterly
in advance on the first day of each quarter, but are only issuable immediately prior to the mandatory redemption of the Class
E Units, and are not issuable upon a conversion of the Class E Units to other equity interests of the issuer.





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



7






VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



SCHEDULE OF INVESTMENTS

(dollars and shares in
thousands)

December 31, 2014



|Portfolio
    Company                           |  | Industry                                  |        | InvestmentCouponRate,
    MaturityDate |  | Principal
    No. of Shares |        |  | AmortizedCost |   |        | Fair
    Value |  |   | %
    ofNetAssets |  
|----------------------------------------------- |  | ----------------------------------------- | ------ | -------------------------------------- |  | --------------------------- | ------ |  | ------------- | - | ------ | -------------- |  | - | ----------------- | -
|Senior Secured First Lien
    Debt - 28.8% (b)  |  |                                           |        |                                        |  |                             |        |  |               |   |        |                |  |   |                   |  
|Accuride Corp.                                  |  | Consumer Goods: Durable                   |        | 9.50%, 8/1/2018                        |  | $                           | 1,400  |  |               | $ | 1,435  |                |  | $ | 1,442             |  
|American Media, Inc.                            |  | Media: Advertising, Printing & Publishing |        | 11.50%, 12/15/2017                     |  |                             | 1,320  |  |               |   | 1,382  |                |  |   | 1,307             |  
|APX Group, Inc.                                 |  | Services: Consumer                        |        | 6.38%, 12/1/2019                       |  |                             | 825    |  |               |   | 825    |                |  |   | 790               |  
|Caesars Entertainment Operating Co., Inc. (a)   |  | Hotel, Gaming & Leisure                   |        | 11.25%, 6/1/2017                       |  |                             | 860    |  |               |   | 765    |                |  |   | 630               |  
|Cambrium Learning Group, Inc.                   |  | Services: Consumer                        |        | 9.75%, 2/15/2017                       |  |                             | 1,375  |  |               |   | 1,392  |                |  |   | 1,347             |  
|EarthLink Holdings Corp. (a)                    |  | Telecommunications                        |        | 7.38%, 6/1/2020                        |  |                             | 40     |  |               |   | 41     |                |  |   | 41                |  
|Endeavour International Corp. (d)               |  | Energy: Oil & Gas                         |        | 12.00%, 3/1/2018                       |  |                             | 525    |  |               |   | 551    |                |  |   | 578               |  
|EuraMax International, Inc.                     |  | Metals & Mining                           |        | 9.50%, 4/1/2016                        |  |                             | 1,475  |  |               |   | 1,464  |                |  |   | 1,371             |  
|Goodman Networks, Inc.                          |  | Telecommunications                        |        | 12.13%, 7/1/2018                       |  |                             | 800    |  |               |   | 849    |                |  |   | 826               |  
|Kratos Defense & Security Solutions, Inc. (a)   |  | Aerospace and Defense                     |        | 7.00%, 5/15/2019                       |  |                             | 1,550  |  |               |   | 1,325  |                |  |   | 1,318             |  
|Ryerson Inc./Joseph T Ryerson & Son, Inc.       |  | Metals & Mining                           |        | 9.00%, 10/15/2017                      |  |                             | 1,315  |  |               |   | 1,376  |                |  |   | 1,351             |  
|Toys R Us Property Co II LLC                    |  | Retail                                    |        | 8.50%, 12/1/2017                       |  |                             | 725    |  |               |   | 736    |                |  |   | 720               |  
|Sub
    Total Senior Secured First Lien Debt    |  | $                                         | 12,210 |                                        |  | $                           | 12,141 |  |               | $ | 11,721 |                |  |   | 28.8              | %
|                                                |  |                                           |        |                                        |  |                             |        |  |               |   |        |                |  |   |                   |  
|Senior Secured Second Lien
    Debt - 14.0% (b) |  |                                           |        |                                        |  |                             |        |  |               |   |        |                |  |   |                   |  
|Aspect Software, Inc.                           |  | Telecommunications                        |        | 10.63%, 5/15/2017                      |  | $                           | 1,302  |  |               | $ | 1,322  |                |  | $ | 1,230             |  
|Bon-ton Department Stores, Inc.                 |  | Retail                                    |        | 10.63%, 7/15/2017                      |  |                             | 1,390  |  |               |   | 1,384  |                |  |   | 1,383             |  
|Claire's Stores, Inc.                           |  | Retail                                    |        | 8.88%, 3/15/2019                       |  |                             | 825    |  |               |   | 805    |                |  |   | 668               |  
|Endeavour International Corp. (d)               |  | Energy: Oil & Gas                         |        | 12.00%, 6/1/2018                       |  |                             | 725    |  |               |   | 708    |                |  |   | 239               |  
|Logan's Roadhouse, Inc.                         |  | Beverage, Food & Tobacco                  |        | 10.75%, 10/15/2017                     |  |                             | 770    |  |               |   | 738    |                |  |   | 566               |  
|Radiation Therapy Services, Inc.                |  | Healthcare & Pharmaceuticals              |        | 8.88%, 1/15/2017                       |  |                             | 1,285  |  |               |   | 1,277  |                |  |   | 1,298             |  
|Saratoga Resources, Inc.                        |  | Energy: Oil & Gas                         |        | 12.50%, 7/1/2016                       |  |                             | 885    |  |               |   | 897    |                |  |   | 310               |  
|Sub
    Total Senior Secured Second Lien Debt   |  | $                                         | 7,182  |                                        |  | $                           | 7,131  |  |               | $ | 5,694  |                |  |   | 14.0              | %
|                                                |  |                                           |        |                                        |  |                             |        |  |               |   |        |                |  |   |                   |  
|Senior Unsecured Debt -
    37.2% (b)           |  |                                           |        |                                        |  |                             |        |  |               |   |        |                |  |   |                   |  
|APX Group, Inc.                                 |  | Services: Consumer                        |        | 8.75%, 12/1/2020                       |  | $                           | 575    |  |               | $ | 553    |                |  | $ | 486               |  
|Armored Autogroup, Inc.                         |  | Consumer Goods: Durable                   |        | 9.25%, 11/1/2018                       |  |                             | 1,250  |  |               |   | 1,247  |                |  |   | 1,244             |  
|Caesar's Entertainment Corp. (a)                |  | Hotel, Gaming & Leisure                   |        | 10.75%, 2/1/2016                       |  |                             | 495    |  |               |   | 475    |                |  |   | 74                |  
|Cenveo Corp.                                    |  | Services: Business                        |        | 11.50%, 5/15/2017                      |  |                             | 1,571  |  |               |   | 1,576  |                |  |   | 1,430             |  
|Clear Channel Communications                    |  | Media: Broadcasting & Subscription        |        | 10.00%, 1/15/2018                      |  |                             | 1,400  |  |               |   | 1,335  |                |  |   | 1,200             |  
|Colt Defense LLC                                |  | Aerospace and Defense                     |        | 8.75%, 11/15/2017                      |  |                             | 1,253  |  |               |   | 1,073  |                |  |   | 507               |  
|DynCorp International Inc.                      |  | Aerospace and Defense                     |        | 10.38%, 7/1/2017                       |  |                             | 1,135  |  |               |   | 1,148  |                |  |   | 965               |  
|EarthLink Holdings Corp. (a)                    |  | Telecommunications                        |        | 8.88%, 5/15/2019                       |  |                             | 375    |  |               |   | 366    |                |  |   | 370               |  
|Gentiva Health Services, Inc.                   |  | Healthcare & Pharmaceuticals              |        | 11.50%, 9/1/2018                       |  |                             | 925    |  |               |   | 967    |                |  |   | 984               |  
|Gymboree Corp.                                  |  | Retail                                    |        | 9.13%, 12/1/2018                       |  |                             | 810    |  |               |   | 764    |                |  |   | 312               |  
|Hutchinson Technology, Inc.                     |  | High Tech Industries                      |        | 8.50%, 1/15/2026,                      |  |                             | 858    |  |               |   | 819    |                |  |   | 858               |  
|                                                |  |                                           |        | puttable on 01/15/2015                 |  |                             |        |  |               |   |        |                |  |   |                   |  
|NII Capital Corp. (d)                           |  | Telecommunications                        |        | 10.00%, 8/15/2016                      |  |                             | 960    |  |               |   | 921    |                |  |   | 331               |  
|Nuverra Environmental Solutions, Inc.           |  | Environmental Industries                  |        | 9.88%, 4/15/2018                       |  |                             | 1,325  |  |               |   | 1,361  |                |  |   | 795               |  
|Seitel, Inc.                                    |  | Energy: Oil & Gas                         |        | 9.50%, 4/15/2019                       |  |                             | 1,575  |  |               |   | 1,574  |                |  |   | 1,307             |  
|Sitel LLC / Sitel Finance Corp                  |  | Media: Advertising, Printing & Publishing |        | 11.50%, 4/1/2018                       |  |                             | 1,450  |  |               |   | 1,413  |                |  |   | 1,138             |  
|Suntech Power Holdings Company, Ltd. (a)(c)     |  | Environmental Industries                  |        | 3.00%, 5/15/2013                       |  |                             | 100    |  |               |   | 107    |                |  |   | 1                 |  
|Toys R Us Inc.                                  |  | Retail                                    |        | 10.38%, 8/15/2017                      |  |                             | 860    |  |               |   | 821    |                |  |   | 684               |  
|UCI International Inc                           |  | Automobile                                |        | 8.63%, 2/15/2019                       |  |                             | 1,400  |  |               |   | 1,358  |                |  |   | 1,337             |  
|Visant Corp.                                    |  | Media: Advertising, Printing & Publishing |        | 10.00%, 10/1/2017                      |  |                             | 1,275  |  |               |   | 1,238  |                |  |   | 1,106             |  
|Sub
    Total Senior Unsecured Debt             |  | $                                         | 19,592 |                                        |  | $                           | 19,116 |  |               | $ | 15,129 |                |  |   | 37.2              | %
|                                                |  |                                           |        |                                        |  |                             |        |  |               |   |        |                |  |   |                   |  
|Senior Subordinated Debt
    - 9.8% (b)         |  |                                           |        |                                        |  |                             |        |  |               |   |        |                |  |   |                   |  
|Affinion Group, Inc.                            |  | Media: Advertising, Printing & Publishing |        | 13.50%, 8/15/2018                      |  | $                           | 816    |  |               | $ | 707    |                |  | $ | 612               |  
|Central Garden and Pet Co.                      |  | Retail                                    |        | 8.25%, 3/1/2018                        |  |                             | 1,400  |  |               |   | 1,440  |                |  |   | 1,411             |  
|Claires Stores, Inc                             |  | Retail                                    |        | 10.50%, 6/1/2017                       |  |                             | 715    |  |               |   | 711    |                |  |   | 651               |  
|DJO Finance, LLC.                               |  | Healthcare & Pharmaceuticals              |        | 9.75%, 10/15/2017                      |  |                             | 1,265  |  |               |   | 1,313  |                |  |   | 1,265             |  
|QuickSilver Resources, Inc.                     |  | Energy: Oil & Gas                         |        | 7.13%, 4/1/2016                        |  |                             | 890    |  |               |   | 863    |                |  |   | 71                |  
|Sub
    Total Senior Subordinated Debt          |  | $                                         | 5,086  |                                        |  | $                           | 5,034  |  |               | $ | 4,010  |                |  |   | 9.8               | %
|                                                |  |                                           |        |                                        |  |                             |        |  |               |   |        |                |  |   |                   |  
|Equity Securities - 2.1%
    (b)                |  |                                           |        |                                        |  |                             |        |  |               |   |        |                |  |   |                   |  
|Education Management LLC                        |  | Services: Consumer                        |        | Common stock                           |  |                             | 874    |  |               | $ | 880    |                |  | $ | 874               |  
|Sub
    Total Equity Securities                 |  |                                           |        |                                        |  | $                           | 880    |  |               | $ | 874    |                |  |   | 2.1               | %
|                                                |  |                                           |        |                                        |  |                             |        |  |               |   |        |                |  |   |                   |  
|Investments - Money Market
    - 7.7% (b)       |  |                                           |        |                                        |  |                             |        |  |               |   |        |                |  |   |                   |  
|Investments - U.S. Bank Money Market            |  |                                           |        | 0.03%                                  |  |                             | 3,104  |  |               | $ | 3,104  |                |  | $ | 3,104             |  
|Sub
    Total Investments - Money Market        |  |                                           |        |                                        |  | $                           | 3,104  |  |               | $ | 3,104  |                |  |   | 7.7               | %
|                                                |  |                                           |        |                                        |  |                             |        |  |               |   |        |                |  |   |                   |  
|TOTAL
    INVESTMENTS - 99.6% (b)               |  |                                           |        |                                        |  | $                           | 47,406 |  |               | $ | 40,532 |                |  |   | 99.6              | %



