UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549










Form 10-Q










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



For the quarterly period
ended March 31, 2016



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



For the transition period
from             to



Commission File No. 0-54615










VII Peaks Co-Optivist Income BDC II,
Inc.

(Exact name of Registrant as specified
in its charter)










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



4 Orinda Way, Suite 125-A

Orinda, CA 94563

(Address of principal executive offices)



(855) 889-1778

(Registrant’s telephone number,
including area code)



Not applicable

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










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



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



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



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



The number of shares of the Registrant’s
common stock, par value $0.001 per share, outstanding as of May 16, 2016 was 6,237,188.









VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.

FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2016



TABLE OF CONTENTS



|           |                                                                                                                | Page
|---------- | -------------------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                                |     
|PART I.    | FINANCIAL INFORMATION                                                                                          | 3   
|Item 1.    | Financial Statements                                                                                           | 3   
|           | Statements of Assets and Liabilities as of March 31, 2016 (unaudited) and December 31, 2015                    | 3   
|           | Statements of Operations for the three months ended March 31, 2016 (unaudited) and 2015 (unaudited)            | 4   
|           | Statements of Changes in Net Assets for the three months ended March 31, 2016 (unaudited) and 2015 (unaudited) | 5   
|           | Statements of Cash Flows for three months ended March 31, 2016 (unaudited) and 2015 (unaudited)                | 6   
|           | Schedule of Investments as of March 31, 2016 (unaudited)                                                       | 7   
|           | Schedule of Investments as of December 31, 2015                                                                | 8   
|           | Notes to Financial Statements (unaudited)                                                                      | 9   
|Item 2.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations                          | 22  
|Item 3.    | Quantitative and Qualitative Disclosures about Market Risk                                                     | 33  
|Item 4.    | Controls and Procedures                                                                                        | 33  
|PART II.   | OTHER INFORMATION                                                                                              | 34  
|Item 1.    | Legal Proceedings                                                                                              | 34  
|Item 1A.   | Risk Factors                                                                                                   | 34  
|Item 2.    | Unregistered Sales of Equity Securities and Use of Proceeds                                                    | 34  
|Item 3.    | Defaults upon Senior Securities                                                                                | 34  
|Item 4.    | Mine Safety Disclosures                                                                                        | 34  
|Item 5.    | Other Information                                                                                              | 34  
|Item 6.    | Exhibits                                                                                                       | 35  
|Signatures | 36                                                                                                            



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          |        
|------------------------------------------------------------------------------------------------ |  | -------------- | -------
|                                                                                                 |  | March 31, 2016 |        
|                                                                                                 |  | (unaudited)    |        
|ASSETS                                                                                           |  |                |        
|                                                                                                 |  |                |        
|Investments, at fair value                                                                       |  |                |        
|Non-controlled/non-affiliate investments (cost of $52,699 and $46,210, respectively)             |  | $              | 30,380 
|Affiliate investments (cost of $4,000 and $2,000, respectively)                                  |  |                | 6,102  
|Investments, money market at fair value (cost of $439 and $6,210, respectively)                  |  |                | 439    
|Total investments, at fair value                                                                 |  |                | 36,921 
|Interest receivable                                                                              |  |                | 761    
|Prepaid expenses                                                                                 |  |                | 16     
|Origination fee receivable                                                                       |  |                | 63     
|Due from related party                                                                           |  |                | 255    
|Total assets                                                                                     |  | $              | 38,016 
|                                                                                                 |  |                |        
|LIABILITIES                                                                                      |  |                |        
|Priority credit line -Wells Fargo                                                                |  | $              | 7,082  
|Priority credit line - Morgan Stanley                                                            |  |                | 1,816  
|Interest payable                                                                                 |  |                | 3      
|Deferred loan fee                                                                                |  |                | 42     
|Accounts payable and accrued liabilities                                                         |  |                | 336    
|Stockholder distributions payable                                                                |  |                | 352    
|Total liabilities                                                                                |  | $              | 9,631  
|                                                                                                 |  |                |        
|NET ASSETS                                                                                       |  |                |        
|Common stock, par value, $.001 per share, 200,000,000 authorized;                                |  |                |        
|6,223,414 and 6,181,515 shares issued and outstanding, respectively                              |  | $              | 6      
|Paid-in capital in excess of par value                                                           |  |                | 59,229 
|Treasury stock at cost, 301,413 and 301,413 shares, respectively                                 |  |                | (2,891 
|Accumulated distribution in excess of net investment income and net realized gain on investments |  |                | (7,742 
|Net unrealized depreciation on investments                                                       |  |                | (20,217
|Total net assets                                                                                 |  |                | 28,385 
|Total liabilities and net assets                                                                 |  | $              | 38,016 
|                                                                                                 |  |                |        
|Net asset value per share                                                                        |  | $              | 4.56   



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 the Three Months Ended March 31, |           |   | For the Three Months Ended March 31, |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | --------- | - | ------------------------------------ | -
|                                                                                                                    |  | 2016                                 |           |   | 2015                                 |  
|                                                                                                                    |  |                                      |           |   |                                      |  
|Investment income:                                                                                                  |  |                                      |           |   |                                      |  
|Interest from investments                                                                                           |  |                                      |           |   |                                      |  
|Non-controlled/non-affiliate investments                                                                            |  | $                                    | 503       |   |                                      | $
|Affiliate investments                                                                                               |  |                                      | 113       |   |                                      |  
|Fee income                                                                                                          |  |                                      |           |   |                                      |  
|Affiliate investments                                                                                               |  |                                      | 21        |   |                                      |  
|Total investment income                                                                                             |  |                                      | 637       |   |                                      |  
|                                                                                                                    |  |                                      |           |   |                                      |  
|Operating expenses:                                                                                                 |  |                                      |           |   |                                      |  
|Professional fees                                                                                                   |  |                                      | 178       |   |                                      |  
|Directors fees                                                                                                      |  |                                      | 8         |   |                                      |  
|Insurance                                                                                                           |  |                                      | 27        |   |                                      |  
|Interest expense                                                                                                    |  |                                      | 75        |   |                                      |  
|Management fees - related parties                                                                                   |  |                                      | 142       |   |                                      |  
|Administrative services - related parties                                                                           |  |                                      | 54        |   |                                      |  
|General and administrative (includes $42 and $57 of related party expenses for accounting and travel, respectively) |  |                                      | 117       |   |                                      |  
|Transfer agent fees                                                                                                 |  |                                      | 28        |   |                                      |  
|Offering expense                                                                                                    |  |                                      | -         |   |                                      |  
|Total operating expenses                                                                                            |  |                                      | 629       |   |                                      |  
|                                                                                                                    |  |                                      |           |   |                                      |  
|Net investment income                                                                                               |  |                                      | 8         |   |                                      |  
|                                                                                                                    |  |                                      |           |   |                                      |  
|Realized and unrealized gain (loss) on investments:                                                                 |  |                                      |           |   |                                      |  
|Net realized gain (loss) from investments                                                                           |  |                                      | (700      | ) |                                      |  
|Net unrealized appreciation (depreciation) on investments                                                           |  |                                      | 1,271     |   |                                      |  
|Net realized and unrealized gain on investments                                                                     |  |                                      | 571       |   |                                      |  
|                                                                                                                    |  |                                      |           |   |                                      |  
|Net increase in net assets resulting from operations                                                                |  | $                                    | 579       |   |                                      | $
|                                                                                                                    |  |                                      |           |   |                                      |  
|Per share information - basic and diluted:                                                                          |  |                                      |           |   |                                      |  
|Net investment income                                                                                               |  | $                                    | 0.00      |   |                                      | $
|Net increase in net assets resulting from operations                                                                |  | $                                    | 0.09      |   |                                      | $
|Weighted average common shares outstanding                                                                          |  | $                                    | 6,196,289 |   |                                      | $





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 Three Months Ended March 31, 2016 |           |   | For the Three Months Ended March 31, 2015 |  
|------------------------------------------------------------------------------------------------ |  | ----------------------------------------- | --------- | - | ----------------------------------------- | -
|                                                                                                 |  |                                           |           |   |                                           |  
|Operations:                                                                                      |  |                                           |           |   |                                           |  
|Net investment income                                                                            |  | $                                         | 8         |   |                                           | $
|Net realized gain (loss) from investments                                                        |  |                                           | (700      | ) |                                           |  
|Net unrealized appreciation (depreciation) on investments                                        |  |                                           | 1,271     |   |                                           |  
|Net increase in net assets from operations                                                       |  |                                           | 579       |   |                                           |  
|Stockholder distributions:                                                                       |  |                                           |           |   |                                           |  
|Distributions from net investment income                                                         |  |                                           | (8        | ) |                                           |  
|Distributions from net realized gain on investments                                              |  |                                           | -         |   |                                           |  
|Distributions from paid in capital                                                               |  |                                           | (1,045    | ) |                                           |  
|Net decrease in net assets from stockholder distributions                                        |  |                                           | (1,053    | ) |                                           |  
|Capital share transactions:                                                                      |  |                                           |           |   |                                           |  
|Issuance of common stock, net of issuance costs                                                  |  |                                           | -         |   |                                           |  
|Reinvestment of stockholder distributions                                                        |  |                                           | 369       |   |                                           |  
|Treasury capital/redemptions                                                                     |  |                                           | -         |   |                                           |  
|Net increase in net assets from capital share transactions                                       |  |                                           | 369       |   |                                           |  
|                                                                                                 |  |                                           |           |   |                                           |  
|Total increase (decrease) in net assets                                                          |  |                                           | (105      | ) |                                           |  
|Net assets at beginning of period                                                                |  |                                           | 28,490    |   |                                           |  
|Net assets at end of period                                                                      |  | $                                         | 28,385    |   |                                           | $
|                                                                                                 |  |                                           |           |   |                                           |  
|Net asset value per common share                                                                 |  | $                                         | 4.56      |   |                                           | $
|Common shares outstanding at end of period                                                       |  | $                                         | 6,223,414 |   |                                           |  
|                                                                                                 |  |                                           |           |   |                                           |  
|Accumulated distribution in excess of net investment income and net realized gain on investments |  | $                                         | (7,742    | ) |                                           | $



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)

(unaudited)



|                                                                                                              |  | For the Three Months 
Ended March 31, 2016 |         |   | For the Three Months 
Ended March 31, 2015 |  
|------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------- | - | ------------------------------------------ | -
|                                                                                                              |  |                                            |         |   |                                            |  
|Operating activities:                                                                                         |  |                                            |         |   |                                            |  
|Net increase in net assets from operations                                                                    |  | $                                          | 579     |   |                                            | $
|Adjustments to reconcile net increase in net assets from operations to net cash used in operating activities: |  |                                            |         |   |                                            |  
|Net accretion of discount on investments                                                                      |  |                                            | (14     | ) |                                            |  
|Repayments from investments                                                                                   |  |                                            | 4,408   |   |                                            |  
|Purchase of investments                                                                                       |  |                                            | (13,583 | ) |                                            |  
|Repayments of investments - money market                                                                      |  |                                            | 7,156   |   |                                            |  
|Purchase of investments - money market                                                                        |  |                                            | (1,385  | ) |                                            |  
|Net realized (gain) loss from investments                                                                     |  |                                            | 700     |   |                                            |  
|Net unrealized (appreciation) depreciation on investments                                                     |  |                                            | (1,271  | ) |                                            |  
|Accretion of deferred loan fees                                                                               |  |                                            | (8      | ) |                                            |  
|(Increase) decrease in operating assets:                                                                      |  |                                            |         |   |                                            |  
|Interest receivable                                                                                           |  |                                            | (232    | ) |                                            |  
|Prepaid expenses                                                                                              |  |                                            | (4      | ) |                                            |  
|Due from related party                                                                                        |  |                                            | (102    | ) |                                            |  
|Receivable for common stock purchased                                                                         |  |                                            | -       |   |                                            |  
|Increase (decrease) in operating liabilities:                                                                 |  |                                            |         |   |                                            |  
|Payable for unsettled trades                                                                                  |  |                                            | -       |   |                                            |  
|Accounts payable and accrued liabilities                                                                      |  |                                            | 69      |   |                                            |  
|Interest payable                                                                                              |  |                                            | 2       |   |                                            |  
|Net cash used in operating activities                                                                         |  |                                            | (3,685  | ) |                                            |  
|                                                                                                              |  |                                            |         |   |                                            |  
|Financing activities:                                                                                         |  |                                            |         |   |                                            |  
|Proceeds from issuance of shares of common stock, net                                                         |  |                                            | -       |   |                                            |  
|Stockholder distributions                                                                                     |  |                                            | (682    | ) |                                            |  
|Treasury stock, net of redemption of common stock                                                             |  |                                            | -       |   |                                            |  
|Borrowings - priority credit lines                                                                            |  |                                            | 7,567   |   |                                            |  
|Repayments - priority credit lines                                                                            |  |                                            | (3,200  | ) |                                            |  
|Net cash provided by financing activities                                                                     |  |                                            | 3,685   |   |                                            |  
|                                                                                                              |  |                                            |         |   |                                            |  
|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                                                                                     |  | $                                          | 121     |   |                                            | $
|Cash distribution payable                                                                                     |  | $                                          | 231     |   |                                            | $
|DRIP distribution paid                                                                                        |  | $                                          | 369     |   |                                            | $



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)

(unaudited)



