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 September 30, 2015                                      



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



Commission File No. 0-54615








VII Peaks Co-Optivist Income BDC II,
Inc.

(Exact name of Registrant as specified
in its charter)








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



4 Orinda Way, Suite 125-A

Orinda, CA 94563

(Address of principal executive offices)



(855) 889-1778

(Registrant’s telephone number,
including area code)



Not applicable

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








Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes x No  ̈



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



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



|Large accelerated filer  ̈ | Accelerated filer  ̈ | Non-accelerated filer x                       | 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  ̈No x



The number of shares
of the Registrant’s common stock, par value $0.001 per share, outstanding as of November 13, 2015 was 6,153,052.











VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



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



TABLE OF CONTENTS



|           |                                                                                                                   | Page
|---------- | ----------------------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                                   |     
|PART I.    | FINANCIAL INFORMATION                                                                                             | 3   
|           |                                                                                                                   |     
|Item 1.    | Financial Statements                                                                                              | 3   
|           |                                                                                                                   |     
|           | Statements of Assets and Liabilities as of September 30, 2015 (unaudited) and December 31, 2014                   | 3   
|           |                                                                                                                   |     
|           | Statements of Operations for the three and nine months ended September 30, 2015 (unaudited) and 2014 (unaudited)  | 4   
|           |                                                                                                                   |     
|           | Statements of Changes in Net Assets for the nine months ended September 30, 2015 (unaudited) and 2014 (unaudited) | 5   
|           |                                                                                                                   |     
|           | Statements of Cash Flows for the nine months ended September 30, 2015 (unaudited) and 2014 (unaudited)            | 6   
|           |                                                                                                                   |     
|           | Schedule of Investments as of September 30, 2015 (unaudited)                                                      | 7   
|           |                                                                                                                   |     
|           | Schedule of Investments as of December 31, 2014                                                                   | 8   
|           |                                                                                                                   |     
|           | Notes to Financial Statements (unaudited)                                                                         | 9   
|           |                                                                                                                   |     
|Item 2.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations                             | 23  
|           |                                                                                                                   |     
|Item 3.    | Quantitative and Qualitative Disclosures about Market Risk                                                        | 34  
|           |                                                                                                                   |     
|Item 4.    | Controls and Procedures                                                                                           | 34  
|           |                                                                                                                   |     
|PART II.   | OTHER INFORMATION                                                                                                 | 36  
|           |                                                                                                                   |     
|Item 1.    | Legal Proceedings                                                                                                 | 36  
|           |                                                                                                                   |     
|Item 1A.   | Risk Factors                                                                                                      | 36  
|           |                                                                                                                   |     
|Item 2.    | Unregistered Sales of Equity Securities and Use of Proceeds                                                       | 36  
|           |                                                                                                                   |     
|Item 3.    | Defaults upon Senior Securities                                                                                   | 36  
|           |                                                                                                                   |     
|Item 4.    | Mine Safety Disclosures                                                                                           | 36  
|           |                                                                                                                   |     
|Item 5.    | Other Information                                                                                                 | 36  
|           |                                                                                                                   |     
|Item 6.    | Exhibits                                                                                                          | 36  
|           |                                                                                                                  
|Signatures | 37                                                                                                               





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              |        
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------
|                                                                                                                                      |  | September 30, 2015 |        
|                                                                                                                                      |  | (Unaudited)        |        
|ASSETS                                                                                                                                |  |                    |        
|                                                                                                                                      |  |                    |        
|Investments, at fair value                                                                                                            |  |                    |        
|Non-controlled/non-affiliate investments (cost of $44,099 and $44,302, respectively)                                                  |  | $                  | 32,200 
|Affiliate investments (cost of $2,000 and $0, respectively)                                                                           |  |                    | 2,000  
|Investments, money market at fair value (cost of $6,489 and $3,104, respectively)                                                     |  |                    | 6,489  
|Total investments, at fair value                                                                                                      |  |                    | 40,689 
|Interest receivable                                                                                                                   |  |                    | 847    
|Prepaid expenses                                                                                                                      |  |                    | 28     
|Origination fee receivable                                                                                                            |  |                    | 63     
|Due from related party                                                                                                                |  |                    | 87     
|Receivable for common stock purchased                                                                                                 |  |                    | -      
|Total assets                                                                                                                          |  | $                  | 41,714 
|                                                                                                                                      |  |                    |        
|LIABILITIES                                                                                                                           |  |                    |        
|Payable for unsettled trades                                                                                                          |  | $                  | -      
|Revolving line of credit                                                                                                              |  |                    | 2,000  
|Interest payable                                                                                                                      |  |                    | 5      
|Deferred loan fee                                                                                                                     |  |                    | 58     
|Management fees payable                                                                                                               |  |                    | -      
|Accounts payable and accrued liabilities                                                                                              |  |                    | 321    
|Stockholder distributions payable                                                                                                     |  |                    | 366    
|Total liabilities                                                                                                                     |  | $                  | 2,750  
|                                                                                                                                      |  |                    |        
|NET ASSETS                                                                                                                            |  |                    |        
|Preferred stock, par value, $.001 per share, 50,000,000 authorized, none issued and outstanding                                       |  | $                  | -      
|Common stock, par value, $.001 per share, 200,000,000 authorized; 6,139,125 and 5,546,292 shares issued and outstanding, respectively |  |                    | 6      
|Paid-in capital in excess of par value                                                                                                |  |                    | 58,481 
|Treasury stock at cost, 301,403 and 79,667 shares, respectively                                                                       |  |                    | (2,891 
|Accumulated distribution in excess of net investment income and net realized gain on investments                                      |  |                    | (4,733 
|Net unrealized depreciation on investments                                                                                            |  |                    | (11,899
|Total net assets                                                                                                                      |  |                    | 38,964 
|Total liabilities and net assets                                                                                                      |  | $                  | 41,714 
|                                                                                                                                      |  |                    |        
|Net asset value per share                                                                                                             |  | $                  | 6.35   