(a) All of our investments are issued
by eligible U.S. portfolio companies, as defined in the Investment Company Act of 1940, except for Caesar's Entertainment Corp.,
Earthlink Holdings Corp., Kratos Defense & Security Solutions, Inc., and Suntech Power Holdings Company, Ltd. Non-qualifying
assets represent 6.0% of the Company's portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in
non-qualifying assets.

(b) Percentages are based on net assets of $40,688 as of December
31, 2014.

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

(d) Non-income producing as of December 31, 2014.



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



8






VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



NOTES TO FINANCIAL
STATEMENTS

June 30, 2015



(Unaudited)



Note 1.  Nature of Operations



VII Peaks Co-Optivist
TM Income BDC II, Inc. (the “Fund” or “we”), a Maryland corporation formed in August 3, 2011,
is an externally managed, non-diversified closed-end management investment company that has elected to be treated as a business
development company under the Investment Company Act of 1940, as amended, or (“1940 Act”). In addition, we have elected
to be treated for federal income tax purpose, and intend to qualify annually, as a regulated investment company, or (“RIC”),
under Subchapter M of the Internal Revenue Code of 1986, as amended, or (the “Code”).



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



On August 9, 2011,
we filed a registration statement on Form N-2 to sell up to 75,000,000 shares of common stock, $0.001 par value per share, at
an initial public offering price of $10.00 per share. The registration statement was declared effective by the SEC on March 1,
2012. We commenced operations when we raised gross offering proceeds of over $1.0 million, all of which was from persons who were
not affiliated with us or our manager by one year from the date the registration statement was declared effective by the SEC.
Prior to the successful satisfaction of that condition, all subscription payments were placed in an account held by the escrow
agent, UMB Bank, N.A., in trust for the benefit of our subscribers, pending release to us. We achieved the minimum offering requirement
on July 10, 2012 and commenced operations on such date. As of June 30, 2015, we issued 6.3 million shares of common stock, including
0.3 million shares under our distribution reinvestment plan (“DRIP”) and less 0.09 million shares redeemed under our
tender offer. Gross proceeds from our common stock issuances total $63.4 million, including $2.6 million under our DRIP less $0.8
million paid to redeem shares in our quarterly tender offers.



Note 2.  Summary of Significant
Accounting Policies



Basis of Presentation



The financial statements
of the Fund included herein were prepared in conformity with accounting principles generally accepted in the United States of
America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
In the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments
and accruals, necessary for a fair presentation of the results for the interim period. This Form 10-Q should be read in conjunction
with the Fund’s annual report on Form 10-K/A for the year ended December 31, 2014, which was filed with the SEC on July
16, 2015. 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, 2015.



Use of Estimates in the Preparation
of Financial Statements



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



Investments - Money Market



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



Organizational and Offering Costs



The Fund is a closed-end
fund with a continuous offering period. Under the investment advisory agreement between the Fund and the Manager, our Manager
fronts the initial cost of the organizational and offering expenses which are reimbursable by the Fund with up to 1.5% of the
gross offering proceeds. The Fund expenses organizational and offering costs as they become payable under the investment advisory
agreement.



U.S. Federal Income Taxes



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



9






The Fund has evaluated
the implications of Accounting Standards Codification (“ASC”) Topic 740, for all open tax years and in all major tax
jurisdictions, and determined that there is no material impact on the financial statements. The Fund continues to remain subject
to examination by U.S. federal and state authorities for the years 2011 through 2014.



New Accounting Pronouncements





In May 2015,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2015-07, “Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its
Equivalent)”. The guidance removes the requirement to categorize within the fair value hierarchy all investments for
which fair value is measured using the NAV per share practical expedient. Sufficient information must be provided to permit
reconciliation of the fair value of assets categorized within the fair value hierarchy to the amounts presented in the
Statements of Assets and Liabilities. The guidance is required to be presented for annual periods beginning after December
15, 2015, and for interim periods within those fiscal years. Management is currently reviewing the requirements and believes
the adoption of the ASU will not have a material impact on its financial statements.





In June 2014,
the FASB issued ASU No. 2014-11
"Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." ASU No. 2014-11 makes limited
changes to the accounting for repurchase agreements, clarifies when repurchase agreements and securities lending transactions
should be accounted for as secured borrowings, and requires additional disclosures regarding these types of transactions. The
guidance is effective for fiscal years beginning on or after December 15, 2014, and for interim periods within those fiscal
years. Management is currently evaluating the impact these changes will have on the Fund's financial statement disclosures.
  Management evaluated the accounting pronouncement and noted no material impact.



In May 2014, the FASB
issued ASU No. 2014-09, Revenue with Contracts from Customers. ASU No. 2014-09 provides clarification on the principles to recognize
revenue and to develop a common standard between GAAP and IFRS. The standard is effective for the Fund for annual reporting periods
beginning after December 15, 2016, including interim periods. In April 2015, the FASB has voted for a one year deferral of the
effective date.



Revenue Recognition



We generate investment
income in the form of interest and fees earned on senior secured loans, senior secured notes, subordinated debt, senior unsecured
debt and collateralized securities in our portfolio. The level of income we receive is directly related to the balance of collectible
income producing investments multiplied by the weighted average yield of our investments. Coupon interest income is adjusted for
the amortization of premiums and accretion of discounts. We record interest income on an accrual basis to the extent that we expect
to collect such amounts. We expect the dollar amount of interest and any dividend income that we earn to increase as the size
of our investment portfolio increases.



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



Our total investment
income was $1.4 million and $2.3 million for the three and six months ended June 30, 2015, as compared to $1.0 million and $1.7
million for the three and six months ended June 30, 2014, respectively.



For the six months
ended June 30, 2015, eight of the investments in the portfolio did not accrue interest as the issuers were in default of the coupon
payment for more than the thirty day grace period. Interest income was accrued through the date of the last coupon payment received
for these investments. These eight are Colt Defense LLC, 8.75%, November 15, 2017; Caesars Entertainment Corp, 11.25%, June 1,
2017; Caesars Entertainment Corp, 10.75%, February 1, 2016; Endeavour International Corp., 12%, March 1, 2018; Endeavour International
Corp., 12%, June 1, 2018; QuickSilver Resources, Inc., 7.13%, April 1, 2016; Saratoga Resources, Inc., 12.50% July 1, 2016; and
Suntech Power Holdings Company, Ltd., 3%, May 15, 2013. Two other investments, Education Management, LLC and NII Holdings were
restructured as a private equity instruments, and no longer have income producing attributes.



Expense Reimbursement Agreement



We entered into an
expense reimbursement agreement with our prior manager under which the prior manager agreed to reimburse us for certain U.S. GAAP
compliant expenses recognized on our quarterly financial statements for 2012, retroactive to the date of formation on August 3,
2011. In 2013, the expense reimbursement agreement was modified to exclude management fees and incentive fees payable to the prior
manager effective as of January 1, 2013. The expense reimbursement agreement allowed the prior manager and us to offset the related
receivables from and payables to each other resulting in a net receivable, or payable position. Our prior manager was obligated
to reimburse us for zero as of December 31, 2014 and $0.8 million as of December 31, 2013.



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



10






During the year ended
December 31, 2014, our Manager paid in full the due from affiliate balance of $1.3 million plus interest of $0.1 million on such
amount at the rate of 7.35% per annum.



Note 3. Valuation of Portfolio Investments



The
investment portfolio is recorded on a trade date basis. The Fund determines the net asset value of its investment portfolio
each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date.  Thirty-six
of the forty investments were valued using the closing market price at period end June 30, 2015. The exceptions were the
investments in equity and warrants of Education Management LLC; Endeavour International Corp., 12% notes due March 1, 2018;
Endeavour International Corp., 12% notes due June 1, 2018; and preferred equity investment in Relativity Media. The market
did not have a sufficient amount of trades to use the quoted price for these positions.