March 31, 2016



|Portfolio
    Company                                 |  | Industry                                  |  | Investment
                                         Coupon Rate,
                                         Maturity Date |  | Principal
                                         / No. of Shares |        |  | Amortized
    Cost |   |        | Fair
    Value |  |   | %
    of Net Assets | 
|----------------------------------------------------- |  | ----------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------ | ------ |  | ------------------ | - | ------ | -------------- |  | - | ------------------- | 
|Senior Secured First Lien Debt - 46.2% (b)            |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|American Media, Inc.                                  |  | Media: Advertising, Printing & Publishing |  | 11.50%, 12/15/2017                                                                                                      |  | $                                                                  | 1,320  |  |                    | $ | 1,358  |                |  | $ | 1,333               | 
|Ansgar Media, LLC (f)                                 |  | Media: Broadcasting & Subscription        |  | 12.00%, 9/8/2017                                                                                                        |  |                                                                    | 4,000  |  |                    |   | 4,000  |                |  |   | 4,000               | 
|APX Group, Inc.                                       |  | Services: Consumer                        |  | 6.38%, 12/1/2019                                                                                                        |  |                                                                    | 825    |  |                    |   | 825    |                |  |   | 827                 | 
|Caesars Entertainment
    Operating Co., Inc. (a)(d)  |  | Hotel, Gaming & Leisure                   |  | 11.25%, 6/1/2017                                                                                                        |  |                                                                    | 860    |  |                    |   | 751    |                |  |   | 718                 | 
|EarthLink Holdings Corp.                              |  | Telecommunications                        |  | 7.38%, 6/1/2020                                                                                                         |  |                                                                    | 40     |  |                    |   | 41     |                |  |   | 42                  | 
|Goodman Networks, Inc.                                |  | Telecommunications                        |  | 12.13%, 7/1/2018                                                                                                        |  |                                                                    | 800    |  |                    |   | 834    |                |  |   | 245                 | 
|Kratos Defense & Security Solutions, Inc.             |  | Aerospace and Defense                     |  | 7.00%, 5/15/2019                                                                                                        |  |                                                                    | 1,112  |  |                    |   | 989    |                |  |   | 884                 | 
|Landing Cove Investors LLC                            |  | Real Estate                               |  | 12.00%, 4/8/2016                                                                                                        |  |                                                                    | 2,000  |  |                    |   | 2,000  |                |  |   | 2,000               | 
|Ryerson Inc./Joseph T Ryerson & Son, Inc.             |  | Metals & Mining                           |  | 9.00%, 10/15/2017                                                                                                       |  |                                                                    | 1,315  |  |                    |   | 1,350  |                |  |   | 1,130               | 
|Titan International Inc.                              |  | Automoile                                 |  | 6.88%, 10/1/2020                                                                                                        |  |                                                                    | 1,500  |  |                    |   | 1,395  |                |  |   | 1,215               | 
|Toys R Us Property Co II LLC                          |  | Retail                                    |  | 8.50%, 12/1/2017                                                                                                        |  |                                                                    | 725    |  |                    |   | 732    |                |  |   | 708                 | 
|Sub Total Senior Secured
    First Lien Debt          |  |                                           |  |                                                                                                                         |  | $                                                                  | 14,497 |  |                    | $ | 14,275 |                |  | $ | 13,102              | 
|                                                      |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|Senior Secured Second Lien Debt - 7.8% (b)            |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|Aspect Software, Inc.                                 |  | Telecommunications                        |  | 10.63%, 5/15/2017                                                                                                       |  | $                                                                  | 1,302  |  |                    | $ | 1,312  |                |  | $ | 456                 | 
|Claire's Stores, Inc.                                 |  | Retail                                    |  | 8.88%, 3/15/2019                                                                                                        |  |                                                                    | 825    |  |                    |   | 810    |                |  |   | 231                 | 
|Logan's Roadhouse, Inc.                               |  | Beverage, Food & Tobacco                  |  | 10.75%, 10/15/2017                                                                                                      |  |                                                                    | 770    |  |                    |   | 751    |                |  |   | 208                 | 
|Nuverra Environmental Solutions, Inc.                 |  | Environmental Industries                  |  | 9.88%, 4/15/2018                                                                                                        |  |                                                                    | 1,325  |  |                    |   | 1,367  |                |  |   | 1,325               | 
|Saratoga
    Resources, Inc. (d)                      |  | Energy: Oil & Gas                         |  | 12.50%, 7/1/2016                                                                                                        |  |                                                                    | 885    |  |                    |   | 912    |                |  |   | 1                   | 
|Sub Total Senior Secured
    Second Lien Debt         |  |                                           |  |                                                                                                                         |  | $                                                                  | 5,107  |  |                    | $ | 5,152  |                |  | $ | 2,221               | 
|                                                      |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|Senior Unsecured Debt - 20.4% (b)                     |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|APX Group, Inc.                                       |  | Services: Consumer                        |  | 8.75%, 12/1/2020                                                                                                        |  | $                                                                  | 575    |  |                    | $ | 557    |                |  | $ | 496                 | 
|Caesar's Entertainment
    Corp. (a)(d)(g)            |  | Hotel, Gaming & Leisure                   |  | 10.75%, 2/1/2016                                                                                                        |  |                                                                    | 495    |  |                    |   | 451    |                |  |   | 236                 | 
|Clear Channel Communications                          |  | Media: Broadcasting & Subscription        |  | 10.00%, 1/15/2018                                                                                                       |  |                                                                    | 1,400  |  |                    |   | 1,359  |                |  |   | 461                 | 
|Colt Defense LLC                                      |  | Aerospace and Defense                     |  | 8.00%, 12/15/2020                                                                                                       |  |                                                                    | 132    |  |                    |   | 1,030  |                |  |   | 132                 | 
|DynCorp International Inc.                            |  | Aerospace and Defense                     |  | 10.38%, 7/1/2017                                                                                                        |  |                                                                    | 1,135  |  |                    |   | 1,142  |                |  |   | 908                 | 
|EarthLink Holdings Corp.                              |  | Telecommunications                        |  | 8.88%, 5/15/2019                                                                                                        |  |                                                                    | 279    |  |                    |   | 274    |                |  |   | 282                 | 
|Gymboree Corp.                                        |  | Retail                                    |  | 9.13%, 12/1/2018                                                                                                        |  |                                                                    | 810    |  |                    |   | 777    |                |  |   | 259                 | 
|Ryerson Inc./Joseph T Ryerson & Son, Inc.             |  | Metals & Mining                           |  | 11.25%, 10/15/2018                                                                                                      |  |                                                                    | 1,500  |  |                    |   | 1,525  |                |  |   | 1,005               | 
|Seitel, Inc.                                          |  | Energy: Oil & Gas                         |  | 9.50%, 4/15/2019                                                                                                        |  |                                                                    | 1,575  |  |                    |   | 1,574  |                |  |   | 1,032               | 
|Suntech Power Holdings
    Company, Ltd. (a)(c)(d)(g) |  | Environmental Industries                  |  | 3.00%, 5/15/2013                                                                                                        |  |                                                                    | 100    |  |                    |   | 111    |                |  |   | 1                   | 
|Toys R Us Inc.                                        |  | Retail                                    |  | 10.38%, 8/15/2017                                                                                                       |  |                                                                    | 860    |  |                    |   | 820    |                |  |   | 785                 | 
|UCI
    International Inc (d)                         |  | Automobile                                |  | 8.63%, 2/15/2019                                                                                                        |  |                                                                    | 1,400  |  |                    |   | 1,354  |                |  |   | 210                 | 
|Sub Total Senior Unsecured
    Debt                   |  |                                           |  |                                                                                                                         |  | $                                                                  | 10,261 |  |                    | $ | 10,974 |                |  | $ | 5,807               | 
|                                                      |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|Senior Subordinated Debt - 5.2% (b)                   |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|Claires Stores, Inc                                   |  | Retail                                    |  | 10.50%, 6/1/2017                                                                                                        |  | $                                                                  | 715    |  |                    | $ | 713    |                |  | $ | 393                 | 
|DJO Finance, LLC.                                     |  | Healthcare & Pharmaceuticals              |  | 10.75%, 4/15/2020                                                                                                       |  |                                                                    | 1,265  |  |                    |   | 1,320  |                |  |   | 1,075               | 
|QuickSilver
    Resources, Inc.(d)                    |  | Energy: Oil & Gas                         |  | 7.13%, 4/1/2016                                                                                                         |  |                                                                    | 890    |  |                    |   | 843    |                |  |   | -                   | 
|Sub Total Senior Subordinated
    Debt                |  |                                           |  |                                                                                                                         |  | $                                                                  | 2,870  |  |                    | $ | 2,876  |                |  | $ | 1,468               | 
|                                                      |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|Equity Securities - 13.2% (b)                         |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|Affinion Group, Inc.
    (d)                          |  | Media: Advertising, Printing & Publishing |  |                                                                                                                         |  |                                                                    | 13     |  |                    | $ | 689    |                |  | $ | 816                 | 
|Aspire Holdings (d)                                   |  | Energy: Oil & Gas                         |  |                                                                                                                         |  |                                                                    | 5      |  |                    |   | 551    |                |  |   | 525                 | 
|Education Management
    LLC (d)                      |  | Services: Consumer                        |  |                                                                                                                         |  |                                                                    | 2,530  |  |                    |   | 4      |                |  |   | 202                 | 
|NII Holdings, Inc. (a)(d)                             |  | Telecommunications                        |  |                                                                                                                         |  |                                                                    | 17     |  |                    |   | 768    |                |  |   | 92                  | 
|Total Common Stock                                    |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   | 2,012  |                |  |   | 1,635               | 
|                                                      |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|Ansgar
    Media, LLC - Class B Units (d)(f)(h)       |  | Media: Broadcasting & Subscription        |  |                                                                                                                         |  |                                                                    | 3      |  |                    |   | -      |                |  |   | 2,102               | 
|Relativity
    Media, LLC - Class E Units (d)(e)      |  | Media: Broadcasting & Subscription        |  |                                                                                                                         |  |                                                                    | 832    |  |                    |   | 10,400 |                |  |   | -                   | 
|Total
    Preferred Stock                             |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   | 10,400 |                |  |   | 2,102               | 
|                                                      |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|Education Management
    LLC(d)                       |  | Services: Consumer                        |  |                                                                                                                         |  |                                                                    | 1,554  |  |                    |   | 876    |                |  |   | -                   | 
|Total Warrants                                        |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   | 876    |                |  |   | -                   | 
|                                                      |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|Sub Total Equity Securities                           |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    | $ | 13,288 |                |  | $ | 3,737               | 
|                                                      |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|U.S. Government Securities - 35.8% (b)                |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|U.S. Treasury Note                                    |  |                                           |  | 0.96%, 10/31/2017                                                                                                       |  | $                                                                  | 3,000  |  |                    | $ | 2,990  |                |  | $ | 3,001               | 
|U.S. Treasury Bill                                    |  |                                           |  | 0.39%, 10/13/2016                                                                                                       |  |                                                                    | 2,200  |  |                    |   | 2,195  |                |  |   | 2,197               | 
|U.S. Treasury Bill                                    |  |                                           |  | 0.18%, 4/28/2016                                                                                                        |  |                                                                    | 4,950  |  |                    |   | 4,949  |                |  |   | 4,949               | 
|Sub Total U.S. Government
    Securities              |  |                                           |  |                                                                                                                         |  | $                                                                  | 10,150 |  |                    | $ | 10,134 |                |  | $ | 10,147              | 
|                                                      |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|Investments - Money Market - 1.5% (b)                 |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|Investments - Morgan Stanley Money Market             |  |                                           |  | 0.01%                                                                                                                   |  | $                                                                  | 144    |  |                    | $ | 144    |                |  | $ | 144                 | 
|Investments - U.S. Bank Money Market                  |  |                                           |  | 0.10%                                                                                                                   |  |                                                                    | 8      |  |                    |   | 8      |                |  |   | 8                   | 
|Investments - Wells Fargo Money Market                |  |                                           |  | 0.01%                                                                                                                   |  |                                                                    | 287    |  |                    |   | 287    |                |  |   | 287                 | 
|Sub Total Investments -
    Money Market              |  |                                           |  |                                                                                                                         |  | $                                                                  | 439    |  |                    | $ | 439    |                |  | $ | 439                 | 
|                                                      |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    |   |        |                |  |   |                     | 
|TOTAL INVESTMENTS - 130.1%
    (b)                    |  |                                           |  |                                                                                                                         |  |                                                                    |        |  |                    | $ | 57,138 |                |  | $ | 36,921              | 



| | (a) | Represents a non-qualifying investment as defined under
Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying investments represent 2.8% 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 $28,385 as of
March 31, 2016.
| | --- | --------------------------------------------------------------------

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

| | (d) | Non-income producing as of March 31, 2016.
| | --- | ------------------------------------------

| | (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. We stopped accruing dividends starting July 30, 2015
when Relativity Media LLC and certain of its subsidiaries filed voluntarily petitions under Chapter 11 of the United States Bankruptcy
Code.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (g) | In maturity default.
| | --- | --------------------

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



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, 2015



|Portfolio Company                                |  | Industry                                  |  | Investment
    