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 September 30, |           |   | For the Three Months Ended September 30, |   |           | For the Nine Months Ended September 30, |  |   | For the Nine Months Ended September 30, |  
|---------------------------------------------------- |  | ---------------------------------------- | --------- | - | ---------------------------------------- | - | --------- | --------------------------------------- |  | - | --------------------------------------- | -
|                                                     |  | 2015                                     |           |   | 2014                                     |   |           | 2015                                    |  |   | 2014                                    |  
|                                                     |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Investment income:                                   |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Interest from investments                            |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Non-controlled/non-affiliate investments             |  | $                                        | 721       |   |                                          | $ | 744       |                                         |  | $ | 2,308                                   |  
|Affiliate investments                                |  |                                          | 20        |   |                                          |   | -         |                                         |  |   | 20                                      |  
|Dividend income                                      |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Non-controlled/non-affiliate investments             |  |                                          | 107       |   |                                          |   | -         |                                         |  |   | 288                                     |  
|Affiliate investments                                |  |                                          | -         |   |                                          |   | -         |                                         |  |   | -                                       |  
|Other income                                         |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Non-controlled/non-affiliate investments             |  |                                          | -         |   |                                          |   | -         |                                         |  |   | 558                                     |  
|Affiliate investments                                |  |                                          | 3         |   |                                          |   | -         |                                         |  |   | 3                                       |  
|Total investment income                              |  | $                                        | 851       |   |                                          | $ | 744       |                                         |  | $ | 3,177                                   |  
|                                                     |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Operating expenses:                                  |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Professional fees                                    |  |                                          | 149       |   |                                          |   | 67        |                                         |  |   | 379                                     |  
|Directors fees                                       |  |                                          | 12        |   |                                          |   | 10        |                                         |  |   | 42                                      |  
|Insurance                                            |  |                                          | 24        |   |                                          |   | 24        |                                         |  |   | 72                                      |  
|Interest expense                                     |  |                                          | 6         |   |                                          |   | -         |                                         |  |   | 6                                       |  
|Management fees                                      |  |                                          | 195       |   |                                          |   | 193       |                                         |  |   | 639                                     |  
|Administrative services - related parties            |  |                                          | 54        |   |                                          |   | 30        |                                         |  |   | 162                                     |  
|General and administrative                           |  |                                          | 171       |   |                                          |   | 158       |                                         |  |   | 683                                     |  
|Offering expense                                     |  |                                          | -         |   |                                          |   | 127       |                                         |  |   | 96                                      |  
|Total operating expenses                             |  |                                          | 611       |   |                                          |   | 609       |                                         |  |   | 2,079                                   |  
|                                                     |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Net investment income                                |  |                                          | 240       |   |                                          |   | 135       |                                         |  |   | 1,098                                   |  
|                                                     |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Realized and unrealized gain (loss) on investments:  |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Net realized gain from investments                   |  |                                          | 142       |   |                                          |   | 28        |                                         |  |   | 357                                     |  
|Net unrealized depreciation on investments           |  |                                          | (4,475    | ) |                                          |   | (2,438    | )                                       |  |   | (5,025                                  | )
|Net realized and unrealized loss on investments      |  |                                          | (4,333    | ) |                                          |   | (2,410    | )                                       |  |   | (4,668                                  | )
|                                                     |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Net decrease in net assets resulting from operations |  | $                                        | (4,093    | ) |                                          | $ | (2,275    | )                                       |  | $ | (3,570                                  | )
|                                                     |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Per share information - basic and diluted:           |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Net investment income                                |  | $                                        | 0.04      |   |                                          | $ | 0.03      |                                         |  | $ | 0.18                                    |  
|Net decrease in net assets resulting from operations |  | $                                        | (0.66     | ) |                                          | $ | (0.52     | )                                       |  | $ | (0.59                                   | )
|Weighted average common shares outstanding           |  |                                          | 6,193,309 |   |                                          |   | 4,365,342 |                                         |  |   | 6,058,931                               |  