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



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



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. USBank is the fund custodian. Through USBank, the fund
uses FT Interactive, a third party valuation firm, to price the notes. The prices are reviewed by the CEO.



Level 3:
Unobservable inputs for the asset or liability. These investments for the fund are three equity securities, a Senior Secured
First Lien Note, and a Senior Secured Lien Note. Two of the equity investments have been issued by a company with terms
settled. Their fair value was determined by their relative amount of the total company enterprise value. The other equity
investment is being carried at cost since we just completed the transaction. The terms of Senior Secured First Lien Note and Senior Secured Second Lien Note, however, have not been finalized. The fair value was derived from the relative
amounts of the notes to the total enterprise value as indicated would be the intended restructuring by the issuer.



11






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 June 30, 2015, according to the fair value hierarchy (dollars in thousands):



|                                |  | Level 1 |       |  | Level 2 |   |        | Level 3 |  |   | Total  | 
|------------------------------- |  | ------- | ----- |  | ------- | - | ------ | ------- |  | - | ------ | 
|Investments – Money Market      |  | $       | 5,267 |  |         | $ | —      |         |  | $ | —      | 
|Senior Secured First Lien Debt  |  |         | —     |  |         |   | 9,833  |         |  |   | 578    | 
|Senior Secured Second Lien Debt |  |         | —     |  |         |   | 2,289  |         |  |   | 239    | 
|Senior Unsecured Debt           |  |         | —     |  |         |   | 11,772 |         |  |   | —      | 
|Senior Subordinated Debt        |  |         | —     |  |         |   | 3,370  |         |  |   | —      | 
|Equity Securities               |  |         | —     |  |         |   | 280    |         |  |   | 11,280 | 
|Total                           |  | $       | 5,267 |  |         | $ | 27,544 |         |  | $ | 12,097 | 



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



|                                |  | Level 1 |       |  | Level 2 |   |        | Level 3 |  |   | Total | 
|------------------------------- |  | ------- | ----- |  | ------- | - | ------ | ------- |  | - | ----- | 
|Investments – Money Market      |  | $       | 3,104 |  |         | $ | —      |         |  | $ | —     | 
|Senior Secured First Lien Debt  |  |         | —     |  |         |   | 11,143 |         |  |   | 578   | 
|Senior Secured Second Lien Debt |  |         | —     |  |         |   | 5,455  |         |  |   | 239   | 
|Senior Unsecured Debt           |  |         | —     |  |         |   | 15,129 |         |  |   | —     | 
|Senior Subordinated Debt        |  |         | —     |  |         |   | 4,010  |         |  |   | —     | 
|Equity Securities               |  |         | —     |  |         |   | —      |         |  |   | 874   | 
|Total                           |  | $       | 3,104 |  |         | $ | 35,737 |         |  | $ | 1,691 | 



During the three month period ended June
30, 2015, Saratoga Resources, Inc., 12.50%, July 1, 2016 was transferred from Level 3 to Level 2.



There were three transfers between levels
for the period ended December 31, 2014. One transfer was Education Management, LLC, originally, 15%, July 1, 2018. The interest
bearing note was restructured by the company to a non-interest bearing private equity holding. The other transfers were two Endeavour
International notes. The first note had a March 1, 2018 maturity date and 12% coupon. The second note had a June 1, 2018 maturity
date and 12% coupon.



During the year ended December 31, 2014,
the following were the transfers in or out of levels:



|                                |  | Level
    1 |   |  | Level
    2 |   |        | Level
    3 |  |   | Total | 
|------------------------------- |  | ----------- | - |  | ----------- | - | ------ | ----------- |  | - | ----- | 
|Senior Secured First Lien Debt  |  | $           | — |  |             | $ | (578   | )           |  | $ | 578   | 
|Senior Secured Second Lien Debt |  |             | — |  |             |   | (239   | )           |  |   | 239   | 
|Equity Securities               |  |             | — |  |             |   | (874   | )           |  |   | 874   | 
|Total                           |  | $           | — |  |             | $ | (1,691 | )           |  | $ | 1,691 | 



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







12






Changes in Level 3 assets measured at fair
value for the six months ended June 30, 2015 are as follows:



|                                |  | Fair
    Value atDecember 31,2014 |       |  | Purchases(Sales andSettlement) |   |        | Amortizationand Accretionof
    FixedIncomePremiums
    andDiscounts |  |   | RealizedandUnrealizedGains(Losses) |  |  | FairValue atJune
    30,2015 |   |  | Change
    inUnrealizedGains
    and (Losses)for Investmentsheld
    as ofJune 30, 2015 |  
|------------------------------- |  | --------------------------------- | ----- |  | ------------------------------ | - | ------ | -------------------------------------------------------------------- |  | - | ---------------------------------- |  |  | ---------------------------- | - |  | --------------------------------------------------------------------------------------- | -
|Senior Secured First Lien Debt  |  | $                                 | 578   |  |                                | $ | —      |                                                                      |  | $ | —                                  |  |  | $                            | — |  |                                                                                         | $
|Senior Secured Second Lien Debt |  |                                   | 239   |  |                                |   | —      |                                                                      |  |   | —                                  |  |  |                              | — |  |                                                                                         |  
|Equity Securities               |  |                                   | 874   |  |                                |   | 10,400 |                                                                      |  |   | —                                  |  |  |                              | 6 |  |                                                                                         |  
|Total                           |  | $                                 | 1,691 |  |                                | $ | 10,400 |                                                                      |  | $ | —                                  |  |  | $                            | 6 |  |                                                                                         | $



Changes in Level 3 assets measured at fair
value for the year ended December 31, 2014 are as follows:



|                                |  | Fair
    Value atDecember 31,2013 |       |  | Purchases(Sales andSettlement) |   |     | Amortizationand Accretionof
    FixedIncomePremiums
    andDiscounts |  |   | RealizedandUnrealizedGains(Losses) |  |  | FairValue
    atDecember 31,2014 |      |   | Change
    inUnrealizedGains
    and (Losses)for Investmentsheld
    as ofDecember 31, 2014 |  
|------------------------------- |  | --------------------------------- | ----- |  | ------------------------------ | - | --- | -------------------------------------------------------------------- |  | - | ---------------------------------- |  |  | -------------------------------- | ---- | - | ------------------------------------------------------------------------------------------- | -
|Senior Secured First Lien Debt  |  | $                                 | 539   |  |                                | $ | 25  |                                                                      |  | $ | —                                  |  |  | $                                | 14   |   |                                                                                             | $
|Senior Secured Second Lien Debt |  |                                   | 655   |  |                                |   | —   |                                                                      |  |   | —                                  |  |  |                                  | (416 | ) |                                                                                             |  
|Equity Securities               |  |                                   | 293   |  |                                |   | 648 |                                                                      |  |   | —                                  |  |  |                                  | (67  | ) |                                                                                             |  
|Total                           |  | $                                 | 1,487 |  |                                | $ | 673 |                                                                      |  | $ | —                                  |  |  | $                                | (469 | ) |                                                                                             | $



Realized and unrealized
gains and losses are included in net realized gain (loss) on investments and net change in unrealized gain (loss) on investments
in the Statement of Operations. There was no change in unrealized losses for Level 3 investments still held as of June 30, 2015.



The following table provides quantitative
information regarding Level 3 fair value measurements as of June 30, 2015 (dollars in thousands):



|                                |  |                |        |  | Valuation |             | Unobservable |                   |      |   |        | Range   | 
|------------------------------- |  | -------------- | ------ |  | --------- | ----------- | ------------ | ----------------- | ---- | - | ------ | ------- | 
|                                |  | Fair
    Value |        |  | Technique |             | Input        |                   | Mean |   |        | Minimum | 
|Senior Secured First Lien Debt  |  | $              | 578    |  |           | Liquidation |              | Transaction Value |      | $ | 578    |         | 
|Senior Secured Second Lien Debt |  |                | 239    |  |           | Liquidation |              | Transaction Value |      |   | 258    |         | 
|Equity Securities               |  |                | 11,280 |  |           | Liquidation |              | Transaction Value |      |   | 11,543 |         | 
|Total                           |  | $              | 12,097 |  |           |             |              |                   |      |   |        |         | 



The following table provides quantitative
information regarding Level 3 fair value measurements as of December 31, 2014 (dollars in thousands):



|                                |  |                |       |  | Valuation |             | Unobservable |                   |      |   |       | Range   | 
|------------------------------- |  | -------------- | ----- |  | --------- | ----------- | ------------ | ----------------- | ---- | - | ----- | ------- | 
|                                |  | Fair
    Value |       |  | Technique |             | Input        |                   | Mean |   |       | Minimum | 
|Senior Secured First Lien Debt  |  | $              | 578   |  |           | Liquidation |              | Transaction Value |      | $ | 578   |         | 
|Senior Secured Second Lien Debt |  |                | 239   |  |           | Liquidation |              | Transaction Value |      |   | 258   |         | 
|Equity Securities               |  |                | 874   |  |           | Liquidation |              | Transaction Value |      |   | 1,143 |         | 
|Total                           |  | $              | 1,691 |  |           |             |              |                   |      |   |       |         | 



The primary significant
unobservable input used in the fair value measurement of the Fund’s equity securities is the completion of an exchange offer
by the issuer in October 2014, whereby issuer completed the exchange of 94% of its indebtedness into shares of preferred stock
and warrants that represent ownership of 96% of the company. The Fund believes that the value of the notes were artificially depressed
by the heavy debt load carried by the issuer, which created a threat of default and bankruptcy. The issuer’s fundamentals
for the year ended June 30, 2014 reflect that it had an operating loss only as a result of impairments taken against long-term
assets, and that it had a positive cash flow from operations. As a result, the Fund determined that the preferred shares and warrants
into which the notes were converted should be worth at least the face value of the notes based upon the recent operating performance
of the company. The primary significant unobservable input used in the fair value measurement of the Fund's Senior Secured First
Lien and one of the Senior Secured Second Lien was the terms of the restructuring offered by the issuer, not yet final. The primary
significant unobservable input used in the fair value measurement of the Fund's other Senior Secured Second Lien was the relevant
trades (over $100,000) that occurred during the first two quarters in 2015 in the secondary market.