Coupon Rate, Maturity Date |  | Principal
    / No. of Shares |        |  | Amortized
    Cost |   |        | Fair
    Value |  |   | %
    of Net Assets | 
|------------------------------------------------ |  | ----------------------------------------- |  | ------------------------------------------ |  | ----------------------------- | ------ |  | ------------------ | - | ------ | -------------- |  | - | ------------------- | 
|Senior Secured First Lien Debt - 31.6% (b)       |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|American Media, Inc.                             |  | Media: Advertising, Printing & Publishing |  | 11.50%, 12/15/2017                         |  | $                             | 1,320  |  |                    | $ | 1,363  |                |  | $ | 1,300               | 
|Ansgar Media, LLC (f)                            |  | Media: Broadcasting & Subscription        |  | 12.00%, 9/8/2017                           |  |                               | 2,000  |  |                    |   | 2,000  |                |  |   | 2,000               | 
|APX Group, Inc.                                  |  | Services: Consumer                        |  | 6.38%, 12/1/2019                           |  |                               | 825    |  |                    |   | 825    |                |  |   | 796                 | 
|Caesars Entertainment Operating Co., Inc. (a)(d) |  | Hotel, Gaming & Leisure                   |  | 11.25%, 6/1/2017                           |  |                               | 860    |  |                    |   | 751    |                |  |   | 639                 | 
|EarthLink Holdings Corp.                         |  | Telecommunications                        |  | 7.38%, 6/1/2020                            |  |                               | 40     |  |                    |   | 41     |                |  |   | 41                  | 
|Endeavour International Corp. (d)                |  | Energy: Oil & Gas                         |  | 12.00%, 3/1/2018                           |  |                               | 525    |  |                    |   | 551    |                |  |   | 525                 | 
|Goodman Networks, Inc.                           |  | Telecommunications                        |  | 12.13%, 7/1/2018                           |  |                               | 800    |  |                    |   | 837    |                |  |   | 216                 | 
|Kratos Defense & Security Solutions, Inc.        |  | Aerospace and Defense                     |  | 7.00%, 5/15/2019                           |  |                               | 1,112  |  |                    |   | 981    |                |  |   | 758                 | 
|Ryerson Inc./Joseph T Ryerson & Son, Inc.        |  | Metals & Mining                           |  | 9.00%, 10/15/2017                          |  |                               | 1,315  |  |                    |   | 1,355  |                |  |   | 1,018               | 
|Titan International Inc.                         |  | Automoile                                 |  | 6.88%, 10/1/2020                           |  |                               | 1,500  |  |                    |   | 1,390  |                |  |   | 1,095               | 
|Toys R Us Property Co II LLC                     |  | Retail                                    |  | 8.50%, 12/1/2017                           |  |                               | 725    |  |                    |   | 732    |                |  |   | 620                 | 
|Sub Total Senior Secured
    First Lien Debt     |  |                                           |  |                                            |  | $                             | 11,022 |  |                    | $ | 10,826 |                |  | $ | 9,008               | 
|                                                 |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|Senior Secured Second Lien  Debt -
    6.3% (b)  |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|Aspect Software, Inc.                            |  | Telecommunications                        |  | 10.63%, 5/15/2017                          |  | $                             | 1,302  |  |                    | $ | 1,314  |                |  | $ | 1,016               | 
|Claire’s Stores, Inc.                            |  | Retail                                    |  | 8.88%, 3/15/2019                           |  |                               | 825    |  |                    |   | 809    |                |  |   | 190                 | 
|Endeavour International Corp. (d)                |  | Energy: Oil & Gas                         |  | 12.00%, 6/1/2018                           |  |                               | 725    |  |                    |   | 708    |                |  |   | 8                   | 
|Logan’s Roadhouse, Inc.                          |  | Beverage, Food & Tobacco                  |  | 10.75%, 10/15/2017                         |  |                               | 770    |  |                    |   | 748    |                |  |   | 531                 | 
|Saratoga Resources, Inc.
    (d)                 |  | Energy: Oil & Gas                         |  | 12.50%, 7/1/2016                           |  |                               | 885    |  |                    |   | 912    |                |  |   | 44                  | 
|Sub Total Senior Secured
    Second Lien Debt    |  |                                           |  |                                            |  | $                             | 4,507  |  |                    | $ | 4,491  |                |  | $ | 1,789               | 
|                                                 |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|Senior Unsecured Debt - 22.0% (b)                |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|APX Group, Inc.                                  |  | Services: Consumer                        |  | 8.75%, 12/1/2020                           |  | $                             | 575    |  |                    | $ | 556    |                |  | $ | 472                 | 
|Caesar’s Entertainment Corp. (a)(d)              |  | Hotel, Gaming & Leisure                   |  | 10.75%, 2/1/2016                           |  |                               | 495    |  |                    |   | 451    |                |  |   | 126                 | 
|Clear Channel Communications                     |  | Media: Broadcasting & Subscription        |  | 10.00%, 1/15/2018                          |  |                               | 1,400  |  |                    |   | 1,354  |                |  |   | 539                 | 
|Colt Defense LLC (d)                             |  | Aerospace and Defense                     |  | 8.75%, 11/15/2017                          |  |                               | 1,253  |  |                    |   | 1,029  |                |  |   | 132                 | 
|DynCorp International Inc.                       |  | Aerospace and Defense                     |  | 10.38%, 7/1/2017                           |  |                               | 1,135  |  |                    |   | 1,143  |                |  |   | 846                 | 
|EarthLink Holdings Corp.                         |  | Telecommunications                        |  | 8.88%, 5/15/2019                           |  |                               | 279    |  |                    |   | 274    |                |  |   | 284                 | 
|Gymboree Corp.                                   |  | Retail                                    |  | 9.13%, 12/1/2018                           |  |                               | 810    |  |                    |   | 774    |                |  |   | 182                 | 
|Nuverra Environmental Solutions, Inc.            |  | Environmental Industries                  |  | 9.88%, 4/15/2018                           |  |                               | 1,325  |  |                    |   | 1,351  |                |  |   | 457                 | 
|Ryerson Inc./Joseph T Ryerson & Son, Inc.        |  | Metals & Mining                           |  | 11.25%, 10/15/2018                         |  |                               | 1,500  |  |                    |   | 1,528  |                |  |   | 1,117               | 
|Seitel, Inc.                                     |  | Energy: Oil & Gas                         |  | 9.50%, 4/15/2019                           |  |                               | 1,575  |  |                    |   | 1,574  |                |  |   | 1,016               | 
|Suntech Power Holdings Company, Ltd. (a)(c)(d)   |  | Environmental Industries                  |  | 3.00%, 5/15/2013                           |  |                               | 100    |  |                    |   | 109    |                |  |   | -                   | 
|Toys R Us Inc.                                   |  | Retail                                    |  | 10.38%, 8/15/2017                          |  |                               | 860    |  |                    |   | 820    |                |  |   | 619                 | 
|UCI International Inc                            |  | Automobile                                |  | 8.63%, 2/15/2019                           |  |                               | 1,400  |  |                    |   | 1,367  |                |  |   | 483                 | 
|Sub Total Senior Unsecured
    Debt              |  |                                           |  |                                            |  | $                             | 12,707 |  |                    | $ | 12,330 |                |  | $ | 6,273               | 
|                                                 |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|Senior Subordinated Debt - 5.2% (b)              |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|Claires Stores, Inc                              |  | Retail                                    |  | 10.50%, 6/1/2017                           |  | $                             | 715    |  |                    | $ | 713    |                |  | $ | 357                 | 
|DJO Finance, LLC.                                |  | Healthcare & Pharmaceuticals              |  | 10.75%, 4/15/2020                          |  |                               | 1,265  |  |                    |   | 1,322  |                |  |   | 1,139               | 
|QuickSilver Resources,
    Inc. (d)              |  | Energy: Oil & Gas                         |  | 7.13%, 4/1/2016                            |  |                               | 890    |  |                    |   | 843    |                |  |   | -                   | 
|Sub Total Senior Subordinated
    Debt           |  |                                           |  |                                            |  | $                             | 2,870  |  |                    | $ | 2,878  |                |  | $ | 1,496               | 
|                                                 |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|Equity Securities - 11.3% (b)                    |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|Affinion Group, Inc. (d)                         |  | Media: Advertising, Printing & Publishing |  |                                            |  | $                             | 13     |  |                    | $ | 689    |                |  | $ | 816                 | 
|Ansgar Media, LLC (d)(f)                         |  | Media: Broadcasting & Subscription        |  |                                            |  |                               | -      |  |                    |   | -      |                |  |   | 2,102               | 
|Education Management LLC (d)                     |  | Services: Consumer                        |  |                                            |  |                               | 2,530  |  |                    |   | 5      |                |  |   | 177                 | 
|NII Holdings, Inc. (a)(d)                        |  | Telecommunications                        |  |                                            |  |                               | 17     |  |                    |   | 768    |                |  |   | 84                  | 
|Total Common Stock                               |  |                                           |  |                                            |  |                               |        |  |                    |   | 1,462  |                |  |   | 3,179               | 
|                                                 |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|Relativity Media, LLC
    (d)(e)                 |  | Media: Broadcasting & Subscription        |  |                                            |  |                               | 855    |  |                    |   | 10,400 |                |  |   | -                   | 
|Total
    Preferred Stock                        |  |                                           |  |                                            |  |                               |        |  |                    |   | 10,400 |                |  |   | -                   | 
|                                                 |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|Education Management LLC (d)                     |  | Services: Consumer                        |  |                                            |  |                               | 1,554  |  |                    |   | 876    |                |  |   | 31                  | 
|Total
    Warrants                               |  |                                           |  |                                            |  |                               |        |  |                    |   | 876    |                |  |   | 31                  | 
|                                                 |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|Sub Total Equity Securities                      |  |                                           |  |                                            |  |                               |        |  |                    | $ | 12,738 |                |  | $ | 3,210               | 
|                                                 |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|U.S. Government Securities -17.4% (b)            |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|U.S. Treasury Bill                               |  |                                           |  | 0.18%, 4/28/2016                           |  | $                             | 4,950  |  |                    | $ | 4,947  |                |  | $ | 4,946               | 
|Sub Total U.S. Government
    Securities         |  |                                           |  |                                            |  | $                             | 4,950  |  |                    | $ | 4,947  |                |  | $ | 4,946               | 
|                                                 |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|Investments - Money Market - 21.8% (b)           |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|Investments - Morgan Stanley Money Market        |  |                                           |  | 0.01%                                      |  | $                             | 3,191  |  |                    | $ | 3,191  |                |  | $ | 3,191               | 
|Investments - U.S. Bank Money Market             |  |                                           |  | 0.02%                                      |  |                               | -      |  |                    |   | -      |                |  |   | -                   | 
|Investments - Wells Fargo Money Market           |  |                                           |  | 0.01%                                      |  |                               | 3,019  |  |                    |   | 3,019  |                |  |   | 3,019               | 
|Sub Total Investments -
    Money Market         |  |                                           |  |                                            |  | $                             | 6,210  |  |                    | $ | 6,210  |                |  | $ | 6,210               | 
|                                                 |  |                                           |  |                                            |  |                               |        |  |                    |   |        |                |  |   |                     | 
|TOTAL INVESTMENTS - 115.6%
    (b)               |  |                                           |  |                                            |  |                               |        |  |                    | $ | 54,420 |                |  | $ | 32,932              | 



| | (a) | Represents a non-qualifying investment as defined under
Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying investments represent 2.6% of the Fund’s
portfolio at fair value. As a BDC, the Fund can only invest 30% of its portfolio in non-qualifying assets.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Percentages are based on net assets of $28,490 as of
December 31, 2015.
| | --- | -----------------------------------------------------------------------

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

| | (d) | Non-income producing as of December 31, 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. We stopped accruing dividends starting July 30, 2015
when Relativity Media LLC and certain of its subsidiaries filed voluntarily petitions under Chapter 11 of the United States Bankruptcy
Code.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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



8







VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



NOTES TO FINANCIAL STATEMENTS



March 31, 2016



(unaudited)



Note 1.  Nature of Operations



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



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



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



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



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



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



Between 2001 and 2008,
corporate debt levels and the supply of leverage offered by banks and other investors began a steady increase. Since then, corporate
debt has continued to increase, with the financing sources less available. We believe a significant amount of this debt will be
subject to a redemption event prior to 2021. Many of the companies that have outstanding issues of such debt have not, or been
unable to proactively refinance, creating a “refinancing wall” that we believe will create a liquidity shortfall for
many issuers. The value of the debt securities of these companies as reflected in prices quoted in the secondary loan market, may
be at a significant discount to par, and represent a premium yield to maturity reflective of these liquidity concerns, creating
the opportunity for us to identify and invest in the debt securities of select companies at attractive current market valuations.
We believe that our Co-OptivistTM approach can help our target companies achieve results that are beneficial to the
long-term value of their businesses, which will in turn, result in capital gains through capital appreciation, or the exchange
of invested securities into a current security or cash at a premium to its acquisition price. Our principals collectively have
experience in principal investing, debt securities and general capital markets, and we believe we are well-positioned to capitalize
on these opportunities.





9







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



On August 9, 2011,
we filed a registration statement on Form N-2 to sell up to 75,000,000 shares of common stock, $0.001 par value per share, at an
initial public offering price of $10.00 per share. The registration statement was declared effective by the SEC on March 1, 2012.
We commenced operations when we raised gross offering proceeds of over $1.0 million, all of which was from persons who were not
affiliated with us or our manager by one year from the date the registration statement was declared effective by the SEC. Prior
to the successful satisfaction of that condition, all subscription payments were placed in an account held by the escrow agent,
UMB Bank, N.A., in trust for the benefit of our subscribers, pending release to us. We achieved the minimum offering requirement
on July 10, 2012 and commenced operations on such date. As of March 31, 2016, we issued 6.5 million shares of common stock, including
0.4 million shares under our distribution reinvestment plan (“DRIP”) and less 0.3 million shares redeemed under our
tender offer. Gross proceeds from our common stock issuances total $64.6 million, including $3.8 million under our DRIP less $2.9
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 for the year ended December 31, 2015, which was filed with the SEC on April 14,
2016. 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, 2016.



Use of Estimates in the Preparation of Financial Statements



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



Investments – Money Market



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



Investment Classification



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



Organizational and Offering Costs



The Fund is
a closed-end fund with a continuous offering period. Under the investment advisory agreement between the Fund and the
Manager, our Manager fronts the initial cost of the organizational and offering expenses 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. Organizational costs are expensed as incurred, and offering costs are deducted from
offering proceeds.



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.





10







The Fund has
evaluated the implications of Accounting Standards Codification (“ASC”) Topic 740, Accounting for Income
Taxes, (“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 2015.



New Accounting Pronouncements







In February 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Amendments to the
Leases - FASB ASC Topic 842”, which will require for all operating leases the recognition of a right-of-use asset and a lease
liability, in the statement of financial position. The lease cost will be allocated over the lease term on a straight-line basis.
This guidance is effective for annual and interim periods beginning after December 15, 2018. Management is currently evaluating
the impact this guidance will have on the Fund’s financial statements.



In January 2016, the FASB issued ASU No.
2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, which will significantly change
the income statement impact of equity investments, and the recognition of changes in fair value of financial liabilities. This
guidance is effective for annual and interim periods beginning after December 15, 2017. Management is currently evaluating the
impact this guidance will have on the Fund’s financial statements.



In May 2015, the FASB issued 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 the Fund’s financial statements.