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 Nine Months Ended September 30, 2015 |           |   | For the Nine Months Ended September 30, 2014 |  
|------------------------------------------------------------------------------------------------ |  | -------------------------------------------- | --------- | - | -------------------------------------------- | -
|                                                                                                 |  |                                              |           |   |                                              |  
|Operations:                                                                                      |  |                                              |           |   |                                              |  
|Net investment income                                                                            |  | $                                            | 1,098     |   |                                              | $
|Net realized gain from investments                                                               |  |                                              | 357       |   |                                              |  
|Net unrealized depreciation on investments                                                       |  |                                              | (5,025    | ) |                                              |  
|Net decrease in net assets from operations                                                       |  |                                              | (3,570    | ) |                                              |  
|Stockholder distributions:                                                                       |  |                                              |           |   |                                              |  
|Distributions from net investment income                                                         |  |                                              | (1,098    | ) |                                              |  
|Distributions from net realized gain on investments                                              |  |                                              | (357      | ) |                                              |  
|Distributions from paid in capital                                                               |  |                                              | (1,971    | ) |                                              |  
|Net decrease in net assets from stockholder distributions                                        |  |                                              | (3,426    | ) |                                              |  
|Capital share transactions:                                                                      |  |                                              |           |   |                                              |  
|Issuance of common stock, net of issuance costs                                                  |  |                                              | 6,232     |   |                                              |  
|Reinvestment of stockholder distributions                                                        |  |                                              | 1,153     |   |                                              |  
|Total investment contributions tranferred in-kind                                                |  |                                              | -         |   |                                              |  
|Treasury capital/redemptions                                                                     |  |                                              | (2,113    | ) |                                              |  
|Net increase in net assets from capital share transactions                                       |  |                                              | 5,272     |   |                                              |  
|                                                                                                 |  |                                              |           |   |                                              |  
|Total increase (decrease) in net assets                                                          |  |                                              | (1,724    | ) |                                              |  
|Net assets at beginning of period                                                                |  |                                              | 40,688    |   |                                              |  
|Net assets at end of period                                                                      |  | $                                            | 38,964    |   |                                              | $
|                                                                                                 |  |                                              |           |   |                                              |  
|Net asset value per common share                                                                 |  | $                                            | 6.35      |   |                                              | $
|Common shares outstanding at end of period                                                       |  |                                              | 6,139,125 |   |                                              |  
|                                                                                                 |  |                                              |           |   |                                              |  
|Accumulated distribution in excess of net investment income and net realized gain on investments |  | $                                            | (4,733    | ) |                                              | $



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



5







VII PEAKS CO-OPTIVIST INCOME BDC
II, INC.



STATEMENTS OF CASH FLOWS

(in thousands, except share and per share
data)

(Unaudited)



|                                                                                                                  |  | For the Nine Months Ended  September 30, 2015 |         |   | For the Nine Months Ended  September 30, 2014 |  
|----------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | - | --------------------------------------------- | -
|                                                                                                                  |  |                                               |         |   |                                               |  
|Operating activities:                                                                                             |  |                                               |         |   |                                               |  
|Net decrease in net assets from
    operations                                                                    |  | $                                             | (3,570  | ) |                                               | $
|Adjustments to reconcile net decrease in net assets
    from operations to net cash used in operating activities: |  |                                               |         |   |                                               |  
|Paid-in-kind interest income                                                                                      |  |                                               | -       |   |                                               |  
|Paid-in-kind dividend income                                                                                      |  |                                               | (288    | ) |                                               |  
|Net accretion of discount on investments                                                                          |  |                                               | 38      |   |                                               |  
|Repayments of investments                                                                                         |  |                                               | 15,699  |   |                                               |  
|Purchase of investments                                                                                           |  |                                               | (16,892 | ) |                                               |  
|Repayments of investments - money market                                                                          |  |                                               | 36,330  |   |                                               |  
|Purchase of investments - money market                                                                            |  |                                               | (39,712 | ) |                                               |  
|Net realized gain from investments                                                                                |  |                                               | (357    | ) |                                               |  
|Net unrealized (appreciation) depreciation on investments                                                         |  |                                               | 5,025   |   |                                               |  
|Proceeds from loan fees received                                                                                  |  |                                               | 60      |   |                                               |  
|Accretion of deferred loan fees                                                                                   |  |                                               | (3      | ) |                                               |  
|(Increase) decrease in operating assets:                                                                          |  |                                               |         |   |                                               |  
|Interest receivable                                                                                               |  |                                               | 204     |   |                                               |  
|Prepaid expenses                                                                                                  |  |                                               | (9      | ) |                                               |  
|Due from related party                                                                                            |  |                                               | 79      |   |                                               |  
|Origination fee receivable                                                                                        |  |                                               | (63     | ) |                                               |  
|Receivable for common stock purchased                                                                             |  |                                               | 614     |   |                                               |  
|Increase (decrease) in operating liabilities:                                                                     |  |                                               |         |   |                                               |  
|Payable for unsettled trades                                                                                      |  |                                               | (1,340  | ) |                                               |  
|Management fees payable                                                                                           |  |                                               | (7      | ) |                                               |  
|Accounts payable and accrued liabilities                                                                          |  |                                               | 138     |   |                                               |  
|Interest payable                                                                                                  |  |                                               | 6       |   |                                               |  
|Net cash used in operating activities                                                                             |  |                                               | (4,048  | ) |                                               |  
|                                                                                                                  |  |                                               |         |   |                                               |  
|Financing activities:                                                                                             |  |                                               |         |   |                                               |  
|Proceeds from issuance of shares of common stock, net                                                             |  |                                               | 6,232   |   |                                               |  
|Redemption of common stock                                                                                        |  |                                               | -       |   |                                               |  
|Stockholder distributions                                                                                         |  |                                               | (2,071  | ) |                                               |  
|Treasury stock                                                                                                    |  |                                               | (2,113  | ) |                                               |  
|Borrowings - Revolving line
    of credit                                                                         |  |                                               | 2,000   |   |                                               |  
|Net cash provided by financing activities                                                                         |  |                                               | 4,048   |   |                                               |  
|                                                                                                                  |  |                                               |         |   |                                               |  
|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                                                                                         |  | $                                             | 129     |   |                                               | $
|Cash distribution payable                                                                                         |  | $                                             | 237     |   |                                               | $
|DRIP distribution paid                                                                                            |  | $                                             | 1,153   |   |                                               | $



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)