13






The composition of
the Fund’s investments as of June 30, 2015, at amortized cost and fair value were as follows (dollars in thousands):



|                                |  | Investments
    atAmortized Cost |        |  | Investments
    atFairValue |   |        | Fair
    ValuePercentageof
    TotalPortfolio | 
|------------------------------- |  | -------------------------------- | ------ |  | --------------------------- | - | ------ | --------------------------------------------- | 
|Investments – Money Market      |  | $                                | 5,267  |  |                             | $ | 5,267  |                                               | 
|Senior Secured First Lien Debt  |  |                                  | 10,679 |  |                             |   | 10,411 |                                               | 
|Senior Secured Second Lien Debt |  |                                  | 4,488  |  |                             |   | 2,528  |                                               | 
|Senior Unsecured Debt           |  |                                  | 14,972 |  |                             |   | 11,772 |                                               | 
|Senior Subordinated Debt        |  |                                  | 4,878  |  |                             |   | 3,370  |                                               | 
|Equity Securities               |  |                                  | 12,048 |  |                             |   | 11,560 |                                               | 
|Total                           |  | $                                | 52,332 |  |                             | $ | 44,908 |                                               | 



The composition of
the Fund’s investments as of December 31, 2014, at amortized cost and fair value were as follows (dollars in thousands):



|                                |  | Investments
    atAmortized Cost |        |  | Investments
    atFairValue |   |        | Fair
    ValuePercentageof
    Total
 Portfolio | 
|------------------------------- |  | -------------------------------- | ------ |  | --------------------------- | - | ------ | ----------------------------------------------- | 
|Investments – Money Market      |  | $                                | 3,104  |  |                             | $ | 3,104  |                                                 | 
|Senior Secured First Lien Debt  |  |                                  | 12,141 |  |                             |   | 11,721 |                                                 | 
|Senior Secured Second Lien Debt |  |                                  | 7,131  |  |                             |   | 5,694  |                                                 | 
|Senior Unsecured Debt           |  |                                  | 19,116 |  |                             |   | 15,129 |                                                 | 
|Senior Subordinated Debt        |  |                                  | 5,034  |  |                             |   | 4,010  |                                                 | 
|Equity Securities               |  |                                  | 880    |  |                             |   | 874    |                                                 | 
|Total                           |  | $                                | 47,406 |  |                             | $ | 40,532 |                                                 | 



Note 4.  Related Party Transactions



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



As a business development
company, 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.



Investment Advisory Agreement



The Fund has entered into an investment
advisory agreement with the Manager to manage the Fund’s investment activities. Pursuant to the investment advisory agreement,
the Manager implements the Fund’s business strategy on a day-to-day basis and performs certain services for us, subject
to oversight by our Board of Directors, or a committee thereof. The Manager is responsible for, among other duties, determining
investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management
duties. Under the investment advisory agreement, the Manager is entitled to a base management and incentive fee as outlined in
the investment advisory agreement with the Fund. The base management fee is 2% of net assets below $100 million; 1.75% of net
assets between $100 million and $250 million; and 1.5% of net assets over $250 million. For the three and six months ended June
30, 2015, the Fund incurred $0.2 million and $0.4 million of base management fees, respectively. For the three and six months
ended June 30, 2014, the Fund incurred $0.2 million and $0.3 million of base management fees, respectively.



The incentive fee
has two parts. The first part, the subordinated incentive fee on income, is calculated and payable quarterly in arrears based
upon the Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter. The subordinated
incentive fee on income is 20% of pre-incentive net investment income subject to a quarterly return to investors, expressed as
a rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 2.0% (8.0% annualized).
The second part of the incentive fee, the incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated
investments from the portfolio and is determined and payable in arrears as of the end of each calendar year (or upon termination
of the investment advisory agreement). This fee equals 20% of the Fund’s incentive fee capital gains, which will equal the
Fund’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed
net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any
previously paid capital gains incentive fees. For the three and six months ended June 30, 2015 and 2014, the Fund did not incur
any incentive fees related to net investment income or capital gains.



14






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



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



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



From time to time,
the Fund has paid directly certain expenses that were classified as organization or offering expenses that should have been borne
by the prior manager and for which the prior manager is obligated to reimburse the Fund. As of June 30, 2015 and December 31,
2014, the unreimbursed amount of organization and offering expenses was $9,000  and $0.2 million, respectively, which amount
is included in “Due from related party” on the Fund’s balance sheet as of that date.



Administration Agreement



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



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



Under the administration
agreement, our Manager will also provide on our behalf managerial assistance to portfolio companies that request such assistance.
The amount of reimbursements to our Manager or services charged directly are captured in the Statement of Operations under “Administrative
Services”. During the three and six months ended June 30, 2015, the Fund reimbursed the Manager or was charged directly
for $0.05 million and $0.1 million in administration expenses under the administration agreement, respectively. During the three
and six months ended June 30, 2014, the Fund reimbursed the Manager or was charged directly for $0.01 million and $0.02 million
in administration expenses under the administration agreement, respectively.



15






Note 5.  Common Stock



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



On July 10, 2012,
the Fund had raised sufficient proceeds to break escrow on its IPO and through December 31, 2014, the Fund had sold 5.5 million
shares of common stock for gross proceeds of $55.5 million, including the purchases made by the Manager.



During the six months
ended June 30, 2015, the Fund sold 767,007 shares of common stock in its offering for net proceeds of $6.1 million.



Note 6. Earnings (Loss) Per Share



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



The following information
sets forth the computation of the weighted average basic and diluted net increase (decrease) in net assets per share from operations
for the three and six months ended June 30, 2015 and 2014 (dollars in thousands except share and per share amounts):



|                                                                          |  | For the threemonths endedJune
    30,2015 |           |  | For the
    threemonths endedJune
    30,2014 |  
|------------------------------------------------------------------------- |  | ----------------------------------------- | --------- |  | --------------------------------------------- | -
|Basic and diluted                                                         |  |                                           |           |  |                                               |  
|Net increase (decrease) in net assets resulting from operations           |  | $                                         | 342       |  |                                               | $
|Weighted average common shares outstanding                                |  |                                           | 6,199,493 |  |                                               |  
|Net increase (decrease) in net assets resulting from operations per share |  | $                                         | 0.06      |  |                                               | $



|                                                                          |  | For the sixmonths endedJune
    30,2015 |           |  | For the
    sixmonths endedJune
    30,2014 |  
|------------------------------------------------------------------------- |  | --------------------------------------- | --------- |  | ------------------------------------------- | -
|Basic and diluted                                                         |  |                                         |           |  |                                             |  
|Net increase (decrease) in net assets resulting from operations           |  | $                                       | 523       |  |                                             | $
|Weighted average common shares outstanding                                |  |                                         | 5,965,660 |  |                                             |  
|Net increase (decrease) in net assets resulting from operations per share |  | $                                       | 0.09      |  |                                             | $



The Fund had no potentially
dilutive securities as of June 30, 2015 or June 30, 2014, resulting in the same number of shares for basic and diluted.



Note 7. Tender Offer Program



We do not currently
intend to list our shares on any securities exchange and do not expect a public market for them to develop in the foreseeable
future. Therefore, shareholders should not expect to be able to sell their shares promptly or at a desired price. Beginning with
fourth calendar quarter of 2013 and on a quarterly basis thereafter, as approved by the Board of Directors, we intend to offer
to repurchase shares of our common stock at a price equal to 90% of our offering price on the date of repurchase. We currently
intend to limit the number of shares to be repurchased during any calendar year to 20% of the weighted average number of shares
outstanding in the prior calendar year, or 5.0% in each quarter, though the actual number of shares that we offer to repurchase
may be less in light of the limitations noted above. We will offer to repurchase such shares on each date of repurchase at a price
equal to 90% of our offering price. For the three months ended March 31, 2015, 5,811 treasury shares were repurchased at $8.775
for the total consideration of $0.05 million. A tender offer was conducted in the second quarter but because proper notifications
were not distributed to the shareholders in a timely manner, the offer was extended until July 29, 2015 and therefore the number
of shares tendered are not reflected on the June 30, 2015. Please see subsequent events for more information.



16






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



|For the Three Months Ended |  | Repurchase Date    |  | SharesRepurchased |        |  | Percent ofSharesTendered thatwereRepurchased |  |     | RepurchasePrice PerShare |  |   | AggregateConsiderationforRepurchasedShares ('000s)
    * | 
|-------------------------- |  | ------------------ |  | ----------------- | ------ |  | -------------------------------------------- |  | --- | ------------------------ |  | - | -------------------------------------------------------- | 
|March 31, 2014             |  | March 14, 2014     |  |                   | 550    |  |                                              |  | 100 | %                        |  | $ | 9.135                                                    | 
|June 30, 2014              |  | June 27, 2014      |  |                   | 34,025 |  |                                              |  | 100 | %                        |  | $ | 9.135                                                    | 
|September 30, 2014         |  | September 30, 2014 |  |                   | 38,482 |  |                                              |  | 100 | %                        |  | $ | 9.135                                                    | 
|December 31, 2014          |  | December 30, 2014  |  |                   | 6,061  |  |                                              |  | 100 | %                        |  | $ | 8.775                                                    | 
|March 31, 2015             |  | March 30, 2015     |  |                   | 5,811  |  |                                              |  | 100 | %                        |  | $ | 8.775                                                    | 
|June 30, 2015              |  | July 29, 2015**    |  |                   | -      |  |                                              |  | -   |                          |  | $ | -                                                        | 
|                           |  |                    |  |                   |        |  |                                              |  |     |                          |  |   |                                                          | 



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

** There were no shares
repurchased during the quarter ended June 30, 2015. Additionally, the tender offer date expired on June 30, 2015 but was extended
to July 29, 2015 because proper notifications were not distributed to the shareholders timely.



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



Note 8.  Distributions



Subject to our board
of trustees' discretion and applicable legal restrictions, we authorize and declare ordinary cash distributions on a semi-monthly
basis and pay such distributions on a semi-monthly basis. Any distributions to our shareholders will be declared out of assets
legally available for distribution. We may fund our cash distributions to shareholders from any sources of funds available to
us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets,
non-capital gains proceeds from the sale of assets, and dividends or other distributions paid to us on account of preferred and
common equity investments in portfolio companies. We have not established limits on the amount of funds we may use from available
sources to make distributions.