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 August 2015, the FASB issued ASU 2015-14 which defers the effective date
of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting
period.





Revenue Recognition



We generate
investment income in the form of interest, dividend and fees earned on senior secured loans, senior secured notes,
subordinated debt, senior unsecured debt 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. The Fund stops accruing upon
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.



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.



Our
total investment income was $0.6 million for the three months ended March 31, 2016, as compared to $0.9 million for the
three months ended March 31, 2015, respectively. The decrease in 2016 as compared to 2015 was attributable to an increase in
debt investments placed on non-accrual status, restructuring of certain debt investments into equity investments as well as
a reallocation of portfolio investments from debt investments to preferred stock investments in 2015. At March 31, 2016,
the weighted average coupon yield was 7.1%, as compared to 8.9% as of March 31, 2015. Based on current and prior
three quarter’s net assets, average net assets as of March 31, 2016 were $35.4 million, as compared to $39.0 million as
of March 31, 2015.



For the
three months ended March 31, 2016, thirteen 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 thirteen investments are Caesars Entertainment Corp, 11.25%,
June 1, 2017; Caesars Entertainment Corp, 10.75%, February 1, 2016; QuickSilver Resources, Inc., 7.13%, April 1, 2016;
Saratoga Resources, Inc., 12.50%, July 1, 2016; Suntech Power Holdings Company, Ltd., 3%, May 15, 2013; UCI International,
Inc., 8.625%, February 15, 2019; Affinion Group, common stock; Ansgar Media, LLC, Class B Units; Aspire
Holdings, LLC, common stock (converted from exchange of 12.00% Endeavour International Corp First Lien Bonds); Education
Management, LLC, common stock and warrant; NII Holdings, Inc., common stock; and Relativity Media LLC, preferred stock. These
instruments do not accrue or pay interest or dividends.



Expense Reimbursement Agreement



The Fund entered into
an expense reimbursement agreement with the prior manager under which the prior manager agreed to reimburse the Fund for certain
U.S. GAAP compliant expenses recognized on the 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 the Fund
to offset the related receivables from and payables to each other resulting in a net receivable, or payable position. The prior
manager was not obligated to reimburse the Fund in 2015 and 2014.





11







On August
20, 2013, the Fund terminated the investment management agreement and expense reimbursement agreement with the prior manager,
and entered into a new investment management agreement with the current Manager. The current Manager has not entered into
an expense reimbursement agreement with the Fund, but agreed to assume the prior manager’s obligation to pay the
$1.3 million which had accrued under the prior manager’s expense reimbursement agreement. During the year ended
December 31, 2014, our manager paid in full the Due from related party balance of $1.3 million. In consideration for such
assumption, the Fund has agreed to pay the current Manager any amounts otherwise due to the prior manager for organization
and offering expenses funded by the 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.



As of March 31, 2016, the Manager had accrued
$0.01 million in Expense reimbursement, which is included in Due from related party on the statements of assets and liabilities.



As of December 31, 2015, the Manager had
accrued $0.01 million in Expense reimbursement, which is included in Due from related party on the statements of assets and liabilities.



Note 3. Valuation of Portfolio Investments



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



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



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



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



Level 3: Unobservable inputs
for the asset or liability.



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. Twenty-nine of
the thirty-nine investments were valued using the closing market price at period end March 31, 2016. The exceptions were the
common stock equity investment for Affinion Group; the two investments in Ansgar Media, LLC, Class B
Units and a note with a 12.00% interest rate and maturity date of September 8, 2017; the common stock equity investment in
Aspire Holdings, LLC (converted from exchange of 12.00% Endeavour International Corp First Lien Bonds); a 8.00% senior
unsecured note of Colt Defense LLC, due December 15, 2020; the two equity investments in Education Management LLC, a common
stock and a warrant; a 12.00% senior secured first lien note of Landing Cove, LLC, due April 8, 2016 (see Note 11. Subsequent
Events); a 9.88% senior secured second lien note of Nuverra Environmental Solutions, Inc., due April 15, 2018; and
the preferred equity investment for Relativity Media, LLC.



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



| | · | the quarterly valuation process begins
        with each portfolio company or investment being initially valued by members of the investment committee, with such valuation taking
        into account information received from an independent valuation firm, if applicable;                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | preliminary valuation conclusions are then
        documented and discussed with the members of the Board of Directors, or committee thereof; and                                                                                                                                                                                  
| | · | the Board of Directors, or committee thereof, discusses valuations and determines the fair value of each investment in the portfolio in good faith based on various statistical and other factors, including the input and recommendation of members of the investment committee and any third-party valuation firm, if applicable.





12







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.



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



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



|                                |  | Level 1 |     |  | Level 2 |   |        | Level 3 |  |   | Total  | 
|------------------------------- |  | ------- | --- |  | ------- | - | ------ | ------- |  | - | ------ | 
|Investments – Money Market      |  | $       | 439 |  |         | $ | —      |         |  | $ | —      | 
|Senior Secured First Lien Debt  |  |         | —   |  |         |   | 7,102  |         |  |   | 6,000  | 
|Senior Secured Second Lien Debt |  |         | —   |  |         |   | 896    |         |  |   | 1,325  | 
|Senior Unsecured Debt           |  |         | —   |  |         |   | 5,675  |         |  |   | 132    | 
|Senior Subordinated Debt        |  |         | —   |  |         |   | 1,468  |         |  |   | —      | 
|U.S. Government Securities      |  |         | —   |  |         |   | 10,147 |         |  |   | —      | 
|Equity Securities               |  |         | —   |  |         |   | 92     |         |  |   | 3,645  | 
|Total                           |  | $       | 439 |  |         | $ | 25,380 |         |  | $ | 11,102 | 



The following table presents fair value
measurements of investments, by major class, as of December 31, 2015 according to the fair value hierarchy (dollars in thousands):



|                                |  | Level 1 |       |  | Level 2 |   |        | Level 3 |  |   | Total | 
|------------------------------- |  | ------- | ----- |  | ------- | - | ------ | ------- |  | - | ----- | 
|Investments – Money Market      |  | $       | 6,210 |  |         | $ | —      |         |  | $ | —     | 
|Senior Secured First Lien Debt  |  |         | —     |  |         |   | 6,483  |         |  |   | 2,525 | 
|Senior Secured Second Lien Debt |  |         | —     |  |         |   | 1,781  |         |  |   | 8     | 
|Senior Unsecured Debt           |  |         | —     |  |         |   | 6,141  |         |  |   | 132   | 
|Senior Subordinated Debt        |  |         | —     |  |         |   | 1,496  |         |  |   | —     | 
|U.S. Government Securities      |  |         | —     |  |         |   | 4,946  |         |  |   | —     | 
|Equity Securities               |  |         | —     |  |         |   | 84     |         |  |   | 3,126 | 
|Total                           |  | $       | 6,210 |  |         | $ | 20,931 |         |  | $ | 5,791 | 



There was one
transfer between levels for the three months ended March 31, 2016. Nuverra Environmental Solutions, Inc.’s
original 9.875% senior unsecured notes due April 15, 2018, got exchanged for the 12.50% second lien notes due April 15, 2021,
at $1,000 for every $1,000 of old notes. Although the restructuring process completed after March 31, 2016, the plan for
reorganization was already proposed and executed piror to quarter end.





During the three months ended March 31,
2016, the following was the transfers in or out of levels (dollars in thousands):



|                                |  | Level 1 |   |  | Level 2 |   |        | Level 3 |  |   | Total | 
|------------------------------- |  | ------- | - |  | ------- | - | ------ | ------- |  | - | ----- | 
|Senior Secured Second Lien Debt |  | $       | - |  |         | $ | (1,325 | )       |  | $ | 1,325 | 
|Total                           |  | $       | - |  |         | $ | (1,325 | )       |  | $ | 1,325 | 







There were two transfers
between levels for the year ended December 31, 2015. One transfer was Affinion Group, Inc., originally, 13.5%, August 15, 2018.
The interest bearing note was restructured by the company to a non-interest bearing private equity holding and hence transferred
to Level 3. The other transfers was Colt Defence, LLC, originally 8.75% senior unsecured notes, due November 15, 2017 which got
exchanged for the 8.00% senior unsecured notes due December 15, 2020 at $105.08 for every $1,000 of old notes. Although the restructuring
process completed after December 31, 2015, the plan for reorganization was already proposed prior to year end.



During the year ended December 31, 2015,
the following were the transfers in or out of levels (dollars in thousands):



|                         |  | Level 1 |   |  | Level 2 |   |      | Level 3 |  |   | Total | 
|------------------------ |  | ------- | - |  | ------- | - | ---- | ------- |  | - | ----- | 
|Senior Unsecured Debt    |  | $       | — |  |         | $ | (132 | )       |  | $ | 132   | 
|Senior Subordinated Debt |  |         | — |  |         |   | (816 | )       |  |   | —     | 
|Equity Securities        |  |         | — |  |         |   | —    |         |  |   | 816   | 
|Total                    |  | $       | — |  |         | $ | (948 | )       |  | $ | 948   | 



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.





13







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





|                                    |  | Fair
    Value at December 31, 2015 |       |  | Transfers
    in/out |   |       | Reclassification |  |   | Purchases
    (Sales and Settlement) |   |  | Amortization
    and Accretion of Fixed Income Premiums and Discounts |       |   | Realized
    and Unrealized Gains (Losses) |   |    | Fair
    Value at March 31, 2016 |  |   | Change
    in Unrealized Gains and (Losses) for Investments held as of March 31, 2016 |  
|----------------------------------- |  | ----------------------------------- | ----- |  | -------------------- | - | ----- | ---------------- |  | - | ------------------------------------ | - |  | --------------------------------------------------------------------- | ----- | - | ------------------------------------------ | - | -- | -------------------------------- |  | - | ------------------------------------------------------------------------------------- | -
|Senior Secured First Lien
    Debt  |  | $                                   | 2,525 |  |                      | $ | -     |                  |  | $ | (525                                 | ) |  | $                                                                     | 4,000 |   |                                            | $ | -  |                                  |  | $ | -                                                                                     |  
|Senior Secured Second Lien
    Debt |  |                                     | 8     |  |                      |   | 1,325 |                  |  |   | -                                    |   |  |                                                                       | (8    | ) |                                            |   | 16 |                                  |  |   | (16                                                                                   | )
|Senior Unsecured Debt               |  |                                     | 132   |  |                      |   | -     |                  |  |   | -                                    |   |  |                                                                       | -     |   |                                            |   | 1  |                                  |  |   | (1                                                                                    | )
|Equity
    Securities               |  |                                     | 3,126 |  |                      |   | -     |                  |  |   | 525                                  |   |  |                                                                       | -     |   |                                            |   | -  |                                  |  |   | (6                                                                                    | )
|Total                               |  | $                                   | 5,791 |  |                      | $ | 1,325 |                  |  | $ | -                                    |   |  | $                                                                     | 3,992 |   |                                            | $ | 17 |                                  |  | $ | (23                                                                                   | )
|                                    |  |                                     |       |  |                      |   |       |                  |  |   |                                      |   |  |                                                                       |       |   |                                            |   |    |                                  |  |   |                                                                                       |  



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



Realized
and unrealized gains and losses are included in net realized gain or loss on investments and net change in unrealized gain
(loss) on investments in the statement of operations. The change in unrealized losses for Level 3 investments still held as
of March 31, 2016 of $23 thousand is included in net change in net unrealized loss on investments in the statement of
changes in net assets for the three months March 31, 2016.



Changes in Level 3 assets measured at fair
value for the year ended December 31, 2015 are as follows  (dollars in thousands):



|                                |  | Fair
    Value at December 31, 2014 |       |  | Transfers
    in/(out) |   |     | Purchases(Sales andSettlement)
    (1) |  |   | Amortization
    and Accretion of Fixed Income Premiums and Discounts |  |  | Realized
    and Unrealized Gains (Losses) |     |   | Fair
    Value at December 31, 2015 |   |        | Change
    in Unrealized Gains and (Losses) for Investments held as of December 31, 2015 | 
|------------------------------- |  | ----------------------------------- | ----- |  | ---------------------- | - | --- | -------------------------------------- |  | - | --------------------------------------------------------------------- |  |  | ------------------------------------------ | --- | - | ----------------------------------- | - | ------ | ---------------------------------------------------------------------------------------- | 
|Senior Secured First Lien Debt  |  | $                                   | 578   |  |                        | $ | —   |                                        |  | $ | 2,000                                                                 |  |  | $                                          | —   |   |                                     | $ | (53    | )                                                                                        | 
|Senior Secured Second Lien Debt |  |                                     | 239   |  |                        |   | —   |                                        |  |   | —                                                                     |  |  |                                            | —   |   |                                     |   | (231   | )                                                                                        | 
|Senior Unsecured Debt           |  |                                     | —     |  |                        |   | 132 |                                        |  |   | —                                                                     |  |  |                                            | (43 | ) |                                     |   | 43     |                                                                                          | 
|Equity Securities               |  |                                     | 874   |  |                        |   | 816 |                                        |  |   | 10,400                                                                |  |  |                                            | (18 | ) |                                     |   | (8,946 | )                                                                                        | 
|Total                           |  | $                                   | 1,691 |  |                        | $ | 948 |                                        |  | $ | 12,400                                                                |  |  | $                                          | (61 | ) |                                     | $ | (9,187 | )                                                                                        | 



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. The change in unrealized gains for Level 3 investments still held as of December 31, 2015 of $(9.2)
million is included in net change in net unrealized gain (loss) on investments in the statement of changes in net assets for the
year ended December 31, 2015.