September 30, 2015

(Unaudited)



|Portfolio Company                                |  | Industry                                  |        | Investment Coupon
    Rate, Maturity Date |  | Principal / No. of
    Shares |        |  | Amortized Cost |   |        | Fair Value |  |   | % of
    Net Assets |  
|------------------------------------------------ |  | ----------------------------------------- | ------ | ----------------------------------------- |  | ----------------------------- | ------ |  | -------------- | - | ------ | ---------- |  | - | ------------------- | -
|Senior Secured First Lien Debt
    - 25.3% (b)   |  |                                           |        |                                           |  |                               |        |  |                |  
|American Media, Inc.                             |  | Media: Advertising, Printing & Publishing |        | 11.50%, 12/15/2017                        |  | $                             | 1,320  |  |                | $ | 1,368  |            |  | $ | 1,353               |  
|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    |            |  |   | 792                 |  
|Caesars Entertainment Operating Co., Inc. (a)(d) |  | Hotel, Gaming & Leisure                   |        | 11.25%, 6/1/2017                          |  |                               | 860    |  |                |   | 751    |            |  |   | 676                 |  
|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    |            |  |   | 578                 |  
|Goodman Networks, Inc.                           |  | Telecommunications                        |        | 12.13%, 7/1/2018                          |  |                               | 800    |  |                |   | 840    |            |  |   | 408                 |  
|Kratos Defense & Security Solutions, Inc.        |  | Aerospace and Defense                     |        | 7.00%, 5/15/2019                          |  |                               | 1,112  |  |                |   | 973    |            |  |   | 901                 |  
|Ryerson Inc./Joseph T Ryerson & Son, Inc.        |  | Metals & Mining                           |        | 9.00%, 10/15/2017                         |  |                               | 1,315  |  |                |   | 1,361  |            |  |   | 1,167               |  
|Titan International Inc.                         |  | Automobile                                |        | 6.88%, 10/1/2020                          |  |                               | 1,500  |  |                |   | 1,386  |            |  |   | 1,257               |  
|Toys R Us Property Co II LLC                     |  | Retail                                    |        | 8.50%, 12/1/2017                          |  |                               | 725    |  |                |   | 733    |            |  |   | 692                 |  
|Sub Total Senior Secured First Lien Debt         |  |                                           |        |                                           |  | $                             | 11,022 |  |                | $ | 10,829 |            |  | $ | 9,865               |  
|                                                 |  |                                           |        |                                           |  |                               |        |  |                |   |        |            |  |   |                     |  
|                                                 |  |                                           |        |                                           |  |                               |        |  |                |   |        |            |  |   |                     |  
|Senior Secured Second Lien  Debt
    - 5.7% (b)  |  |                                           |        |                                           |  |                               |        |  |                |   |        |            | 
|Aspect Software, Inc.                            |  | Telecommunications                        |        | 10.63%, 5/15/2017                         |  | $                             | 1,302  |  |                | $ | 1,316  |            |  | $ | 1,100               |  
|Claire's Stores, Inc.                            |  | Retail                                    |        | 8.88%, 3/15/2019                          |  |                               | 825    |  |                |   | 808    |            |  |   | 322                 |  
|Endeavour International Corp. (d)                |  | Energy: Oil & Gas                         |        | 12.00%, 6/1/2018                          |  |                               | 725    |  |                |   | 708    |            |  |   | 239                 |  
|Logan's Roadhouse, Inc.                          |  | Beverage, Food & Tobacco                  |        | 10.75%, 10/15/2017                        |  |                               | 770    |  |                |   | 745    |            |  |   | 508                 |  
|Saratoga Resources, Inc. (d)                     |  | Energy: Oil & Gas                         |        | 12.50%, 7/1/2016                          |  |                               | 885    |  |                |   | 912    |            |  |   | 70                  |  
|Sub Total Senior
    Secured Second Lien Debt    |  | $                                         | 4,507  |                                           |  | $                             | 4,489  |  |                | $ | 2,239  |            |  |   | 5.7                 | %
|                                                 |  |                                           |        |                                           |  |                               |        |  |                |   |        |            |  |   |                     |  
|                                                 |  |                                           |        |                                           |  |                               |        |  |                |   |        |            |  |   |                     |  
|Senior Unsecured Debt - 23.5%
    (b)            |  |                                           |        |                                           |  |                               |        |  |                |   |        |            |  |   |                     |  
|APX Group, Inc.                                  |  | Services: Consumer                        |        | 8.75%, 12/1/2020                          |  | $                             | 575    |  |                | $ | 555    |            |  | $ | 486                 |  
|Caesar's Entertainment Corp. (a)(d)              |  | Hotel, Gaming & Leisure                   |        | 10.75%, 2/1/2016                          |  |                               | 495    |  |                |   | 451    |            |  |   | 129                 |  
|Clear Channel Communications                     |  | Media: Broadcasting & Subscription        |        | 10.00%, 1/15/2018                         |  |                               | 1,400  |  |                |   | 1,349  |            |  |   | 742                 |  
|Colt Defense LLC (d)                             |  | Aerospace and Defense                     |        | 8.75%, 11/15/2017                         |  |                               | 1,253  |  |                |   | 1,029  |            |  |   | 119                 |  
|DynCorp International Inc.                       |  | Aerospace and Defense                     |        | 10.38%, 7/1/2017                          |  |                               | 1,135  |  |                |   | 1,144  |            |  |   | 812                 |  
|EarthLink Holdings Corp.                         |  | Telecommunications                        |        | 8.88%, 5/15/2019                          |  |                               | 279    |  |                |   | 274    |            |  |   | 287                 |  
|Gymboree Corp.                                   |  | Retail                                    |        | 9.13%, 12/1/2018                          |  |                               | 810    |  |                |   | 771    |            |  |   | 251                 |  
|Nuverra Environmental Solutions, Inc.            |  | Environmental Industries                  |        | 9.88%, 4/15/2018                          |  |                               | 1,325  |  |                |   | 1,354  |            |  |   | 775                 |  