When we
commenced operations, we initiated a policy of declaring semi-monthly distributions at an annual distribution rate of 7.35%
per annum of our offering price. We have authorized, declared and paid distributions to our shareholders at that rate on a
semi-monthly basis since July 2012. Based upon our current level of operations, we estimate that about 80% of our
distributions will constitute a return of capital. Our distributions historically have not been based on our investment
performance. Prior to September 2013, our distributions were supported by our Manager in the form of operating expense
support payments to us, and a portion of our distributions constituted a return of capital. Since September 2013, we
have not had an expense support agreement with our Manager and as a result a greater portion of our distributions have
constituted a return of capital. A return of capital generally is a return of your investment rather than a return of
earnings or gains derived from our investment activities.



As of June 30, 2015,
the Fund has accrued $0.2 million in stockholder distributions that were unpaid. This amount with record date of June 29, 2015
and paid on July 15, 2015 has been accrued in the June 30, 2015 financial statements. As of December 31, 2014, the Fund accrued
$0.2 million in stockholder distributions that were unpaid. This amount, with record date of December 29, 2014 and paid on January
15, 2015 was accrued in the December 31, 2014 financial statements.



17






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



Source of Distribution by Cash vs.
DRIP:



|                                      |  |           |          |  | NetInvestment |   |       | RealizedGain From |  |   | Return of |  |  |       |       |  | Paid in |   |       |      | 
|------------------------------------- |  | --------- | -------- |  | ------------- | - | ----- | ----------------- |  | - | --------- |  |  | ----- | ----- |  | ------- | - | ----- | ---- | 
|Period                                |  | Per Share |          |  | Income        |   |       | Investments       |  |   | Capital   |  |  | Total |       |  | Cash    |   |       | DRIP | 
|July 12, 2012 - September 30, 2012    |  | $         | 0.183750 |  |               | $ | 32    |                   |  | $ | -         |  |  | $     | 18    |  |         | $ | 50    |      | 
|October 1, 2012 - December 31, 2012 * |  |           | 0.260750 |  |               |   | 118   |                   |  |   | -         |  |  |       | 82    |  |         |   | 200   |      | 
|January 1, 2013 -March 31. 2013 *     |  |           | 0.262586 |  |               |   | 247   |                   |  |   | 47        |  |  |       | 75    |  |         |   | 369   |      | 
|April 1, 2013 - June 30, 2013         |  |           | 0.186504 |  |               |   | 235   |                   |  |   | 43        |  |  |       | 27    |  |         |   | 305   |      | 
|July 1, 2013 - September 30, 2013     |  |           | 0.186504 |  |               |   | 244   |                   |  |   | 47        |  |  |       | 183   |  |         |   | 474   |      | 
|October 1, 2013 - December 31, 2013   |  |           | 0.186504 |  |               |   | 72    |                   |  |   | 258       |  |  |       | 219   |  |         |   | 549   |      | 
|January 1, 2014 - March 31, 2014      |  |           | 0.186504 |  |               |   | 168   |                   |  |   | 85        |  |  |       | 379   |  |         |   | 632   |      | 
|April 1, 2014 - June 30, 2014         |  |           | 0.186504 |  |               |   | 372   |                   |  |   | -         |  |  |       | 382   |  |         |   | 754   |      | 
|July 1, 2014 - September 30, 2014     |  |           | 0.184668 |  |               |   | 135   |                   |  |   | 29        |  |  |       | 644   |  |         |   | 808   |      | 
|October 1, 2014 – December 31, 2014   |  |           | 0.181452 |  |               |   | 144   |                   |  |   | 52        |  |  |       | 748   |  |         |   | 944   |      | 
|January 1, 2015 – March 31, 2015      |  |           | 0.179154 |  |               |   | 153   |                   |  |   | 52        |  |  |       | 824   |  |         |   | 1,029 |      | 
|April 1, 2015 - June 30, 2015         |  |           | 0.179154 |  |               |   | 705   |                   |  |   | 163       |  |  |       | 243   |  |         |   | 1,111 |      | 
|TOTAL                                 |  | $         | 2.364034 |  |               | $ | 2,625 |                   |  | $ | 776       |  |  | $     | 3,824 |  |         | $ | 7,225 |      | 



* Includes a special distribution of $0.077
per share.



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



Percentage of Distributions by Source:



|                                    |  |           |          |  | Net        |  |    | Realized    |  |  |           |  
|----------------------------------- |  | --------- | -------- |  | ---------- |  | -- | ----------- |  |  | --------- | -
|                                    |  |           |          |  | Investment |  |    | Gain From   |  |  | Return of |  
|Period                              |  | Per Share |          |  | Income     |  |    | Investments |  |  | Capital   |  
|July 12, 2012 - September 30, 2012  |  | $         | 0.183750 |  |            |  | 64 | %           |  |  | 0         | %
|October 1, 2012 - December 31, 2012 |  |           | 0.260750 |  |            |  | 59 | %           |  |  | 0         | %
|January 1, 2013 -March 31. 2013     |  |           | 0.262586 |  |            |  | 67 | %           |  |  | 13        | %
|April 1, 2013 - June 30, 2013       |  |           | 0.186504 |  |            |  | 77 | %           |  |  | 14        | %
|July 1, 2013 - September 30, 2013   |  |           | 0.186504 |  |            |  | 51 | %           |  |  | 10        | %
|October 1, 2013 - December 31, 2013 |  |           | 0.186504 |  |            |  | 4  | %           |  |  | 47        | %
|January 1, 2014 - March 31, 2014    |  |           | 0.186504 |  |            |  | 27 | %           |  |  | 13        | %
|April 1, 2014 - June 30, 2014       |  |           | 0.186504 |  |            |  | 46 | %           |  |  | 0         | %
|July 1, 2014  - September 30, 2014  |  |           | 0.184668 |  |            |  | 17 | %           |  |  | 3         | %
|October 1, 2014 – December 31, 2014 |  |           | 0.181467 |  |            |  | 13 | %           |  |  | 6         | %
|January 1, 2015 – March 31, 2015    |  |           | 0.179154 |  |            |  | 15 | %           |  |  | 5         | %
|April 1, 2015 - June 30, 2015       |  |           | 0.179154 |  |            |  | 63 | %           |  |  | 15        | %



The following table
reflects the sources of the distributions on a tax basis that the Fund has paid on its common stock (dollars in thousands) during
the six months ended June 30, 2015 and the fiscal years ended December 31, 2014, 2013 and 2012:



|                                         |  | Six months ended  |       |  | Year ended        |  |       | Year ended        |  |   | Year ended        | 
|---------------------------------------- |  | ----------------- | ----- |  | ----------------- |  | ----- | ----------------- |  | - | ----------------- | 
|Source of Distributions:                 |  | June
    30, 2015 |       |  | December 31, 2014 |  |       | December 31, 2013 |  |   | December 31, 2012 | 
|Distributions from net investment income |  | $                 | 858   |  |                   |  | 40.1  | %                 |  | $ | 819               | 
|Distributions from realized gains        |  |                   | 215   |  |                   |  | 10.0  | %                 |  |   | 166               | 
|Distributions from paid In capital       |  |                   | 1,067 |  |                   |  | 49.9  | %                 |  |   | 2,153             | 
|TOTAL                                    |  | $                 | 2,140 |  |                   |  | 100.0 | %                 |  | $ | 3,138             | 



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



We expect to continue
paying distributions at the same distribution rate, and that a substantial part of those distributions will constitute a return
of capital for the foreseeable future. Our distributions will continue to constitute return of capital until our net investment
income is sufficient to support our distribution rate, which will probably not occur until our Manager enters into an expense
support agreement with us, or our assets increase enough to lower our expense ratio, which we do not expect to occur until we
have more than $100 million in assets.



18






We are in a fund raising stage. As such,
we incur offering expenses of 1.5% of the gross offering proceeds. The chart below shows the percentages of distributions from
Net Investment Income excluding offering costs:





|     |  |  | OfferingExpenses |     |  | Net
    InvestmentIncomeexcludingoffering costs |   |       | %
    Distributionfrom NetInvestmentIncomeexcludingoffering costs |  |  | %
    Distributionsfrom RealizedGains excludingoffering costs |   |  | %
    Distributionsfrom Paid InCapitalexcludingoffering costs |   
|---- |  |  | ---------------- | --- |  | ----------------------------------------------- | - | ----- | ----------------------------------------------------------------- |  |  | ------------------------------------------------------------- | - |  | ------------------------------------------------------------- | --
|2015 |  |  | $                | 96  |  |                                                 | $ | 954   |                                                                   |  |  | 45                                                            | % |  |                                                               | 10
|2014 |  |  | $                | 352 |  |                                                 | $ | 1,171 |                                                                   |  |  | 37                                                            | % |  |                                                               | 5 
|2013 |  |  | $                | 322 |  |                                                 | $ | 1,120 |                                                                   |  |  | 66                                                            | % |  |                                                               | 23
|2012 |  |  | $                | 142 |  |                                                 | $ | 292   |                                                                   |  |  | 100                                                           | % |  |                                                               | 0 





Note 9.  Financial Highlights



The following is a schedule of financial
highlights for the six months ended June 30, 2015 and 2014:



|                                                                         |  | For the sixmonthsendedJune 30, 2015 |           |   | For the sixmonths endedJune
    30, 2014 |  
|------------------------------------------------------------------------ |  | ----------------------------------- | --------- | - | ---------------------------------------- | -
|Per share data:                                                          |  |                                     |           |   |                                          |  
|Net asset value, beginning of period                                     |  | $                                   | 7.34      |   |                                          | $
|                                                                         |  |                                     |           |   |                                          |  
|Results of operations (1)                                                |  |                                     |           |   |                                          |  
|Net investment income                                                    |  |                                     | 0.14      |   |                                          |  
|Net realized gain on investments                                         |  |                                     | 0.04      |   |                                          |  
|Net unrealized loss on investments                                       |  |                                     | (0.09     | ) |                                          |  
|                                                                         |  |                                     |           |   |                                          |  
|Net increase (decrease) in net assets resulting from
    operations      |  |                                     | 0.09      |   |                                          |  
|                                                                         |  |                                     |           |   |                                          |  
|Stockholder distributions
    (2)                                        |  |                                     |           |   |                                          |  
|Distributions from net investment income                                 |  |                                     | (0.14     | ) |                                          |  
|Distributions from realized gains                                        |  |                                     | (0.04     | ) |                                          |  
|Distributions from capital                                               |  |                                     | (0.18     | ) |                                          |  
|Net decrease in net assets resulting from stockholder
    distributions  |  |                                     | (0.36     | ) |                                          |  
|                                                                         |  |                                     |           |   |                                          |  
|Capital share transactions                                               |  |                                     |           |   |                                          |  
|Impact
    from issuance of common stock (3)                             |  |                                     | 0.19      |   |                                          |  
|Net increase in net assets resulting from capital
    share transactions |  |                                     | 0.19      |   |                                          |  
|Net asset value, end of period                                           |  | $                                   | 7.26      |   |                                          | $
|Shares outstanding at end of period                                      |  |                                     | 6,313,300 |   |                                          |  
|Total return (5)                                                         |  |                                     | 2.47      | % |                                          |  
|Ratio/Supplemental
    data:                                             |  |                                     |           |   |                                          |  
|Net assets, end of period (in thousands)                                 |  | $                                   | 45,850    |   |                                          | $
|Average net assets (in thousands)                                        |  | $                                   | 42,140    |   |                                          | $
|Ratio of net investment
    income to average net assets (4)(7)          |  |                                     | 4.11      | % |                                          |  
|Ratio of operating
    expenses to average net assets (4)(7)             |  |                                     | 7.02      | % |                                          |  
|Portfolio turnover
    ratio (6)                                         |  |                                     | 33.15     | % |                                          |  