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



|                                |  |                |       |  |                         |             |                        |                                           |      |   |       | Range   | 
|------------------------------- |  | -------------- | ----- |  | ----------------------- | ----------- | ---------------------- | ----------------------------------------- | ---- | - | ----- | ------- | 
|                                |  | Fair
    Value |       |  | Valuation
    Technique |             | Unobservable
    Input |                                           | Mean |   |       | Minimum | 
|Senior Secured First Lien Debt  |  | $              | 6,000 |  |                         | Liquidation |                        | Transaction Value                         |      | $ | 6,000 |         | 
|Senior Secured Second Lien Debt |  |                | 1,325 |  |                         | Liquidation |                        | Transaction Value                         |      |   | 1,325 |         | 
|Senior Unsecured Debt           |  |                | 132   |  |                         | Liquidation |                        | Transaction Value                         |      |   | 132   |         | 
|Equity
    Securities           |  |                | 3,645 |  |                         | Liquidation |                        | Transaction Value / Discounted Cash Flows |      |   | 9,674 |         | 
|Total                           |  | $              | 9,777 |  |                         |             |                        |                                           |      |   |       |         | 





14







The following table provides quantitative
information regarding Level 3 fair value measurements as of December 31, 2015 (dollars in thousands):



|                                    |  |                |       |  |                         |             |                        |                                           |      |   |       | Range   | 
|----------------------------------- |  | -------------- | ----- |  | ----------------------- | ----------- | ---------------------- | ----------------------------------------- | ---- | - | ----- | ------- | 
|                                    |  | Fair
    Value |       |  | Valuation
    Technique |             | Unobservable
    Input |                                           | Mean |   |       | Minimum | 
|Senior Secured
    First Lien Debt  |  | $              | 2,525 |  |                         | Liquidation |                        | Transaction Value                         |      | $ | 2,525 |         | 
|Senior Secured Second
    Lien Debt |  |                | 8     |  |                         | Liquidation |                        | Transaction Value                         |      |   | 8     |         | 
|Senior Unsecured Debt               |  |                | 132   |  |                         | Liquidation |                        | Transaction Value                         |      |   | 132   |         | 
|Equity
    Securities               |  |                | 3,126 |  |                         | Liquidation |                        | Transaction Value / Discounted Cash Flows |      |   | 9,155 |         | 
|Total                               |  | $              | 5,791 |  |                         |             |                        |                                           |      |   |       |         | 



The
primary significant unobservable input used in the fair value measurement of the Fund’s equity securities are the fair
value estimates of the issuer’s equity securities received in exchange of the bonds held earlier (Affinion Group,
Inc., Aspire Holdings LLC and Education Management LLC) and conservative management’s estimates of fair value of
investments in Relativity Media LLC and Ansgar Media LLC. Significant increases or decreases in the fair value of the
issuer’s equity securities would result in a significantly lower or higher fair value measurement. The two senior
secured first lien notes (Ansgar Media LLC and Landing Cove Investors LLC) are being held at par since we expect
 full payment for senior secured first lien type bonds, as compared to senior secured second-lien or
unsecured bonds. The primary significant unobservable input used in the fair value measurement of the Fund’s senior
secured second lien debt and senior unsecured debt was the fair value of the exchanged bonds offered by the issuer (Nuverra
Environmental Solutions, Inc. and Colt Defense, LLC).



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



|                                |  | Investments at Amortized Cost |        |  | Investments at Fair Value |   |        | Fair Value Percentage of 
Total Portfolio | 
|------------------------------- |  | ----------------------------- | ------ |  | ------------------------- | - | ------ | ----------------------------------------- | 
|Investments – Money Market      |  | $                             | 439    |  |                           | $ | 439    |                                           | 
|Senior Secured First Lien Debt  |  |                               | 14,275 |  |                           |   | 13,102 |                                           | 
|Senior Secured Second Lien Debt |  |                               | 5,152  |  |                           |   | 2,221  |                                           | 
|Senior Unsecured Debt           |  |                               | 10,974 |  |                           |   | 5,807  |                                           | 
|Senior Subordinated Debt        |  |                               | 2,876  |  |                           |   | 1,468  |                                           | 
|U.S. Government Securities      |  |                               | 10,134 |  |                           |   | 10,147 |                                           | 
|Equity Securities               |  |                               | 13,288 |  |                           |   | 3,737  |                                           | 
|Total                           |  | $                             | 57,138 |  |                           | $ | 36,921 |                                           | 



The composition of the Fund’s investments
as of December 31, 2015, at amortized cost and fair value were as follows (dollars in thousands):

|                                |  | Investments at Amortized Cost |        |  | Investments at Fair Value |   |        | Fair Value Percentage of 
Total Portfolio | 
|------------------------------- |  | ----------------------------- | ------ |  | ------------------------- | - | ------ | ----------------------------------------- | 
|Investments – Money Market      |  | $                             | 6,210  |  |                           | $ | 6,210  |                                           | 
|Senior Secured First Lien Debt  |  |                               | 10,826 |  |                           |   | 9,008  |                                           | 
|Senior Secured Second Lien Debt |  |                               | 4,491  |  |                           |   | 1,789  |                                           | 
|Senior Unsecured Debt           |  |                               | 12,330 |  |                           |   | 6,273  |                                           | 
|Senior Subordinated Debt        |  |                               | 2,878  |  |                           |   | 1,496  |                                           | 
|U.S. Government Securities      |  |                               | 4,947  |  |                           |   | 4,946  |                                           | 
|Equity Securities               |  |                               | 12,738 |  |                           |   | 3,210  |                                           | 
|Total                           |  | $                             | 54,420 |  |                           | $ | 32,932 |                                           | 



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 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 relief order from the SEC or co-invest alongside our Manager or its affiliates in accordance with existing
regulatory guidance and our allocation policy. Under existing regulatory guidance, we are permitted to, and may co-invest in syndicated
deals and secondary loan market transactions where price is the only negotiated point.



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





15







Investment Advisory Agreement



The Fund has entered
into an investment advisory agreement with the Manager to manage the Fund’s investment activities. Pursuant to the investment
advisory agreement, the Manager implements the Fund’s business strategy on a day-to-day basis and performs certain services
for us, subject to oversight by our Board of Directors, or a committee thereof. The Manager is responsible for, among other duties,
determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing
asset management duties. The investment advisory agreement must be re-approved at least every two years by a majority of the non-interested
Board Members. The initial contract was signed on August 20, 2013. On August 17, 2015, the non-interested Board Members re-approved
the agreement between the Manager and the Fund under the agreement’s existing terms.



Under the investment
advisory agreement, the Manager is entitled to a base management and incentive fee as outlined in the investment advisory agreement
with the Fund. The base management fee is 2% of net assets below $100 million; 1.75% of net assets between $100 million and $250
million; and 1.5% of net assets over $250 million. For the three months ended March 31, 2016 and 2015, the Fund incurred $0.1 million
and $0.2 million of base management fees, respectively.



The incentive fee has
two parts. The first part, the subordinated incentive fee on income, is calculated and payable quarterly in arrears based upon
the Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter. The subordinated
incentive fee on income is 20% of pre-incentive net investment income subject to a quarterly return to investors, expressed as
a rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 2.0% (8.0% annualized).
The second part of the incentive fee, the incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated
investments from the portfolio and is determined and payable in arrears as of the end of each calendar year (or upon termination
of the investment advisory agreement). This fee equals 20% of the Fund’s incentive fee capital gains, which will equal the
Fund’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed
net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any
previously paid capital gains incentive fees. For the three months ended March 31, 2016 and 2015, the Fund did not incur any incentive
fees related to net investment income or capital gains.



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



Under the investment
advisory agreement, the Manager bears all offering and organizational expenses. Pursuant to the terms of the investment advisory
agreement, the Fund has agreed to reimburse the Manager for any such organizational and offering expenses incurred by the Manager
not to exceed 1.5% of the gross subscriptions raised by the Fund over the course of the offering period, 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 prior manager which the Fund
would otherwise be obligated to reimburse prior manager from future sales of the Fund’s securities, beginning with any sales
of securities occurring after August 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.





Administration
Agreement



Our Manager
serves as our administrator. Pursuant to an administration agreement, our Manager furnishes us with office facilities,
equipment, clerical, bookkeeping and record keeping services at such facilities. Under the administration agreement, our
Manager also performs, or oversees the performance of our required administrative services, which include, among other
things, transfer agency and other service providers supervision and oversight, preparation and supervision of the financial
records for which we are required to maintain for SEC reporting, stockholder reporting and other Fund needs, implementation
and supervision of a robust compliance program and oversight and administration of the quarterly share repurchase program. In
addition, our Manager assists us in activities which include, among other things, performance and supervision of investor
relations, the Fund’s Board of 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.





16







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





Note 5. Common Stock



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



On July 10, 2012, the Fund had raised sufficient
proceeds to break escrow on its IPO and through March 31, 2016, the Fund has sold 6.5 million shares of common stock for gross
proceeds of $64.6 million including the purchases made by the Manager.



During the three months ended March 31,
2016, the Fund did not sell any shares of common stock as its prospectus was not effective. Also, for the three months ended March
31, 2016, there were no treasury shares repurchased.



Note 6. Borrowings



Wells Fargo Credit Facility



On August
4, 2015, the Fund entered into an agreement with the Wells Fargo Advisors, LLC for the purpose of obtaining a revolving line
of credit. The amount the Fund can borrow is based upon the value of cash deposited in an account at Wells Fargo Advisors,
LLC, which serves as collateral for the loan. On August 28, 2015, the Fund drew down an additional $2.0 million. As of March
31, 2016, the outstanding balance under this credit line was $7.1 million. The interest rate on the outstanding balance is
currently 3.00%.



Morgan Stanley Credit Facility



On September 10, 2015,
the Fund entered into an agreement with the Morgan Stanley Private Bank, N.A. The amount the Fund can borrow is based upon the
value of cash deposited in an account at Morgan Stanley Private Bank, N.A., which serve as collateral for the loan. The maximum
amount which the Fund may borrow under the line of credit is $1.8 million. As of March 31, 2016, the outstanding balance under
this credit line was $1.8 million. The interest rate on the outstanding balance is currently 5.375%.



Note 7.  Earnings (Loss) Per
Share



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



The following information sets forth the
computation of the weighted average basic and diluted net increase in net assets per share from operations for the three
months ended March 31, 2016 and 2015 (dollars in thousands, except share and per share amounts):



|                                                               |  | For the Three Months Ended March 31, 2016 |           |  | For the Three
 Months Ended March 31, 2015 |  
|-------------------------------------------------------------- |  | ----------------------------------------- | --------- |  | ------------------------------------------ | -
|Basic and diluted:                                             |  |                                           |           |  |                                            |  
|Net increase in net assets resulting from operations           |  | $                                         | 579       |  |                                            | $
|Weighted average common shares outstanding                     |  |                                           | 6,196,289 |  |                                            |  
|Net increase in net assets resulting from operations per share |  | $                                         | 0.09      |  |                                            | $





17







The Fund had
no potentially dilutive securities as of March 31, 2016 and March 31, 2015, resulting in the same number of shares for basic and
diluted.



Note 8. Tender Offer Program



We do not currently
intend to list our shares on any securities exchange and do not expect a public market for them to develop in the foreseeable future.
Therefore, shareholders should not expect to be able to sell their shares promptly or at a desired price. Beginning with fourth
calendar quarter of 2013, and on a quarterly basis through June 30, 2015, the Board approved a Tender Offer to repurchase shares
of our common stock at a price equal to 90% of our offering price on the date of repurchase. In the third quarter of 2015, the
Board decided to suspend the repurchase program, as the fund was not raising any new capital. When a tender offer is approved by
the Board, we intend to limit the number of shares to be repurchased during any calendar year to 20% of the weighted average number
of shares outstanding in the prior calendar year, or 5.0% in each quarter, though the actual number of shares that we offer to
repurchase may be less 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, 2016, no tender offer was approved by the Board
of Directors.



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



|For
        the Three
        Months
        Ended |  | Repurchase
    Date  |  | SharesRepurchased |         |  | Percent
    of SharesTendered thatwere Repurchased |  |     | RepurchasePrice Per Share |  |   | AggregateConsideration forRepurchasedShares (‘000s)* | 
|-------------------------------------------------- |  | -------------------- |  | ----------------- | ------- |  | -------------------------------------------------- |  | --- | ------------------------- |  | - | ---------------------------------------------------- | 
|December
    13, 2013                              |  | December 12, 2013    |  |                   | 548     |  |                                                    |  | 100 | %                         |  | $ | 9.135                                                | 
|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 | %                         |  | $ | 9.000                                                | 
|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                                      |  | June 29, 2015        |  |                   | 215,935 |  |                                                    |  | 69  | %                         |  | $ | 8.775                                                | 
|September 30, 2015                                 |  | September 30, 2015** |  |                   | —       |  |                                                    |  | —   |                           |  |   | —                                                    | 
|December 31, 2015                                  |  | December 31, 2015**  |  |                   | —       |  |                                                    |  | —   |                           |  |   | —                                                    | 
|March 31, 2016                                     |  | March 31, 2016**     |  |                   | —       |  |                                                    |  | —   |                           |  |   | —                                                    | 
|                                                   |  |                      |  |                   |         |  |                                                    |  |     |                           |  |   |                                                      | 



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

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



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



Note 9.  Distributions



Subject to our Board
of Director’s discretion and applicable legal restrictions, we have historically authorized and declared ordinary cash distributions
on a semi-monthly basis and paid such distributions on a semi-monthly basis. However, at the August 17, 2015 Board of Directors
meeting, the Board determined that monthly distributions, at the same annual rate, would reduce costs and would be in the best
interest of the shareholders. The distribution paid to shareholders on September 30, 2015, with a record date of August 30, 2015,
represented the first monthly 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 beginning in
July 2012, then changed to a monthly distribution beginning in August 2015. 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.





18







As of March 31, 2016,
the Fund has accrued $0.4 million in stockholder distributions that were unpaid. All amounts with record dates in March 2016 and
paid in April 2016 have been accrued in the March 31, 2016 financial statements. As of December 31, 2015, the Fund had accrued
$0.3 million in stockholder distributions that were unpaid. All amounts with record dates in December 2015 and paid in January
2016 had been accrued in the December 31, 2015 financial statements.