|Ryerson Inc./Joseph T Ryerson & Son, Inc.        |  | Metals & Mining                           |        | 11.25%, 10/15/2018                        |  |                               | 1,500  |  |                |   | 1,530  |            |  |   | 1,425               |  
|Seitel, Inc.                                     |  | Energy: Oil & Gas                         |        | 9.50%, 4/15/2019                          |  |                               | 1,575  |  |                |   | 1,574  |            |  |   | 1,315               |  
|Suntech Power Holdings Company, Ltd.(c)          |  | Environmental Industries                  |        | 3.00%, 5/15/2013                          |  |                               | 100    |  |                |   | 114    |            |  |   | -                   |  
|Toys R Us Inc.                                   |  | Retail                                    |        | 10.38%, 8/15/2017                         |  |                               | 860    |  |                |   | 820    |            |  |   | 669                 |  
|UCI International Inc                            |  | Automobile                                |        | 8.63%, 2/15/2019                          |  |                               | 1,400  |  |                |   | 1,364  |            |  |   | 1,120               |  
|Visant Corp.                                     |  | Media: Advertising, Printing & Publishing |        | 10.00%, 10/1/2017                         |  |                               | 1,275  |  |                |   | 1,237  |            |  |   | 1,042               |  
|Sub Total Senior
    Unsecured Debt              |  | $                                         | 13,982 |                                           |  | $                             | 13,566 |  |                | $ | 9,172  |            |  |   | 23.5                | %
|                                                 |  |                                           |        |                                           |  |                               |        |  |                |   |        |            |  |   |                     |  
|Senior Subordinated Debt - 8.7%
    (b)          |  |                                           |        |                                           |  |                               |        |  |                |   |        |            |  |   |                     |  
|Affinion Group, Inc.                             |  | Media: Advertising, Printing & Publishing |        | 13.50%, 8/15/2018                         |  | $                             | 816    |  |                | $ | 722    |            |  | $ | 428                 |  
|Central Garden and Pet Co. (a)                   |  | Retail                                    |        | 8.25%, 3/1/2018                           |  |                               | 1,246  |  |                |   | 1,275  |            |  |   | 1,263               |  
|Claires Stores, Inc                              |  | Retail                                    |        | 10.50%, 6/1/2017                          |  |                               | 715    |  |                |   | 713    |            |  |   | 429                 |  
|DJO Finance, LLC.                                |  | Healthcare & Pharmaceuticals              |        | 10.75%, 4/15/2020                         |  |                               | 1,265  |  |                |   | 1,325  |            |  |   | 1,265               |  
|QuickSilver Resources, Inc. (d)                  |  | Energy: Oil & Gas                         |        | 7.13%, 4/1/2016                           |  |                               | 890    |  |                |   | 843    |            |  |   | -                   |  
|Sub Total Senior
    Subordinated Debt           |  | $                                         | 4,932  |                                           |  | $                             | 4,878  |  |                | $ | 3,385  |            |  |   | 8.7                 | %
|                                                 |  |                                           |        |                                           |  |                               |        |  |                |   |        |            |  |   |                     |  
|Equity Securities - 24.5%(b)                     |  |                                           |        |                                           |  |                               |        |  |                |   |        |            |  |   |                     |  
|Ansgar Media, LLC(d)(f)                          |  | Media: Broadcasting & Subscription        |        | Common Stock                              |  |                               | -      |  |                | $ | -      |            |  | $ | -                   |  
|Education Management LLC (d)                     |  | Services: Consumer                        |        | Common Stock                              |  |                               | 2,530  |  |                |   | 5      |            |  |   | 152                 |  
|Education Management LLC (d)                     |  | Services: Consumer                        |        | Warrants                                  |  |                               | 1,554  |  |                |   | 876    |            |  |   | 728                 |  
|NII Holdings, Inc. (a)(d)                        |  | Telecommunications                        |        | Common Stock                              |  |                               | 17     |  |                |   | 768    |            |  |   | 108                 |  
|Relativity Media, LLC(d)(e)                      |  | Media: Broadcasting & Subscription        |        | Preferred stock                           |  |                               | 855    |  |                |   | 10,688 |            |  |   | 8,551               |  
|Sub Total Equity
    Securities                  |  |                                           |        |                                           |  | $                             | 12,337 |  |                | $ | 9,539  |            |  |   | 24.5                | %
|                                                 |  |                                           |        |                                           |  |                               |        |  |                |   |        |            |  |   |                     |  
|Investments - Money Market - 16.7%
    (b)       |  |                                           |        |                                           |  |                               |        |  |                |   |        |            |  |   |                     |  
|Investments - Morgan Stanley Money Market        |  |                                           |        | 0.01%                                     |  | $                             | 502    |  |                | $ | 502    |            |  | $ | 502                 |  
|Investments - U.S. Bank Money Market             |  |                                           |        | 0.03%                                     |  |                               | 1,388  |  |                |   | 1,388  |            |  |   | 1,388               |  
|Investments - Wells Fargo Money Market           |  |                                           |        | 0.01%                                     |  |                               | 4,599  |  |                |   | 4,599  |            |  |   | 4,599               |  
|Sub Total Investments
    - Money Market         |  |                                           |        |                                           |  | $                             | 6,489  |  |                | $ | 6,489  |            |  |   | 16.7                | %
|                                                 |  |                                           |        |                                           |  |                               |        |  |                |   |        |            |  |   |                     |  
|TOTAL INVESTMENTS
    - 104.4% (b)               |  |                                           |        |                                           |  | $                             | 52,588 |  |                | $ | 40,689 |            |  |   | 104.4               | %



(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 8.5% of the Company's portfolio
at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying asstes.