|(1) | The per share amounts were
    derived by using the weighted average shares outstanding during the period. There was no expense waiver and reimbursement
    for the six months ended June 30, 2015 and 2014.                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The per share data for distributions
    reflects the actual amount of distributions declared per share during the period.                                                                                                                                                                                                                                                                                          
|(3) | The issuance of common stock on a per
    share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock in the
    Fund's continuous offering.                                                                                                                                                                                                                 
|(4) | The ratios are after giving effect
    to amounts reimbursed by the Manager under an expense reimbursement agreement. See “Note 4 – Related Party
    Transactions.” For the six months ended June 30, 2015 and 2014, 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. For the six months ended June 30, 2015 and 2014, there was no expense reimbursement.
|(6) | Portfolio turnover rate is calculated
    using the lesser of year-to-date sales or purchases over the average of the invested assets at fair value. Not annualized.                                                                                                                                                                                                                                                



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





19






Note
10.  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:



On July 30, 2015
Relativity Media, LLC filed for chapter 11 bankruptcy. The Fund made a convertible preferred equity investment that is the
senior most equity investment in the capital structure. We are working with the company and the management team via our
co-optivist approach to restructure the company’s balance sheet through the bankruptcy process.



On August 10, 2015,
the Fund received a notice for mandatory full call from Euramax International, Inc. 9.50%. Senior Secured Second Lien debt due
June 1, 2018 at par plus accrued interest.





On May 18th,
2015, the Board of Directors approved a tender offer for 214,082 shares of its issued and outstanding common stock, which
represents 5% of the weighted average number of shares outstanding for the calendar year ended December 31, 2014. The offer
originally expired on June 30, 2015, but because proper notification was not sent to the shareholders in a timely manner, the
offer was extended to July 29, 2015. Subsequent to June 30, 2015, the Fund received tender offer requests for 311,937 shares.
Since the amount of repurchase requests exceeded the number of shares the Fund would repurchase, the Fund repurchased shares
on a pro rata basis. A total of 27 investors requested to tender their shares and each investor received 69% of
their request. The offer is for cash at a price equal to 90% of the offering price on July 29, 2015, which was $8.78. The
total dollar amount of this tender offer transaction was $1,878,570.



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



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



Forward-Looking Statements



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



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



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



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



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



20






Critical Accounting Policies



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



Valuation of Portfolio Investments



The investment
portfolio is recorded on a trade date basis. We determine the net asset value of our investment portfolio each quarter.
Securities that are publicly-traded are valued at the reported closing price on the valuation date.  Thirty-six of the forty
investments were valued using the closing market price at period end June 30, 2015. The exceptions were the investment in
Education Management LLC, restructured to private equity in the quarter, and the two notes from Endeavour International
Corp., one with a 12.00% interest rate and maturity date of June 1, 2018, the second with a 12.00% interest rate and maturity
date of March 1, 2018 and  Relativity Media, LLC. Endeavour International Corp. made its intent to
restructure during the quarter, with the specific terms not yet finalized.



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



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



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



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



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



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



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



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



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



21






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. USBank is the fund custodian. Through USBank, the fund
uses FT Interactive, a third party valuation firm, to price the notes. The prices are reviewed by the CEO.



Level 3:
Unobservable inputs for the asset or liability. These investments for the fund are three equity securities, a Senior Secured
First Lien Note, and a Senior Secured Lien Note. Two of the equity investments have been issued by a company with terms
settled. Their fair value was determined by their relative amount of the total company enterprise value. The other equity
investment is being carried at cost since we just completed the transaction. The terms of Senior Secured First Lien Note and Senior Secured Second Lien Note, however, have not been finalized. The fair value was derived from the relative
amounts of the notes to the total enterprise value as indicated would be the intended restructuring by the issuer.



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



Securities
transactions are accounted for on the trade date. We generate investment income in the form of interest, dividend and
fees earned on senior secured loans, senior secured notes, subordinated debt, senior unsecured debt, preferred stock and
collateralized securities in our portfolio. The level of income we receive is directly related to the balance of collectible
income producing investments multiplied by the weighted average yield of our investments. Coupon interest income is adjusted
for the amortization of premiums and accretion of discounts. We record interest income on an accrual basis to the extent that
we expect to collect such amounts. We record dividend income on the ex-dividend date.



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. We record prepayment premiums on loans and debt securities as interest income when we receive such
amounts. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring
fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees generated
in connection with investments will be recognized when earned.



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



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



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



Payment-in-Kind Interest



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



22






Organizational and Offering Costs



The Fund is a closed-end
fund with a continuous offering period. Organization costs include, among other things, the cost of organizing us as a Maryland
corporation, including the cost of legal services and other fees pertaining to our organization. Offering expenses include, among
other things, legal fees and other costs pertaining to the preparation of our registration statement in connection with the Fund’s
continuous offering. Under the investment advisory agreement between the Fund and the Manager, our Manager fronted the cost of
the organizational and offering expenses which are reimbursable by the Fund with up to 1.5% of the gross offering proceeds. The
Fund expenses organizational and offering costs as they become payable under the investment advisory agreement.



U.S. Federal Income Taxes



The Fund has elected
to be treated for federal income tax purposes as a RIC under subchapter M of the Code and to operate in a manner so as to qualify
for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Fund is required to annually distribute
to its stockholders at least 90% of investment company taxable income, as defined by Internal Revenue Code of 1986, or (the “Code”).
So long as the Fund maintains its status as a RIC, it generally will not pay corporate-level U.S. federal income taxes on any
ordinary income or capital gains that it distributes at least annually to its stockholders as distributions. Rather, any tax liability
related to income earned by the Fund represents obligations of the Fund’s investors and will not be reflected in the financial
statements of the Fund. The Fund will also be subject to nondeductible federal excise taxes if it does not distribute at least
98% of net ordinary income, 98.2% of capital gain net income, if any, and any recognized and undistributed income from prior years
for which it paid no federal income taxes.



Portfolio and Investment Activity



During the six months
ended June 30, 2015, we made $14.8 million of investments in new portfolio companies and had $10.7 million in aggregate amount
of exits and repayments, resulting in net investments of $4.1 million for the period. During the six months ended June 30, 2014,
we made $15.3 million of investments in new portfolio companies and had $7.3 million in aggregate amount of exits and repayments,
resulting in net investments of $8.0 million for the period.



As of June 30, 2015,
we have invested an aggregate of approximately $47.1 million in 40 investment positions in 32 portfolio companies. At June 30,
2015, the fair value of our investment positions was $40.6 million (excluding cash and including the accrued interest of $0.9
million). As of such date, our estimated gross annual portfolio current yield was 9.53% and gross annual portfolio yield to maturity
was 10.82% based on the purchase price of our investments. The average duration of our portfolio was approximately 2.7 years.
During the six months ended June 30, 2015, we  exited 9 portfolio companies in full and 1 partially for aggregate sales proceeds
of $10.7 million. As of June 30, 2015, we had one portfolio investment in default of payment of its par value at maturity date,
Suntech Power Holdings Company, with a fair value of $1 which represented a negligible amount of our total portfolio. As of June
30, 2015, in addition to the investment in maturity date default, seven additional investments had not paid coupon interest as
due beyond the thirty day grace period. These investments are Colt Defense LLC, 8.75%, November 15, 2017; Caesars Entertainment Corp, 11.25%,
June 1, 2017; Caesars Entertainment Corp, 10.75%, February 1, 2016; Endeavour International Corp., 12%, March 1, 2018; Endeavour
International Corp., 12%, June 1, 2018; QuickSilver Resources, Inc., 7.13%, April 1, 2016; and Saratoga Resources, Inc., 12.50%
July 1, 2016. Interest on these investments was accrued through the date that the last coupon payment
was received. These investments were placed in a nonaccrual status. Two other investments, Education Management, LLC and NII Holdings
were restructured as a private equity instruments, and no longer have income producing attributes.



The following table presents our portfolio
composition based on fair value as of June 30, 2015:



|                                |  | As
    of June 30, 2015      |      
|------------------------------- |  | ---------------------------- | -----
|                                |  | Percentage ofTotal Portfolio |      
|Investments – Money Market      |  |                              | 11.7 
|Senior Secured First Lien Debt  |  |                              | 23.2 
|Senior Secured Second Lien Debt |  |                              | 5.6  
|Senior Unsecured Debt           |  |                              | 26.2 
|Senior Subordinated Debt        |  |                              | 7.5  
|Equity Securities               |  |                              | 25.8 
|Total                           |  |                              | 100.0



As of June 30, 2015, our debt
investment portfolio had a yield to maturity of 10.82%, and an average duration of 2.70 years.



23






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



|                                |  | As
    of December 31, 2014  |      
|------------------------------- |  | ---------------------------- | -----
|                                |  | Percentage ofTotal Portfolio |      
|Investments – Money Market      |  |                              | 7.7  
|Senior Secured First Lien Debt  |  |                              | 28.9 
|Senior Secured Second Lien Debt |  |                              | 14.0 
|Senior Unsecured Debt           |  |                              | 37.3 
|Senior Subordinated Debt        |  |                              | 9.9  
|Equity Securities               |  |                              | 2.2  
|Total                           |  |                              | 100.0



As of December 31, 2014, our investment
portfolio had a yield to maturity of 10.35%, and an average duration of 2.55 years.