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



Source of Distribution by Cash vs. DRIP:



|                                      |  |               |          |  | Net        |  |       | Realized    |  |  |           |  |  |       |       |  |         |  |        |      | 
|------------------------------------- |  | ------------- | -------- |  | ---------- |  | ----- | ----------- |  |  | --------- |  |  | ----- | ----- |  | ------- |  | ------ | ---- | 
|                                      |  |               |          |  | Investment |  |       | Gain From   |  |  | Return of |  |  |       |       |  | Paid in |  |        |      | 
|Period                                |  | Per
    Share |          |  | Income     |  |       | Investments |  |  | Capital   |  |  | Total |       |  | Cash    |  |        | DRIP | 
|July 12, 2012 - September 30, 2012    |  | $             | 0.183750 |  |            |  | 32    |             |  |  | -         |  |  |       | 18    |  |         |  | 50     |      | 
|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   |  |               | 0.181467 |  |            |  | 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  |      | 
|July 1, 2015  - September 30, 2015    |  |               | 0.209015 |  |            |  | 240   |             |  |  | 142       |  |  |       | 904   |  |         |  | 1,286  |      | 
|October 1, 2015 - December 31, 2015** |  |               | 0.170315 |  |            |  | —     |             |  |  | 68        |  |  |       | 996   |  |         |  | 1,064  |      | 
|January 1, 2016 – March 31, 2016 ***  |  |               | 0.169969 |  |            |  | 8     |             |  |  | —         |  |  |       | 1,045 |  |         |  | 1,053  |      | 
|TOTAL                                 |  | $             | 2.913348 |  |            |  | 2,873 |             |  |  | 986       |  |  |       | 6,770 |  |         |  | 10,628 |      | 



* Includes a special
distribution of $0.077 per share.



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



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



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 |  |            |  | 49 | %           |  |  | 0         | %
|July 1, 2014  - September 30, 2014   |  |           | 0.184668 |  |            |  | 17 | %           |  |  | 3         | %
|October 1, 2014 - December 31, 2014  |  |           | 0.181467 |  |            |  | 15 | %           |  |  | 6         | %
|January 1, 2015 - March 31, 2015     |  |           | 0.179154 |  |            |  | 15 | %           |  |  | 5         | %
|April 1, 2015 - June 30, 2015        |  |           | 0.179154 |  |            |  | 63 | %           |  |  | 15        | %
|July 1, 2015  - September 30, 2015   |  |           | 0.209015 |  |            |  | 19 | %           |  |  | 11        | %
|October 1, 2015 - December 31, 2015  |  |           | 0.170315 |  |            |  | —  | %           |  |  | 6         | %
|January 1, 2016 – March 31, 2016     |  |           | 0.169969 |  |            |  | 1  | %           |  |  | —         | %



* Includes a special
distribution of $0.077 per share.





19





The following table
reflects the sources of the cash distributions on a tax basis that the Fund has paid on its common stock (dollars in thousands)
during the three months ended March 31, 2016 and the fiscal years ended December 31, 2015, 2014 and 2013:



|Source of Distributions:                 |  | Three
                                         monthsended March
               31, 2016 |       |  | Year
    ended
    December 31, 2015 |  |       | Year
    ended 
     December 31, 2014 |  |   | Year
                                         ended December
                                         31, 2013 | 
|---------------------------------------- |  | ---------------------------------------------------------------------------------------- | ----- |  | ------------------------------------ |  | ----- | -------------------------------------- |  | - | -------------------------------------------------------------------------------------------------------------- | 
|Distributions from net investment income |  | $                                                                                        | 8     |  |                                      |  | 0.8   | %                                      |  | $ | 830                                                                                                            | 
|Distributions from realized gains        |  |                                                                                          | —     |  |                                      |  | —     |                                        |  |   | 425                                                                                                            | 
|Distributions from paid In capital       |  |                                                                                          | 1,045 |  |                                      |  | 99.2  |                                        |  |   | 3,235                                                                                                          | 
|Total                                    |  | $                                                                                        | 1,053 |  |                                      |  | 100.0 | %                                      |  | $ | 4,490                                                                                                          | 



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



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 |   
|---- |  |  | ---------------- | --- |  | ------------------------------------------- | - | ----- | --------------------------------------------------------------- |  |  | --------------------------------------------------------- | - |  | ----------------------------------------------------------- | --
|2016 |  |  | $                | —   |  |                                             | $ | 8     |                                                                 |  |  | 1                                                         | % |  |                                                             | — 
|2015 |  |  | $                | 96  |  |                                             | $ | 926   |                                                                 |  |  | 21                                                        | % |  |                                                             | 9 
|2014 |  |  | $                | 352 |  |                                             | $ | 1,171 |                                                                 |  |  | 37                                                        | % |  |                                                             | 5 
|2013 |  |  | $                | 322 |  |                                             | $ | 1,120 |                                                                 |  |  | 66                                                        | % |  |                                                             | 23
|2012 |  |  | $                | 142 |  |                                             | $ | 292   |                                                                 |  |  | 100                                                       | % |  |                                                             | 0 







20





Note 10.  Financial Highlights



The following is a schedule of financial
highlights for the three months ended March 31, 2016 and 2015:



|                                                                     |  | For the three
 months ended March 31, 2016 |           |   | For the three months ended March 31, 2015 |  
|-------------------------------------------------------------------- |  | ------------------------------------------ | --------- | - | ----------------------------------------- | -
|                                                                     |  |                                            |           |   |                                           |  
|Per share data:                                                      |  |                                            |           |   |                                           |  
|Net asset value, beginning of period                                 |  | $                                          | 4.61      |   |                                           | $
|                                                                     |  |                                            |           |   |                                           |  
|Results of operations (1)                                            |  |                                            |           |   |                                           |  
|Net investment income                                                |  |                                            | 0.00      |   |                                           |  
|Net realized gain (loss) on investments                              |  |                                            | (0.11     | ) |                                           |  
|Net unrealized gain (loss) on investments                            |  |                                            | 0.20      |   |                                           |  
|Net increase in net assets resulting from operations                 |  |                                            | 0.09      |   |                                           |  
|                                                                     |  |                                            |           |   |                                           |  
|Stockholder distributions (2)                                        |  |                                            |           |   |                                           |  
|Distributions from net investment income                             |  |                                            | -         |   |                                           |  
|Distributions from realized gains                                    |  |                                            | -         |   |                                           |  
|Distributions from capital                                           |  |                                            | (0.17     | ) |                                           |  
|                                                                     |  |                                            |           |   |                                           |  
|Net decrease in net assets resulting from stockholder distributions  |  |                                            | (0.17     | ) |                                           |  
|                                                                     |  |                                            |           |   |                                           |  
|Capital share transactions                                           |  |                                            |           |   |                                           |  
|Impact from issuance of common stock (3)                             |  |                                            | 0.00      |   |                                           |  
|                                                                     |  |                                            |           |   |                                           |  
|Net increase in net assets resulting from capital share transactions |  |                                            | 0.00      |   |                                           |  
|Other (8)                                                            |  |                                            | 0.03      |   |                                           |  
|                                                                     |  |                                            |           |   |                                           |  
|Net asset value, end of period                                       |  | $                                          | 4.56      |   |                                           | $
|                                                                     |  |                                            |           |   |                                           |  
|Shares outstanding at end of period                                  |  | $                                          | 6,223,414 |   |                                           | $
|Total return (5)                                                     |  |                                            | 0.84      | % |                                           |  
|                                                                     |  |                                            |           |   |                                           |  
|Ratio/Supplemental data:                                             |  |                                            |           |   |                                           |  
|Net assets, end of period (in thousands)                             |  | $                                          | 28,384    |   |                                           | $
|Average net assets (in thousands)                                    |  | $                                          | 35,422    |   |                                           | $
|Ratio of net investment income to average net assets (4)(7)          |  |                                            | 0.08      | % |                                           |  
|Ratio of operating expenses to average net assets (4)(7)             |  |                                            | 7.15      | % |                                           |  
|Ratio of expenses reimbursed to average net assets (7)               |  |                                            | -         | % |                                           |  
|Portfolio turnover ratio (6)                                         |  |                                            | 12.87     | % |                                           |  

_________________________

|(1) | The per share amounts were derived by using the weighted average shares outstanding during the period. There was no expense waiver and reimbursement for the three months ended March 31, 2016 and March 31, 2015.                                                                                                                                                                                         
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The per share data for distributions reflects the actual amount of distributions declared per share during the period.                                                                                                                                                                                                                                                                                     
|(3) | The issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock in the Fund’s continuous offering.                                                                                                                                                                                                                
|(4) | The ratios are after giving effect to amounts reimbursed by the Manager under an expense reimbursement agreement. See “Note 4 – Related Party Transactions.” For the three months ended March 31, 2016 and 2015, 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 three months ended March 31, 2016 and 2015, 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 and calculated based on
    average net     assets using current and prior 3 quarters net assets.                                                                                                                                                                                                                                                                                    
|(8) | Represents the impact of different share amounts used
in calculating per share data as a result of calculating certain per share data based on weighted average shares.                                                                                                                                                                                                                                    



Note 11.  Subsequent Events



On April 15, 2016, in connection with the
previously announced closing of its private exchange offer, Nuverra Environmental Solutions, Inc. issued $327,221,000 aggregate
principal amount of its 12.5%/10.0% Senior Secured Second Lien Notes due April 12, 2021 in exchange of its 9.875% Senior Notes
due 2018. As part of the exchange, the Fund received $1.33 million par value of the new notes and 14,752 warrants.



On April 8, 2016, the Fund received repayment
plus interest from its loan to Landing Cove, LLC. The Fund received $2,000,000 in principal and $60,000 in interest per the terms
of the Promissory Note dated January 8, 2016.



On April 26, 2016, Aspect Software issued
a restructuring plan where the Fund will receive a rights offering in exchange for our current bonds. This rights offering will
entitle us to a new bond in the reorganized company.



On April 27, 2016, the Fund made a $1,500,000
Senior Secured First Lien Loan to GeoCommerce, Inc. The loan bears interest at a rate of 12% per annum and the Fund received the
first year’s interest prepaid of $180,000. The Fund also received a loan origination fee of $45,000.



21







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



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



Forward-Looking Statements



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



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



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



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



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



Critical Accounting Policies



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





22







Valuation of Portfolio Investments



We have adopted Financial
Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”), Topic 820, Fair Value Measurements and Disclosures
(“ASC Topic 820”) (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.



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. Twenty-nine of the
thirty-nine investments were valued using the closing market price at period end March 31, 2016. The exceptions were the
common stock equity investment for Affinion Group; the two investments in Ansgar Media, LLC, Class B
Units and a note with a 12.00% interest rate and maturity date of September 8, 2017; the common stock equity investment in
Aspire Holdings, LLC (converted from exchange of 12.00% Endeavour International Corp First Lien Bonds); a 8.00% senior
unsecured note of Colt Defense LLC, due December 15, 2020; the two equity investments in Education Management LLC, a common
stock and a warrant; a 12.00% senior secured first lien note of Landing Cove, LLC, due April 8, 2016 (see Note 11. Subsequent
Events); a 9.88% senior secured second lien note of Nuverra Environmental Solutions, Inc., due April 15, 2018; and the
preferred equity investment for Relativity Media, LLC.



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.



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.





23







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.



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



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 ASC Topic 310 — Receivables (“ASC
Topic 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.



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





24







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.



The Fund has evaluated
the implications of ASC Topic 740,Accounting for Income Taxes (“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 2015.



Portfolio and Investment Activity



During the three months ended March
31, 2016, we made $13.6 million of investments in new and existing portfolio companies and had $4.4 million in aggregate
amount of exits and repayments, resulting in net investments of $9.2 million for the period. During the three months ended
March 31, 2015, we made $2.9 million of investments in new and existing portfolio companies and had $2.0 million in aggregate
amount of exits and repayments, resulting in net investments of $0.9 million for the period. As of March 31, 2016, we had two
portfolio investments in maturity default with a fair value of $0.2 million which represented a negligible amount of our
portfolio.



As
of March 31, 2016, we have invested an aggregate of approximately $57.1 million in 44 investment positions in 36 portfolio
companies. On March 31, 2016, the fair value of our investment positions was $37.7 million (including money market
investments and the accrued interest of $0.8 million). As of such date, our estimated gross annual portfolio
yield was 7.1% and gross annual portfolio yield to maturity was 7.1% (excluding equity investments and non-accrual
investments) based on the purchase price of our investments. The average duration of our debt portfolio was approximately 1.3
years. During the three months ended March 31, 2016, we exited one portfolio company partially for aggregate sales proceeds
of $0.01 million. As of March 31, 2016, we had two portfolio investments in default of payment of its par value at maturity
date, Suntech Power Holdings Company, with a fair value of $643 and 10.75% Caesars Entertainment Corp, with a fair value of
$0.2 million, which represented a negligible amount of our total portfolio. As of March 31, 2016, in addition to the
investment in maturity date default, four additional debt investments had not paid coupon interest as due beyond the thirty
day grace period. These investments are Caesars
Entertainment Corp, 11.25%, June 1, 2017; QuickSilver Resources, Inc., 7.13%, April 1, 2016; Saratoga Resources, Inc.,
12.50%, July 1, 2016; and UCI International, Inc., 8.625%, February 15, 2019. Interest on these investments was
accrued through the date that the last coupon payment was received. There are seven equity investments which are non-income
producing as of December 31, 2015. These seven are Affinion
Group, common stock; Ansgar Media, LLC, Class B Units; Aspire Holdings, LLC, Common Stock (converted
from exchange of 12.00% Endeavour International Corp First Lien Bonds); Education Management, LLC, common stock and
warrant; NII Holdings, Inc., common stock; and Relativity Media LLC, preferred stock.