(b) Percentages are based on net assets of $38,964 as of September
30, 2015.

(c) Non-U.S. company. The principal place of business for Suntech
Power Holdings Company, Ltd. Is China. Non-income producing as of September 30, 2015.

(d) Non-income producing as of September 30, 2015.

(e) The Class E Units are entitled to
PIK dividends at the rate of 12.5% per annum, payable in additional Class E Units. The PIK dividends accrue quarterly in
advance on the first day of each quarter, but are only issuable immediately prior to the mandatory redemption of the Class E
Units, and are not issuable upon a conversion of the Class E Units to other equity interests of the issuer. 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. The Class E Units are subject to mandatory redemption at a
price equal to $25 per share plus all accrued PIK dividends in 2020 if certain events have occurred by then.

(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.



7







VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



SCHEDULE OF INVESTMENTS

(dollars and shares in thousands)

December 31, 2014



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



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

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

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

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



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



8







VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.



NOTES TO FINANCIAL STATEMENTS

September 30, 2015



(Unaudited)



Note 1.  Nature of Operations



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



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



On August 9, 2011,
we filed a registration statement on Form N-2 to sell up to 75,000,000 shares of common stock, $0.001 par value per share, at an
initial public offering price of $10.00 per share. The registration statement was declared effective by the SEC on March 1, 2012.
We commenced operations when we raised gross offering proceeds of over $1.0 million, all of which was from persons who were not
affiliated with us or our manager by one year from the date the registration statement was declared effective by the SEC. Prior
to the successful satisfaction of that condition, all subscription payments were placed in an account held by the escrow agent,
UMB Bank, N.A., in trust for the benefit of our subscribers, pending release to us. We achieved the minimum offering requirement
on July 10, 2012 and commenced operations on such date. As of September 30, 2015, we issued 6.4 million shares of common stock,
including 0.3 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 $63.8 million, including $3.0 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/A for the year ended December 31, 2014, which was filed with the SEC on July 16,
2015. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved
for the fiscal year ending December 31, 2015.



Use of Estimates in the Preparation
of Financial Statements



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



Investments - Money Market



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



9







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.



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.



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



New Accounting Pronouncements



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



In 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. We expect the dollar amount of
interest and any dividend income that we earn to increase as the size of our investment portfolio increases.



10







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 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.



Our total investment
income was $0.9 million and $3.2 million for the three and nine months ended September 30, 2015, as compared to $0.7 million and
$2.4 million for the three and nine months ended September 30, 2014, respectively.



For the nine months
ended September 30, 2015, nine of the investments in the portfolio did not accrue interest/dividend as the issuers were in default
of the coupon payment for more than the thirty day grace period. Interest income/dividend was accrued through the date of the last
coupon payment received for these investments. These nine are Colt Defense LLC, 8.75%, November 15, 2017; Caesars Entertainment
Corp, 11.25%, June 1, 2017; Caesars Entertainment Corp, 10.75%, February 1, 2016; Endeavour International Corp., 12%, March 1,
2018; Endeavour International Corp., 12%, June 1, 2018; QuickSilver Resources, Inc., 7.13%, April 1, 2016; Saratoga Resources,
Inc., 12.50% July 1, 2016; Suntech Power Holdings Company, Ltd., 3%, May 15, 2013; and Relativity Media LLC, preferred stock, 12.50%
PIK 05/20/2020. There are four equity investments which are non-income producing as of September 30, 2015. These four are Ansgar
Media, LLC, common stock; Education Management, LLC, common stock and warrant; and NII Holdings, Inc., common stock.



Expense Reimbursement Agreement



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



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



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



11







Note 3. Valuation of Portfolio Investments



The Fund has adopted
FASB 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.



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. Thirty-three of the forty investments
were valued using the closing market price at period end September 30, 2015. The other seven investments either were not traded
or, if traded, the market did not have a sufficient amount of trades to use the quoted price for these positions. The exceptions
were the investments in equity and warrants of Education Management LLC; Endeavour International Corp., 12% notes due March 1,
2018; Endeavour International Corp., 12% notes due June 1, 2018; Ansgar Media, LLC, 12% notes due September 8, 2017 and a common
stock investment; and preferred equity investment in 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



12







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



|                                |  | Level 1 |       |  | Level 2 |   |        | Level 3 |  |   | Total  | 
|------------------------------- |  | ------- | ----- |  | ------- | - | ------ | ------- |  | - | ------ | 
|Investments – Money Market      |  | $       | 6,489 |  |         | $ | —      |         |  | $ | —      | 
|Senior Secured First Lien Debt  |  |         | —     |  |         |   | 7,287  |         |  |   | 2,578  | 
|Senior Secured Second Lien Debt |  |         | —     |  |         |   | 2,000  |         |  |   | 239    | 
|Senior Unsecured Debt           |  |         | —     |  |         |   | 9,172  |         |  |   | —      | 
|Senior Subordinated Debt        |  |         | —     |  |         |   | 3,385  |         |  |   | —      | 
|Equity Securities               |  |         | —     |  |         |   | 108    |         |  |   | 9,431  | 
|Total                           |  | $       | 6,489 |  |         | $ | 21,952 |         |  | $ | 12,248 | 



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



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



During the three month period ended September
30, 2015, there were no transfers between Level 2 and Level 3.