The following table shows the portfolio
composition by industry grouping at fair value as of June 30, 2015 (dollars in thousands):



|                                          |  | As
    of June 30, 2015      |       
|----------------------------------------- |  | ---------------------------- | ------
|                                          |  | Investments
    atFair Value |       
|Media: Advertising, Printing & Publishing |  | $                            | 14,404
|Investments – Money Market                |  |                              | 5,267 
|Metals & Mining                           |  |                              | 4,293 
|Retail                                    |  |                              | 3,850 
|Automobile                                |  |                              | 2,624 
|Aerospace and Defense                     |  |                              | 2,596 
|Telecommunications                        |  |                              | 2,523 
|Energy: Oil & Gas                         |  |                              | 2,361 
|Services: Consumer                        |  |                              | 2,198 
|Healthcare and Pharmaceuticals            |  |                              | 1,297 
|Media: Broadcasting & Subscription        |  |                              | 1,127 
|Environmental Industries                  |  |                              | 994   
|Hotel, Gaming & Leisure                   |  |                              | 804   
|Beverage, Food & Tobacco                  |  |                              | 570   
|Total                                     |  | $                            | 44,908



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



|                                          |  | As
    of December 31, 2014 |       
|----------------------------------------- |  | --------------------------- | ------
|                                          |  | InvestmentsatFair
    Value |       
|Retail                                    |  | $                           | 5,827 
|Media: Advertising, Printing & Publishing |  |                             | 4,163 
|Healthcare & Pharmaceuticals              |  |                             | 3,547 
|Services: Consumer                        |  |                             | 3,497 
|Investments – Money Market                |  |                             | 3,104 
|Telecommunications                        |  |                             | 2,798 
|Aerospace and Defense                     |  |                             | 2,790 
|Metals & Mining                           |  |                             | 2,723 
|Consumer Goods: Durable                   |  |                             | 2,686 
|Energy: Oil & Gas                         |  |                             | 2,505 
|Services: Business                        |  |                             | 1,430 
|Automobile                                |  |                             | 1,337 
|Media: Broadcasting & Subscription        |  |                             | 1,201 
|High Tech Industries                      |  |                             | 858   
|Environmental Industries                  |  |                             | 795   
|Hotel, Gaming & Leisure                   |  |                             | 704   
|Beverage, Food & Tobacco                  |  |                             | 567   
|Total                                     |  | $                           | 40,532



24






Our fair value of
total investments was $44.9 million as of June 30, 2015 as compared to $40.5 million as of December 31, 2014. The portfolio increase
in the three and six months ending June 30, 2015 is mainly due to invested proceeds from continuous investor closings.



Results of Operations



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



Operating results for the three and six
months ended June 30, 2015 and 2014 are as follows (dollars in thousands):



|                                                                    |  | For the threemonths endedJune
    30, 2015 |       |   | For the threemonths endedJune
    30, 2014 |  
|------------------------------------------------------------------- |  | ------------------------------------------ | ----- | - | ------------------------------------------ | -
|Total investment income                                             |  | $                                          | 1,412 |   |                                            | $
|Total expenses, net                                                 |  |                                            | 707   |   |                                            |  
|Net investment income                                               |  |                                            | 705   |   |                                            |  
|Net realized gains from investments                                 |  |                                            | 163   |   |                                            |  
|Net unrealized depreciation on investments                          |  |                                            | (526  | ) |                                            |  
|Net increase (decrease) in net assets resulting
    from operations |  | $                                          | 342   |   |                                            | $



|                                                                    |  | For the sixmonths endedJune
    30, 2015 |       |   | For the sixmonths endedJune
    30, 2014 |  
|------------------------------------------------------------------- |  | ---------------------------------------- | ----- | - | ---------------------------------------- | -
|Total investment income                                             |  | $                                        | 2,326 |   |                                          | $
|Total expenses, net                                                 |  |                                          | 1,468 |   |                                          |  
|Net investment income                                               |  |                                          | 858   |   |                                          |  
|Net realized gains from investments                                 |  |                                          | 215   |   |                                          |  
|Net unrealized depreciation on investments                          |  |                                          | (550  | ) |                                          |  
|Net increase (decrease) in net assets resulting
    from operations |  | $                                        | 523   |   |                                          | $



Revenues



We generated
investment income of $1.4 million and $2.3 million for the three and six months ended June 30, 2015, as compared to $1.0
million and $1.7 million for the three and six months ended June 30, 2014. Interest revenue was $0.9 million and $1.8 million
for the three and six months ended June 30, 2015, as compared to $0.8 million and $1.6 million for the three and six months
ended June 30, 2014. The increase in interest revenue in 2015 as compared to 2014 was attributable to an increase in the
average size of our debt portfolio, offset by an increase in debt investments placed on non-accrual status. Other income was
$0.6 million and $0.6 million for the three and six months ended June 30, 2015, as compared to $0.1 million and $0.1 million
for the three and six months ended June 30, 2014. The substantial increase in other income in 2015 as compared to 2014 is the
result of fee income derived from an equity investment in Relativity Media in the second quarter of 2015.



Interest
from investments is in the form of interest and fees earned on senior secured loans, senior secured notes, subordinated
debt, senior unsecured debt and collateralized securities in our debt portfolio. Our debt portfolio constituted approximately
71.8% of investment portfolio at June 30, 2014 (excluding money market investments). The level of income we receive is
directly related to the balance of collectible income producing investments multiplied by the weighted average yield of
our investments, offset by debt investments held in non-accrual status. We expect the dollar amount of interest and any
dividend income that we earn to increase as the size of our investment portfolio increases. With the continuous offerings and
periodic closings through April 30, 2015, the assets available for and deployed to investment received a boost. The average
balance of the debt portfolio during the three and six months ended June 30, 2015 was significantly higher than the same
periods in fiscal 2014, resulting in the increase in interest income. At June 30, 2015, the weighted average
coupon yield was 9.5%, as compared to the 10.5% as of June 30, 2014. For the six months ended June 30, 2015, the average net
assets were $42.1 million, as compared to $30.1 million for the six months ended June 30, 2014.



For the six
months ended June 30, 2015, eight of the investments in the debt portfolio did not accrue interest as the issuers were in
default of the coupon payment for more than the thirty day grace period. Interest income was accrued through the date of the
last coupon payment received for these investments. These eight
are Colt Defense LLC, 8.75%, November 15, 2017; Caesars Entertainment Corp, 11.25%, June 1, 2017; Caesars Entertainment Corp,
10.75%, February 1, 2016; Endeavour International Corp., 12%, March 1, 2018; Endeavour International Corp., 12%, June 1, 2018;
QuickSilver Resources, Inc., 7.13%, April 1, 2016; Saratoga Resources, Inc., 12.50% July 1, 2016; and Suntech Power Holdings
Company, Ltd., 3%, May 15, 2013. Two other investments, Education Management, LLC and NII Holdings were restructured as a
private equity instruments, and no longer have income producing attributes.



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.



25






Expenses



The composition of
our operating expenses for the three and six months ended June 30, 2015 and 2014 was as follows (dollars in thousands):



|                                          |  | For the threemonths endedJune 30, 2015 |     |  | For the threemonths endedJune 30, 2014 |  
|----------------------------------------- |  | -------------------------------------- | --- |  | -------------------------------------- | -
|Professional fees                         |  | $                                      | 134 |  |                                        | $
|Director fees                             |  |                                        | 12  |  |                                        |  
|Insurance                                 |  |                                        | 24  |  |                                        |  
|Management fees                           |  |                                        | 229 |  |                                        |  
|Administrative services – related parties |  |                                        | 54  |  |                                        |  
|General and administrative                |  |                                        | 214 |  |                                        |  
|Offering expense                          |  |                                        | 40  |  |                                        |  
|Total operating expenses                  |  | $                                      | 707 |  |                                        | $



|                                          |  | For the sixmonths endedJune 30, 2015 |       |  | For the sixmonths endedJune 30, 2014 |  
|----------------------------------------- |  | ------------------------------------ | ----- |  | ------------------------------------ | -
|Professional fees                         |  | $                                    | 230   |  |                                      | $
|Director fees                             |  |                                      | 30    |  |                                      |  
|Insurance                                 |  |                                      | 48    |  |                                      |  
|Management fees                           |  |                                      | 444   |  |                                      |  
|Administrative services – related parties |  |                                      | 108   |  |                                      |  
|General and administrative                |  |                                      | 512   |  |                                      |  
|Offering expense                          |  |                                      | 96    |  |                                      |  
|Total operating expenses                  |  | $                                    | 1,468 |  |                                      | $



For the six months ended June 30, 2015 and 2014, our operating expenses were $1.5 million and $1.1 million,
respectively. For the three months ended June 30, 2015 and 2014, our operating expenses were $0.7 million and $0.6 million, respectively.
The rise in expenses for the three and six months ended June 30, 2015 as compared to the three and six months ended June 30, 2014,
was due to higher management fees, administrative services, professional fees and general and administrative in 2015 as the operation
of the Fund have increased. The increase in expenses in the six months ended June 30, 2015 as compared to June 30, 2014 was offset
by lower offering expenses as an update to our registration statement was delayed approval, which reduced the gross proceeds in
our continuous offering. The amount of offering costs is directly related to the gross offering price of shares sold in the period.
Professional fees were lower in 2014, as less legal and audit support was needed.



The management fees
for the three and six months ended June 30, 2015 and 2014 remain at 2% of the net asset value. The offering costs are consistent
at 1.5% of the gross closing proceeds for the three months ended June 30, 2015 and 2014.











26






Net Investment Income





Our net investment
income totaled $0.7 million and $0.4 million for the three months ended June 30, 2015 and 2014, respectively. Our net investment
income totaled $0.9 million and $0.5 million for the six months ended June 30, 2015 and 2014, respectively. Our net investment
income is derived from investment income less operating expenses for the period.



The increase in net investment income in the three months ended June 30, 2015 as compared to the three
months ended June 30, 2014 is primarily due to an increase in other income derived from an equity investment in Relativity Media,
and to a lesser extent by a higher interest earnings on our debt portfolio, which was offset by an increase in operating expenses
during each period.





Net Realized Gains or Losses from Investments



For the three and
six months ended June 30, 2015, we had $10.2 million and $12.3 million of principal repayments, resulting in $0.2 million and
$0.2 million of realized gains, respectively. For the three and six months ended June 30, 2014, we had $3.0 million and $7.3 million
of principal repayments, resulting in $0.1 thousand and $0.1 million of realized gains, respectively.