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



|                                |  | At March 31, 2016             |      
|------------------------------- |  | ----------------------------- | -----
|                                |  | Percentage of Total Portfolio |      
|Investments – Money Market      |  |                               | 1.2  
|Senior Secured First Lien Debt  |  |                               | 35.5 
|Senior Secured Second Lien Debt |  |                               | 6.0  
|Senior Unsecured Debt           |  |                               | 15.7 
|Senior Subordinated Debt        |  |                               | 4.0  
|U.S. Government Securities      |  |                               | 27.5 
|Equity Securities               |  |                               | 10.1 
|Total                           |  |                               | 100.0



* 7.1% yield is on non-defaulted,
non-equity positions and excludes money market investments.



As of March 31, 2016, our non-defaulted,
non-equity portfolio had a yield to maturity of 7.1%, and an average duration of 1.30 years.



The following table shows the weighted average
yield of our portfolio composition based on fair value at December 31, 2015:



|                                |  | At December 31, 2015          |      
|------------------------------- |  | ----------------------------- | -----
|                                |  | Percentage of Total Portfolio |      
|Investments – Money Market      |  |                               | 18.9 
|Senior Secured First Lien Debt  |  |                               | 27.4 
|Senior Secured Second Lien Debt |  |                               | 5.4  
|Senior Unsecured Debt           |  |                               | 19.0 
|Senior Subordinated Debt        |  |                               | 4.5  
|U.S. Government Securities      |  |                               | 15.0 
|Equity Securities               |  |                               | 9.8  
|Total                           |  |                               | 100.0



* 7.6% yield is on non-defaulted, non-equity
positions and excludes money market investments.





25







As of December 31, 2015, our non-defaulted,
non-equity portfolio had a yield to maturity of 7.6%, and an average duration of 1.80 years.



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



|                                          |  | At March 31, 2016          |       
|----------------------------------------- |  | -------------------------- | ------
|                                          |  | Investments at  Fair Value |       
|U.S. Government Securities                |  | $                          | 10,147
|Media: Broadcasting & Subscription        |  |                            | 6,563 
|Retail                                    |  |                            | 2,376 
|Media: Advertising, Printing & Publishing |  |                            | 2,149 
|Metals & Mining                           |  |                            | 2,136 
|Real Estate                               |  |                            | 2,000 
|Aerospace and Defense                     |  |                            | 1,924 
|Energy: Oil & Gas                         |  |                            | 1,558 
|Services: Consumer                        |  |                            | 1,526 
|Automobile                                |  |                            | 1,425 
|Environmental Industries                  |  |                            | 1,325 
|Telecommunications                        |  |                            | 1,116 
|Healthcare & Pharmaceuticals              |  |                            | 1,075 
|Hotel, Gaming & Leisure                   |  |                            | 954   
|Investments – Money Market                |  |                            | 439   
|Beverage, Food & Tobacco                  |  |                            | 208   
|Total                                     |  | $                          | 36,921



The following table shows the portfolio
composition by industry grouping at fair value at December 31, 2015 (dollars in thousands):



|                                          |  | At December 31, 2015       |       
|----------------------------------------- |  | -------------------------- | ------
|                                          |  | Investments at  Fair Value |       
|Investments – Money Market                |  | $                          | 6,210 
|U.S. Government Securities                |  |                            | 4,946 
|Media: Broadcasting & Subscription        |  |                            | 4,641 
|Metals & Mining                           |  |                            | 2,137 
|Media: Advertising, Printing & Publishing |  |                            | 2,116 
|Retail                                    |  |                            | 1,969 
|Aerospace and Defense                     |  |                            | 1,734 
|Telecommunications                        |  |                            | 1,640 
|Energy: Oil & Gas                         |  |                            | 1,593 
|Automobile                                |  |                            | 1,578 
|Services: Consumer                        |  |                            | 1,476 
|Healthcare & Pharmaceuticals              |  |                            | 1,139 
|Hotel, Gaming & Leisure                   |  |                            | 765   
|Beverage, Food & Tobacco                  |  |                            | 531   
|Environmental Industries                  |  |                            | 457   
|Total                                     |  | $                          | 32,932



Our fair value of
total investments was $36.9 million as of March 31, 2016 as compared to $32.9 million as of December 31, 2015. The increase
in the fair value of our investments was attributable to two factors: a) high-yield bonds began the first quarter on a down
note, but a subsequent rally enabled the asset class to close in positive territory; b) a second round of investment in the
senior secured first lien notes of Ansgar Media, LLC and an investment in the senior secured first lien notes of
Landing Cove, LLC.





26







Discussion and Analysis of Results of Operations



Results of Operations



The results of operations
are based on revenue less expenses, adjusted for the impact of the realized gain/loss and change in unrealized gain/loss on our
investment portfolio. To the extent that it is expected to be received, revenue is recognized on an accrual basis. Income is earned
as coupon interest adjusted for the amortization of premiums and accretion of discounts on the high-yield corporate debt investments.
Expenses include professional services, management fees, administrative services, organizational and offering costs and other general
and administrative. Realized gains/losses are from investments sold 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 months ended
March 31, 2016 and 2015 were as follows (dollars in thousands):



|                                                              |  | For the three months
 ended March 31, 2016 |       |   | For the three months
 ended March 31, 2015 |  
|------------------------------------------------------------- |  | ------------------------------------------ | ----- | - | ------------------------------------------ | -
|Total investment income                                       |  | $                                          | 637   |   |                                            | $
|Total operating expenses                                      |  |                                            | 629   |   |                                            |  
|Net investment income                                         |  |                                            | 8     |   |                                            |  
|Net realized gain (loss) from investments                     |  |                                            | (700  | ) |                                            |  
|Net unrealized appreciation
    (depreciation) on investments |  |                                            | 1,271 |   |                                            |  
|                                                              |  |                                            |       |   |                                            |  
|Net increase  in net assets resulting from operations         |  | $                                          | 579   |   |                                            | $



Revenues



We generated
investment income of $0.6 million for the three months ended March 31, 2016, as compared to $0.9 million for the three months
ended March 31, 2015. Interest revenue was $0.6 million for the three months ended March 31, 2016, as compared to $0.9
million for the three months ended March 31, 2015. The decrease in interest revenue in 2016 as compared to 2015 was
attributable to an increase in debt investments placed on non-accrual status, restructuring of certain debt investments into
equity investments as well as a reallocation of portfolio investments from debt investments to preferred stock investments in
2015. Fee income was $0.02 million for the three months ended March 31, 2016, as compared to zero for the three months ended
March 31, 2015. The increase in fee income in 2016 as compared to 2015 was attributable to a facility fee earned on the
Fund’s investment in Ansgar Media and a consent fee earned on the Fund’s investment in American Media, Inc. in
2016.



Interest from
debt investments is in the form of interest and fees earned on senior secured loans, senior secured notes, subordinated debt,
senior unsecured debt and collateralized securities in our debt portfolio. Our debt portfolio constituted approximately 88.7%
of investment portfolio at March 31, 2016 (excluding money market investments). The level of interest income we receive is
directly related to the balance of collectible income producing investments multiplied by the weighted average yield of our
investments, offset by debt investments held in nonaccrual status. We expect the dollar amount of interest and any dividend
income that we earn to increase as the size of our investment portfolio increases. The average balance of the debt portfolio
during the three months ended March 31, 2016 was lower than the three months ended March 31, 2015, which was attributable to
an increase in debt investments held on nonaccrual status, the restructuring of certain debt instruments into equity
instruments as well as a reallocation of portfolio investments from debt investments to preferred stock investments in 2015,
which resulted in the decrease in interest income in 2016 as compared to 2015. At March 31, 2016, the weighted average
coupon yield of our debt investments was 7.1%, as compared to 8.9% as of March 31, 2015. For the three months ended March 31,
2016, the average net assets were $35.4 million, as compared to $39.0 million for the three months ended March 31, 2015.



As of March 31,
2016, we had two portfolio investments in default of payment of its par value at maturity date, Suntech Power Holdings
Company, with a fair value of $643 and 10.75% Caesars Entertainment Corp, with a fair value of $0.2 million which represented
a negligible amount of our total portfolio. As of March 31, 2016, in addition to the investment in maturity date default,
four additional debt investments had not paid coupon interest as due beyond the thirty day grace period. These investments
are Caesars Entertainment Corp, 11.25%, June 1, 2017; QuickSilver Resources, Inc., 7.13%, April 1; 2016; Saratoga Resources,
Inc., 12.50%, July 1, 2016; and UCI International, Inc., 8.625%, February 15, 2019. Interest on these investments was accrued
through the date that the last coupon payment was received. There are seven equity investments which are non-income producing
as of March 31, 2016. These seven are Affinion Group, common stock; Ansgar Media, LLC, Class B Units;
Aspire Holdings, LLC, common stock (converted from exchange of 12.00% Endeavour International Corp First Lien Bonds);
Education Management, LLC, common stock and warrant; NII Holdings, Inc., common stock; and Relativity Media LLC, preferred
stock.



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.







27





Expenses



The composition of
our operating expenses for the three months ended March 31, 2016 and 2015 was as follows (dollars in thousands):



|                                                                                                                    |  | For the three months
 ended March 31, 2016 |     |  | For the three months
 ended March 31, 2015 |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | --- |  | ------------------------------------------ | -
|                                                                                                                    |  |                                            |     |  |                                            |  
|Professional fees                                                                                                   |  | $                                          | 178 |  |                                            | $
|Director fees                                                                                                       |  |                                            | 8   |  |                                            |  
|Insurance                                                                                                           |  |                                            | 27  |  |                                            |  
|Interest Expense                                                                                                    |  |                                            | 75  |  |                                            |  
|Management fees – related parties                                                                                   |  |                                            | 142 |  |                                            |  
|Administrative services – related parties                                                                           |  |                                            | 54  |  |                                            |  
|General and administrative (includes $42 and $57 of related party expenses for accounting and travel, respectively) |  |                                            | 117 |  |                                            |  
|Transfer Agent Fees                                                                                                 |  |                                            | 28  |  |                                            |  
|Offering expense                                                                                                    |  |                                            | -   |  |                                            |  
|Total operating expenses                                                                                            |  | $                                          | 629 |  |                                            | $



For the
three months ended March 31, 2016 and 2015, our operating expenses were $0.6 million and $0.8 million, respectively. In
general and administrative, the related party expenses include our chief financial officer’s salary and travel expenses
reimbursed to the manager, which were $0.04 million and $0.06 million, respectively, for the three months ended March 31,
2016 and 2015. The decrease in expenses in the period ended March 31, 2016 as compared to March 31, 2015 was also due
primarily to the fact that the fund has not raised new capital since April 30, 2015 as our registration statement has not
been declared effective by the SEC. With no additional capital coming into the fund, no offering expenses were incurred, and
general and administrative expenses were less as there was less travel and conference fees. Management fees were lower as the
portfolio value has declined. Professional fees were higher in 2016 due to the Relativity Media ongoing litigation.



The management fees
for the three months ended March 31, 2016 and 2015 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 March 31, 2016 and 2015.



Expense Reimbursement



We entered into an
expense reimbursement agreement with our prior manager under which the prior manager agreed to reimburse us for all U.S. GAAP compliant
expenses recognized on our quarterly financial statements for 2012, retroactive to the date of formation on August 3, 2011. In
2013, the expense reimbursement agreement was modified to exclude management fees and incentive fees payable to the Manager effective
as of January 1, 2013. We recognized a receivable on our books for the amount due from the prior manager under the expense reimbursement
agreement, and the prior manager recognized a liability on its books in the same amount. 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 not obligated to reimburse us for 2015 and 2014.



On August 20, 2013,
we terminated our investment management agreement with our prior manager, and entered into a new investment management agreement
with our current Manager. Our current Manager has not entered into an expense reimbursement agreement with us, but has agreed to
assume the prior manager’s obligation to pay us $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.



As of March 31, 2016, our Manager had accrued
$0.01 million in expense reimbursement, which is included in Due from related party on the statements of assets and liabilities.
As of December 31, 2015, our Manager had accrued $0.01 million in expense reimbursement, which is included in Due from related
party on the statements of assets and liabilities.



Net Investment Income



Our net investment
income totaled $8 thousand and $0.2 million for the three months ended March 31, 2016 and 2015, respectively. Our net investment
income was attributable to investment income less operating expenses for the period. For the three months ended March 31, 2016
and 2015, total investment income was $0.6 million and $0.9 million, respectively. For the same periods, the total investment income
included $0.02 million and zero of nonrecurring interest, respectively, captured in fee income.



The decrease
in net investment income for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015
was primarily due to the decrease in interest revenue attributable to an increase in debt investments placed on non-accrual
status, restructuring of certain debt investments into equity investments as well as a reallocation of portfolio investments
from debt investments to preferred stock investments in 2015, partially offset by a decrease in total expenses. For the
three months ended March 31, 2016 and 2015, total operating expenses were $0.6 million and $0.8
million, respectively.





28







Net Realized Gains or Losses from Investments



For the three
months ended March 31, 2016 and 2015, we had $4.4 million and $2.0 million of principal repayments, resulting in $0.7 million
of realized loss and $0.05 million of realized gain, respectively.