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



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



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



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



13







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



|                                |  | Fair Value at December 31, 2014 |       |  | Purchases(Sales andSettlement)(1) |   |        | Amortization and Accretion of Fixed Income Premiums and Discounts |  |   | Realized and Unrealized Gains (Losses) |  |  | Fair Value at September 30, 2015 |        |   | Change in Unrealized Gains and (Losses) for Investments held as of  September 30, 2015 |  
|------------------------------- |  | ------------------------------- | ----- |  | --------------------------------- | - | ------ | ----------------------------------------------------------------- |  | - | -------------------------------------- |  |  | -------------------------------- | ------ | - | -------------------------------------------------------------------------------------- | -
|Senior Secured First Lien Debt  |  | $                               | 578   |  |                                   | $ | 2,000  |                                                                   |  | $ | —                                      |  |  | $                                | —      |   |                                                                                        | $
|Senior Secured Second Lien Debt |  |                                 | 239   |  |                                   |   | —      |                                                                   |  |   | —                                      |  |  |                                  | —      |   |                                                                                        |  
|Equity Securities               |  |                                 | 874   |  |                                   |   | 10,688 |                                                                   |  |   | —                                      |  |  |                                  | (2,131 | ) |                                                                                        |  
|Total                           |  | $                               | 1,691 |  |                                   | $ | 12,688 |                                                                   |  | $ | —                                      |  |  | $                                | (2,131 | ) |                                                                                        | $



(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 paydowns received.



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



|                                |  | Fair Value at December 31, 2013 |       |  | Purchases (Sales and Settlement) |   |     | Amortization and Accretion of Fixed Income Premiums and Discounts |  |   | Realized and Unrealized Gains (Losses) |  |  | Fair Value at December 31, 2014 |      |   | Change in Unrealized Gains and (Losses) for Investments held as of December 31, 2014 |  
|------------------------------- |  | ------------------------------- | ----- |  | -------------------------------- | - | --- | ----------------------------------------------------------------- |  | - | -------------------------------------- |  |  | ------------------------------- | ---- | - | ------------------------------------------------------------------------------------ | -
|Senior Secured First Lien Debt  |  | $                               | 539   |  |                                  | $ | 25  |                                                                   |  | $ | —                                      |  |  | $                               | 14   |   |                                                                                      | $
|Senior Secured Second Lien Debt |  |                                 | 655   |  |                                  |   | —   |                                                                   |  |   | —                                      |  |  |                                 | (416 | ) |                                                                                      |  
|Equity Securities               |  |                                 | 293   |  |                                  |   | 648 |                                                                   |  |   | —                                      |  |  |                                 | (67  | ) |                                                                                      |  
|Total                           |  | $                               | 1,487 |  |                                  | $ | 673 |                                                                   |  | $ | —                                      |  |  | $                               | (469 | ) |                                                                                      | $



Realized and unrealized
gains and losses are included in net realized gain (loss) on investments and net change in unrealized gain (loss) on investments
in the Statement of Operations. The change in unrealized losses for Level 3 investments still held as of September 30, 2015 was
$2.1 million.



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



|                                |  |            |        |  | Valuation |             | Unobservable |                   |      |   |        | Range   | 
|------------------------------- |  | ---------- | ------ |  | --------- | ----------- | ------------ | ----------------- | ---- | - | ------ | ------- | 
|                                |  | Fair Value |        |  | Technique |             | Input        |                   | Mean |   |        | Minimum | 
|Senior Secured First Lien Debt  |  | $          | 2,578  |  |           | Liquidation |              | Transaction Value |      | $ | 2,578  |         | 
|Senior Secured Second Lien Debt |  |            | 239    |  |           | Liquidation |              | Transaction Value |      |   | 258    |         | 
|Equity Securities               |  |            | 9,431  |  |           | Liquidation |              | Transaction Value |      |   | 10,616 |         | 
|Total                           |  | $          | 12,248 |  |           |             |              |                   |      |   |        |         | 



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



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



14







The primary significant unobservable input used in the fair value measurement of Education Management’s
2 equity securities is the completion of an exchange offer by the issuer in October 2014, whereby issuer completed the exchange
of 94% of its indebtedness into shares of preferred stock and warrants that represent ownership of 96% of the company. The Fund
believes that the value of the notes was artificially depressed by the heavy debt load carried by the issuer, which created a threat
of default and bankruptcy. The issuer’s fundamentals for the year ended June 30, 2014 reflect that it had an operating loss
only as a result of impairments taken against long-term assets, and that it had a positive cash flow from operations. As a result,
the Fund determined that the preferred shares and warrants into which the notes were converted should be worth at least the face
value of the notes based upon the recent operating performance of the company. On April 17, 2015, the Fund received a notice for
mandatory reorganization from Education Management Corp. to convert each share of Series A-2 preferred stock into 317 shares of
common stock. We are still waiting for warrant conversion guidelines. The other preferred equity investment in Relativity Media
and its associated PIK is being carried at 80% of the cost based on its recent restructuring activities. Ansgar Media’s senior
secured first lien debt is being carried at cost since we just completed the transaction in first week of September 2015. The primary
significant unobservable input used in the fair value measurement of Endeavour’s Senior Secured First Lien and one of the
Senior Secured Second Lien was the terms of the restructuring offered by the issuer, not yet final.