Net Change in Unrealized Appreciation or Depreciation
on Investments



For the three
and six months ended June 30, 2015, we experienced $0.5 million and $0.6 million of unrealized depreciation, respectively. For the
three and six months ended June 30, 2014, we  experienced $1.0 million and $1.2 million of unrealized depreciation,
respectively. The global bond markets finished the second quarter with negative returns, as a sharp increase in European
government bonds set the tone for the rest of the world. In addition, investors began to position for what appears to be a growing
likelihood that the U.S. Federal Reserve will start to raise interest rates before the end of 2015. These circumstances had the
largest negative impact on the most rate sensitive market segments, including U.S. Treasuries, higher-quality bonds, and longer-term
debt. However, the market’s credit sectors— most notably high-yield and emerging-market bonds—outperformed thanks
to the backdrop of positive global growth, favorable credit conditions, and investors’ continued appetite for yield. During
the second quarter, high-yield bonds enjoyed two solid months in April and May. These were followed by retreating prices in June,
prompted by an uptick in defaults and concern about the increasing likelihood of debt-strapped Greece defaulting on its payment
of roughly €1.6 billion due to the International Monetary Fund by June 30.



In addition, we encountered greater than
average declines in certain positions that were caused by conditions unique to the company or industry. In particular, we had
a number of positions that either initiated a restructuring of their indebtedness (either in Chapter 11 bankruptcy or prepackaged
bankruptcy) or announced that they were considering a restructuring. Such announcements generally reduce liquidity in the secondary
market creating greater mispricing in underlying bonds. Until the bankruptcy or other restructuring process is complete, it becomes
difficult to ascertain whether some of these positions will result in loss of principal or full recovery of principal given their
position in the capital structure of the issuer and the underlying asset values. Generally, we expect much higher recoveries or
full payment for senior secured first lien type bonds, as compared to senior secured second-lien or unsecured bonds for defaulted
bonds.



Changes in Net Assets from Operations



For the three and
six months ended June 30, 2015, we recorded a net increase in net assets resulting from operations of $0.3 million and $0.5 million,
respectively. For the three and six months ended June 30, 2015, this increase is mainly due to net investment income of $0.7 million
and $0.9 million, respectively, and net realized gain from investment of $0.2 million and $0.2 million, respectively, earned on
our portfolio investments, partially offset by net unrealized depreciation of $0.5 million and $0.6 million, respectively. Based
on 6,199,493 and 5,965,660 weighted average common shares outstanding for the three and six months ended June 30, 2015, our per
share net increase in net assets resulting from operations was $0.06 and $0.09, respectively.



For the three
and six months ended June 30, 2014, we recorded a net decrease in net assets resulting from operations of $0.6 million and
$0.6 million, respectively. Based on 4,054,473 and 3,749,965 weighted average common shares outstanding for the three and
six months ended June 30, 2014, respectively, our per share net decrease in net assets resulting from operations was $0.14
and $0.16, respectively.



Liquidity and Capital Resources



We generate cash primarily
from the net proceeds of our ongoing continuous public offering and from cash flows from fees, interest and dividends earned from
our investments as well as principal repayments and proceeds from sales of our investments. On July 10, 2012, we satisfied our
minimum offering requirement of raising gross offering proceeds in excess of $1.0 million from persons who are not affiliated
with us or our Manager, and commenced operations. As of June 30, 2015, we had issued 6.4 million shares of common stock, including
0.3 million shares under our distribution reinvestment plan (“DRIP”) less 0.09 million shares redeemed under our tender
offer. As of June 30, 2015, we had received gross proceeds from our continuous offering of total $63.4 million, including $2.6
million under our DRIP less $0.8 paid to redeem shares in our quarterly tender offers.



We currently sell
our shares on a continuous basis at a current offering price of $9.75; however, to the extent that our net asset value per share
increases, we will sell at a price necessary to ensure that our shares are not sold at a price, after deduction of selling commissions
and dealer manager fees, that is below our net asset value per share.



Prior to
investing in  portfolio securities, we invest the net proceeds from our continuous offering primarily in money market funds
that invest in U.S. government securities and high-quality debt instruments maturing in one year or less from the time of
investment. As of June 30, 2015 and December 31, 2014, we had $5.3 million and $3.1 million, respectively, invested in money
market investments pending investment in debt instruments.



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For the six months
ended June 30, 2015, we experienced a net increase in money market investments of $2.2 million. For the six months ended June
30, 2015, approximately $4.7 million was generated from our financing activities, which primarily consisted of $6.0 million in
net offering proceeds received, offset by $1.4 million in distributions. We used approximately $4.7 million of cash in our operating
activities primarily as the result of the purchase of new portfolio debt investments of $14.9 million, offset by the receipt of
proceeds from the sale of, repayment of and principal payments on portfolio  investments of $12.3 million.



We have thus far not borrowed any
funds 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



Subject to our board
of trustees' discretion and applicable legal restrictions, we authorize and declare ordinary cash distributions on a semi-monthly
basis and pay such distributions on a semi-monthly basis. Any distributions to our shareholders will be declared out of assets
legally available for distribution. We may fund our cash distributions to shareholders from any sources of funds available to
us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets,
non-capital gains proceeds from the sale of assets, and dividends or other distributions paid to us on account of preferred and
common equity investments in portfolio companies. We have not established limits on the amount of funds we may use from available
sources to make distributions.



When we commenced
operations, we initiated a policy of declaring semi-monthly distributions at an annual distribution rate of 7.35% per annum of
our offering price. We have authorized, declared and paid distributions to our shareholders at that rate on a semi-monthly basis
since July 2012. Based upon our current level of operations, we estimate that about 80% of our distributions will constitute
a return of capital. Our distributions historically have not been based on our investment performance. Prior to
September 30, 2013, our distributions were supported by our Manager in the form of operating expense support payments to us, and
a portion of our distributions constituted a return of capital. Since September 30, 2013, we have not had an expense support agreement
with our Manager and as a result a greater portion of our distributions have constituted a return of capital. A return of
capital generally is a return of your investment rather than a return of earnings or gains derived from our investment activities.



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



Each year a statement
on Internal Revenue Service Form 1099-DIV (or such successor form) identifying the source of the distribution (i.e. , paid
from ordinary income, paid from net capital gain on the sale of securities, or a return of capital) will be mailed to our shareholders.
We expect that our distributions will continue to constitute a return of capital until our net investment income is sufficient
to support our distribution rate, which will probably not occur until our Manager enters into an expense support agreement with
us, or our assets increase enough to lower our expense ratio, which we do not expect to occur until we have more than $100 million
in assets, neither of which may ever occur. As a result, for the foreseeable future, a portion of the distributions we make
will represent a return of capital for tax purposes. The tax basis of shares must be reduced by the amount of any return of capital
distributions, which will result in an increase in the amount of any taxable gain (or a reduction in any deductible loss) on the
sale of shares.



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



Distribution Reinvestment Plan



We have adopted an
“opt-in” DRIP pursuant to which shareholders may elect to have the full amount of their cash distributions reinvested
in additional shares of our common stock. If shareholders wish to receive their distribution in cash, no action 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.



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We are in a fund raising stage. As such,
we incur offering expenses of 1.5% of the gross offering proceeds. The chart below shows the percentages of distributions from
Net Investment Income excluding offering costs:





|     |  |  | OfferingExpenses |     |  | Net InvestmentIncomeexcludingoffering costs |   |       | % Distributionfrom NetInvestmentIncome
excludingoffering costs |  |  | % Distributionsfrom RealizedGains excludingoffering costs |   |  | % Distributionsfrom Paid InCapital
excludingoffering costs |   
|---- |  |  | ---------------- | --- |  | ------------------------------------------- | - | ----- | -------------------------------------------------------------- |  |  | --------------------------------------------------------- | - |  | ---------------------------------------------------------- | --
|2015 |  |  | $                | 96  |  |                                             | $ | 954   |                                                                |  |  | 45                                                        | % |  |                                                            | 10
|2014 |  |  | $                | 352 |  |                                             | $ | 1,171 |                                                                |  |  | 37                                                        | % |  |                                                            | 5 
|2013 |  |  | $                | 322 |  |                                             | $ | 1,120 |                                                                |  |  | 66                                                        | % |  |                                                            | 23
|2012 |  |  | $                | 142 |  |                                             | $ | 292   |                                                                |  |  | 100                                                       | % |  |                                                            | 0 



Election as a RIC



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



Related-Party Transactions and Agreements



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



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



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



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



As a business development
company, 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.



Off-Balance Sheet Arrangements



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



Item 3. Quantitative and Qualitative Disclosures about Market
Risk



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



29






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 June 30, 2015 levels would result in an increase or decrease in net asset
value of $0.4 million or 0.78%.



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







During the quarter ending June 30, 2015, we determined that
a material weakness in internal control over financial reporting existed relating to the determination of offering expenses that
should have been borne by our Fund manager instead of us, and reimbursed to our manager at the rate of 1.5% of gross offering proceeds
in accordance with our investment management agreement with the Fund manager, and that the material weakness existed from the fourth
quarter of 2013 to the end of fiscal 2014, including at December 31, 2013 and 2014 when management had previously concluded that
its internal controls were effective.  In response, in 2015 we implemented additional controls whereby officers will map out
financial statement line items to the relevant portions of the agreements with our Fund manager to ensure compliance and proper
accounting for amounts due thereunder.  We believe the material weakness has been remediated by the additional controls and
procedures that have been implemented.





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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, 2014.



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



Not applicable.



Item 3. Defaults upon Senior Securities



Not applicable.



Item 4. Mine Safety Disclosures



Not applicable.



Item 5. Other Information



Not applicable.



Item 6. Exhibits



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



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



*    Filed herewith.



31






SIGNATURES



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



|                      | VII Peaks Co-Optivist Income
    BDC II, Inc.
|--------------------- | ---------------------------------------------
|                      |                                              
|Date: August 14, 2015 | By                                           
|                      |                                              
|                      |                                              
|                      |                                              
|                      |                                              



|                      | VII Peaks Co-Optivist Income
    BDC II, Inc.
|--------------------- | ---------------------------------------------
|                      |                                              
|Date: August 14, 2015 | By                                           
|                      |                                              
|                      |                                              
|                      |                                              
|                      |                                              



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