Net Change in Unrealized Appreciation or Depreciation on
Investments



For the
three months ended March 31, 2016, we experienced $1.3 million of unrealized appreciation. For the three months ended March
31, 2015, we experienced $0.01 million of unrealized depreciation. The increase in unrealized appreciation during this
first quarter of 2016 was due to two main factors. First, high-yield bond funds had
a strong start to 2016 with a first-quarter gain of 2.0%. The increase
was majorly impacted by oil prices as they oscillated wildly in the recent months.
Crude oil prices fell till mid-February, and have then rallied by more than
45.0%. Despite the volatility, over the entire quarter high-yield notes gained 2.0% in the first three months of
2016, their best quarter in more than two years, according to Bank of America
Merrill Lynch index data. March had a 4.42% increase, making it best month
since October 2011.Second, one of the fund’s investment bonds completed its restructuring plan and exchanged
its old bonds for new ones at par. The old bonds were trading in the mid to high 30’s before the restructuring, while the new ones
are trading at par. Although, there was an increase in unrealized appreciation, our NAV declined significantly since March,
2015 mainly due to two factors. First, the Fund decided to write down to zero a $10.4 million investment in Relativity Media,
LLC Series E preferred stock in 2015. We have reached a settlement with Relativity which would involve the receipt of
warrants in reorganized Relativity that we believe will have substantial value. However, the settlement is subject to the
approval of the bankruptcy court, and potential objections by creditors, and until it is approved, we have elected to value
the investment at zero. On the other hand, another one of our portfolio investments, Ansgar Media, LLC, in which we initially
acquired a 25% equity interest, has raised initial equity financing at a pre-money equity valuation of $40.0 million. While Ansgar
is ahead of its business plan operationally, we have used an enterprise valuation of $12.0 million,
which has resulted in a net equity ownership value of $2.1 million based upon a current 24.4% equity ownership interest in Ansgar
and after applying a liquidity discount. Below is a table that shows our pro forma NAV per share assuming that the settlement with
Relativity Media, LLC is approved by the bankruptcy court, and that our investment in Ansgar is valued at full value:











|Adjusted Pro Forma NAV per share (non GAAP)                     |  |   |      
|--------------------------------------------------------------- |  | - | -----
|                                                                |  |   |      
|Current NAV per share                                           |  | $ | 4.56 
|Relativity Media Equity Ownership post settlement (in millions) |  | $ | 4.16 
|Ansgar Equity Ownership post Equity raise (in millions)         |  | $ | 10.00
|Adjusted NAV per share                                          |  | $ | 6.50 







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 a
loss of principal or full recovery of principal given their position in the capital structure of the issuer and the
underlying asset values. Generally, we expect much higher recoveries or full payment for senior secured first lien type
bonds, as compared to senior secured second-lien or unsecured bonds for defaulted bonds.





Changes in Net Assets from Operations





For the
three months ended March 31, 2016 and 2015, we recorded a net increase in net assets resulting from operations of $0.6
million and $0.2 million, respectively. This increase is largely due to strong rally in high yield markets because of
positive oil movement and completion of restructuring plans by a few of our bond investment companies. Overall, the portfolio
experienced a market value increase, with an increase in net unrealized appreciation on investments of $1.3 million for the
three months ended March 31, 2016. Based on 6,196,289 and 5,763,005 weighted average common shares outstanding for the three
months ended March 31, 2016 and 2015, respectively, our per share net increase  in net assets resulting from
operations was $0.09 and $0.03, respectively.





Liquidity and Capital Resources





On August
4, 2015, the Fund entered into an agreement with Wells Fargo Advisors, LLC for the purpose of obtaining a revolving line
of credit. The amount the Fund can borrow is based upon the value of cash deposited in an account at Wells Fargo Advisors,
LLC, which serves as collateral for the loan.  On August 28, 2015, the Fund drew down an additional $2.0 million. As of
March 31, 2016, the outstanding balance under this credit line was $7.1 million. The interest rate on the outstanding balance
is currently 3.00%.





On September 10, 2015,
the Fund entered into an agreement with the Morgan Stanley Private Bank, N.A. The amount the Fund can borrow is based upon the
value of cash deposited in an account at Morgan Stanley Private Bank, N.A., which serves as collateral for the loan. The maximum
amount which the Fund may borrow under the line of credit is $1.8 million. As of March 31, 2016, the outstanding balance under
this credit line was $1.8 million. The interest rate on the outstanding balance is currently 5.375%.





We generate cash primarily
from the net proceeds of our ongoing continuous public offering and from cash flows from fees, interest and dividends earned from
our investments as well as principal repayments and proceeds from sales of our investments. On July 10, 2012, we satisfied our
minimum offering requirement of raising gross offering proceeds in excess of $1.0 million from persons who are not affiliated with
us or our Manager, and commenced operations. As of March 31, 2016, we had issued 6.5 million shares of common stock, including
0.4 million shares under our distribution reinvestment plan (“DRIP”) less 0.3 million shares redeemed under our tender
offer. As of March 31, 2016, we had received gross proceeds from our continuous offering of total $64.6 million, including $3.8
million under our DRIP less $2.9 million paid to redeem shares in our quarterly tenders.





29







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





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 March
31, 2016 and December 31, 2015, we had $0.4 million and $6.2 million, respectively, invested in money market investments pending
investment in debt instruments.





For the three
months ended March 31, 2016, we experienced a net decrease in money market investments of $5.8 million. For the three months
ended March 31, 2016, approximately $3.7 million was generated from our financing activities, which primarily consisted of
$7.6 million received through the priority credit line, partially offset by $3.2 million repayments of the priority credit
line and $0.7 million in distributions. We used approximately $3.7 million of cash in our operating activities mainly as the
result of the purchase of new portfolio debt investments of $13.6 million, partially offset by the receipt of proceeds from
the sale of, repayment of and principal payments on portfolio debt investments of $4.4 million.





Distributions





Subject to our board
of director’s discretion and applicable legal restrictions, we have historically authorized and declared ordinary cash distributions
on a semi-monthly basis and paid such distributions on a semi-monthly basis. However, at the August 17, 2015 Board of Directors
meeting, the Board determined that monthly distributions, at the same annual rate, would reduce costs and would be in the best
interest of the shareholders. The distribution paid to shareholders on September 30, 2015, with a record date of August 30, 2015,
represented the first monthly distribution. 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 beginning in
July 2012, then changed to a monthly distribution beginning in August 2015. Based upon our current level of operations, we estimate
that about 99.0% of our distributions will constitute a return of capital. Our distributions historically have not been based on
our investment performance. Prior to September 2013, our distributions were supported by our Manager in the form of operating expense
support payments to us, and a portion of our distributions constituted a return of capital. Since September 2013, we have not had
an expense support agreement with our Manager and as a result a greater portion of our distributions have constituted a return
of capital. A return of capital generally is a return of your investment rather than a return of earnings or gains derived
from our investment activities constitutes the return of capital previously paid to us for shares of our common stock.





30





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





|                                       |  |           |          |  | Net        |  |    | Realized    |  |  |           |  
|-------------------------------------- |  | --------- | -------- |  | ---------- |  | -- | ----------- |  |  | --------- | -
|                                       |  |           |          |  | 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 |  |            |  | 49 | %           |  |  | 0         | %
|July 1, 2014  - September 30, 2014     |  |           | 0.184668 |  |            |  | 17 | %           |  |  | 3         | %
|October 1, 2014 - December 31, 2014    |  |           | 0.181467 |  |            |  | 15 | %           |  |  | 6         | %
|January 1, 2015 - March 31, 2015       |  |           | 0.179154 |  |            |  | 15 | %           |  |  | 5         | %
|April 1, 2015 - June 30, 2015          |  |           | 0.179154 |  |            |  | 63 | %           |  |  | 15        | %
|July 1, 2015  - September 30, 2015     |  |           | 0.209015 |  |            |  | 19 | %           |  |  | 11        | %
|October 1, 2015 - December 31, 2015 ** |  |           | 0.170315 |  |            |  | —  | %           |  |  | 6         | %
|January 1, 2016 – March 31, 2016 ***   |  |           | 0.169968 |  |            |  | 1  | %           |  |  | —         | %







* Includes a special
distribution of $0.077 per share.





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





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





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





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





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





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





The following table
reflects the sources of the cash distributions on a tax basis that the Fund has paid on its common stock (dollars in thousands)
during the three months ended March 31, 2016 and fiscal years ended December 31, 2015, 2014 and 2013:





|Source of Distributions:                 |  | Three
                                         monthsended March
               31, 2016 |       |  | Year
    ended
    December 31, 2015 |  |       | Year
    ended
    December 31, 2014 |  |   | Year
                                         ended December
                                         31, 2013 | 
|---------------------------------------- |  | ---------------------------------------------------------------------------------------- | ----- |  | ------------------------------------ |  | ----- | ------------------------------------ |  | - | -------------------------------------------------------------------------------------------------------------- | 
|Distributions from net investment income |  | $                                                                                        | 8     |  |                                      |  | 0.8   | %                                    |  | $ | 830                                                                                                            | 
|Distributions from realized gains        |  |                                                                                          | —     |  |                                      |  | —     |                                      |  |   | 425                                                                                                            | 
|Distributions from paid In capital       |  |                                                                                          | 1,045 |  |                                      |  | 99.2  |                                      |  |   | 3,235                                                                                                          | 
|Total                                    |  | $                                                                                        | 1,053 |  |                                      |  | 100.0 | %                                    |  | $ | 4,490                                                                                                          | 





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.





31







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 |   
|---- |  |  | ---------------- | --- |  | ------------------------------------------- | - | ----- | --------------------------------------------------------------- |  |  | --------------------------------------------------------- | - |  | ----------------------------------------------------------- | --
|2016 |  |  | $                | —   |  |                                             | $ | 8     |                                                                 |  |  | 1                                                         | % |  |                                                             | — 
|2015 |  |  | $                | 96  |  |                                             | $ | 926   |                                                                 |  |  | 21                                                        | % |  |                                                             | 9 
|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 (“BDC”), we are subject to certain regulatory restrictions in making our investments. For example, we generally
are not permitted to co-invest with certain entities affiliated with our Manager in transactions originated by our Manager or
its affiliates unless we obtain an exemptive order from the SEC or co-invest alongside our Manager or its affiliates in
accordance with existing regulatory guidance and our allocation policy. Under existing regulatory guidance, we are permitted
to, and may co-invest in syndicated deals and secondary loan market transactions where price is the only negotiated point. We
may seek exemptive relief from the SEC to engage in co-investment transactions with our Manager and/or its affiliates.
However, there can be no assurance that we will obtain such exemptive relief, if requested. Even if we receive exemptive
relief, neither our Manager nor its affiliates are obligated to offer us the right to participate in any transactions
originated by them. Prior to obtaining exemptive relief, we may co-invest alongside our Manager or its affiliates only in
accordance with existing regulatory guidance and our allocation policy.





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.





32







Item 3. Quantitative and Qualitative
Disclosures about Market Risk





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





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





Assuming that our current
financial condition were to remain constant and no actions were taken to alter our existing interest rate sensitivity, a 100 basis
point move in interest rates up or down from their March 31, 2016 levels would result in an increase or decrease in net asset value
of $0.4 million or 1.51%.







Item 4. Controls and Procedures





Disclosure Controls





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





Change in Internal
Control over Financial Reporting





No change
in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the
three months ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.





During the year ended December 31, 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.





33







Part II





OTHER INFORMATION





Item 1. Legal Proceedings







On July 30,
2015, Relativity Media, LLC (“Relativity”) filed a voluntary Chapter 11 case in the United States Bankruptcy
Court for the Southern District of New York (the “Bankruptcy Court”). The Fund owns 855,079 shares of Series E
Preferred Stock of Relativity. On October 19, 2015, Relativity filed an adversary proceeding against VII Peaks Capital, LLC
(“VII Peaks”) in the Bankruptcy Court, styled Relativity Fashion, LLC, et al. v. VII Peaks Capital, LLC,
Adversary No. 15-1361 (the “Adversary Proceeding”), alleging that our investment manager, VII Peaks breached a
commitment to provide $30 million of financing as part of a proposed reorganization of Relativity. The Fund was not named as
a defendant in the Adversary Proceeding. On October 20, 2015, Relativity sought and obtained from the Bankruptcy Court an ex
parte temporary restraining order (the “TRO”) that barred VII Peaks and “its agents, servants, officers,
employees and attorneys, and all persons in active concert or participation with them from transferring, assigning,
encumbering, or taking any other action with respect to any and all funds” in the US Bank and Wells Fargo accounts
which belong to the Fund. Neither the Fund nor VII Peaks were provided with prior notice of the hearing on the TRO or was
present at the hearing. The two accounts affected by the TRO contained substantially all of the Fund’s assets. The TRO
was dissolved pursuant to a Stipulation and Agreed Order entered by the Bankruptcy Court on October 28, 2015 (the “Stipulation”), pursuant
to which the parties agreed to engage in negotiations to resolve their dispute. As part of the Stipulation, VII Peaks agreed
to cause its clients to deposit $3 million in escrow with its counsel while negotiations are pending, of which $2.5 million
was provided by the Fund. The negotiations did not result in a settlement, and the funds in escrow were returned to VII Peaks
as of December 15, 2015.





Relativity then
filed a reorganization plan which provided that the Series E preferred stock would receive no consideration under the plan.
The Fund filed an objection to the plan. On February 2, 2016, at the hearing on confirmation Relativity’s plan, VII
Peaks and Relativity reached a memorandum of understanding regarding a settlement of Relativity’s claims against the
VII Peaks and the Fund, as well as the Fund’s objection to the plan. Under the settlement, VII Peaks or the funds it
manages, including the Fund, would receive warrants in the reorganized debtor and certain film distribution rights.  VII
Peaks or funds it manages would make a new $5 million loan to the reorganized debtor. Pending completion of the settlement,
on March 1, 2016, VII Peaks filed a motion for summary judgment to dismiss Relativity’s adversarial complaint. On March
18, 2016, the Bankruptcy Court approved Relativity’s plan of reorganization. The settlement with Relativity is still
subject to the completion of definitive documentation to evidence the terms, and has not yet been approved by the bankruptcy
court. The next bankruptcy court hearing is scheduled for May 18, 2016, but that date could be postponed. If the settlement is not
approved, Relativity’s claims against VII Peaks will be assigned to a litigation trust created to hold and prosecute a
variety of claims held by Relativity’s bankruptcy estate. We do not believe that the Fund has any exposure in the
lawsuit since no claims have been asserted against the Fund and it has not been named in the case.





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, 2015.





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.





34







Item 6. Exhibits





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







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



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



35







SIGNATURES





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





|                   | VII Peaks Co-Optivist Income BDC II, Inc.
|------------------ | -----------------------------------------
|                   |                                          
|                   |                                          
|Date: May 16, 2016 | By                                       
|                   |                                          
|                   |                                          



|                   |                                          
|------------------ | -----------------------------------------
|                   |                                          
|                   | VII Peaks Co-Optivist Income BDC II, Inc.
|                   |                                          
|                   |                                          
|Date: May 16, 2016 | By                                       
|                   |                                          





36