The composition of the Fund’s investments
as of September 30, 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      |  | $                             | 6,489  |  |                           | $ | 6,489  |                                          | 
|Senior Secured First Lien Debt  |  |                               | 10,829 |  |                           |   | 9,865  |                                          | 
|Senior Secured Second Lien Debt |  |                               | 4,489  |  |                           |   | 2,239  |                                          | 
|Senior Unsecured Debt           |  |                               | 13,566 |  |                           |   | 9,172  |                                          | 
|Senior Subordinated Debt        |  |                               | 4,878  |  |                           |   | 3,385  |                                          | 
|Equity Securities               |  |                               | 12,337 |  |                           |   | 9,539  |                                          | 
|Total                           |  | $                             | 52,588 |  |                           | $ | 40,689 |                                          | 



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



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



Note 4.  Related Party Transactions



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



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



15







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



Investment Advisory Agreement



The Fund has entered into an investment
advisory agreement with the Manager to manage the Fund’s investment activities. Pursuant to the investment advisory agreement,
the Manager implements the Fund’s business strategy on a day-to-day basis and performs certain services for us, subject to
oversight by our Board of Directors, or a committee thereof. The Manager is responsible for, among other duties, determining investment
criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties.
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 Company 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 and nine months ended September 30, 2015, the Fund incurred $0.2
million and $0.6 million of base management fees, respectively. For the three and nine months ended September 30, 2014, the Fund
incurred $0.2 million and $0.5 million of base management fees, respectively.



The incentive fee has
two parts. The first part, the subordinated incentive fee on income, is calculated and payable quarterly in arrears based upon
the Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter. The subordinated
incentive fee on income is 20% of pre-incentive net investment income subject to a quarterly return to investors, expressed as
a rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 2.0% (8.0% annualized).
The second part of the incentive fee, the incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated
investments from the portfolio and is determined and payable in arrears as of the end of each calendar year (or upon termination
of the investment advisory agreement). This fee equals 20% of the Fund’s incentive fee capital gains, which will equal the
Fund’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed
net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any
previously paid capital gains incentive fees. For the three and nine months ended September 30, 2015 and 2014, 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 initial offering and organizational expenses. Pursuant to the terms of the investment
advisory agreement, the Fund has agreed to reimburse the Manager for any such organizational and offering expenses incurred by
the Manager not to exceed 1.5% of the gross subscriptions raised by the Fund over the course of the offering period, which is currently
scheduled to terminate two years from the initial offering date, unless extended. From each sale of common stock, the Fund pays
the Manager the lesser of 1.5% of the gross offering proceeds or the amount of unreimbursed offering and organizational expenses
incurred by the Manager. The Fund expenses organizational and offering costs as they become payable to the Manager under the investment
advisory agreement.



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



16







From time to time,
the Fund has paid directly certain expenses that were classified as organization or offering expenses that should have been borne
by the prior manager and for which the prior manager is obligated to reimburse the Fund. As of September 30, 2015 and December
31, 2014, the unreimbursed amount of organization and offering expenses was $0.1 million and $0.2 million, respectively, which
amount is included in “Due from related party” on the Fund’s Statements of Assets and Liabilities as of that
date.



Administration Agreement



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



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



Under the administration
agreement, our Manager will also provide on our behalf managerial assistance to portfolio companies that request such assistance.
The amount of reimbursements to our Manager or services charged directly are captured in the Statement of Operations under “Administrative
Services”. During the three and nine months ended September 30, 2015, the Fund reimbursed the Manager or was charged directly
for $0.05 million and $0.2 million in administration expenses under the administration agreement, respectively. During the three
and nine months ended September 30, 2014, the Fund reimbursed the Manager or was charged directly for $0.03 million and $0.05 million
in administration expenses under the administration agreement, respectively.



Note 5.  Common Stock



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



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



During the nine months
ended September 30, 2015, the Fund sold 592,833 shares of common stock in its offering for net proceeds of $6.2 million.



17







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 serve as collateral for the loan.  On August
28, 2015, the Fund drew down $2.0 million. As of September 30, 2015, the outstanding balance under this credit line was $2.0 million.
The interest rate on the outstanding balance is currently 2.75%.



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 September 30, 2015, there was no
outstanding balance under this credit line.  The interest rate on borrowings under the line of credit will be determined
at the time of the borrowing.





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 (decrease) in net assets per share from operations
for the three and nine months ended September 30, 2015 and 2014 (dollars in thousands except share and per share amounts):



|                                                                          |  | For the three months ended September 30, 2015 |           |   | For the three months ended September 30, 2014 |  
|------------------------------------------------------------------------- |  | --------------------------------------------- | --------- | - | --------------------------------------------- | -
|Basic and diluted                                                         |  |                                               |           |   |                                               |  
|Net increase (decrease) in net assets resulting from operations           |  | $                                             | (4,093    | ) |                                               | $
|Weighted average common shares outstanding                                |  |                                               | 6,193,309 |   |                                               |  
|Net increase (decrease) in net assets resulting from operations per share |  | $                                             | (0.66     | ) |                                               | $



|                                                                          |  | For the nine months ended September 30, 2015 |           |   | For the nine months ended September 30, 2014 |  
|------------------------------------------------------------------------- |  | -------------------------------------------- | --------- | - | -------------------------------------------- | -
|Basic and diluted                                                         |  |                                              |           |   |                                              |  
|Net increase (decrease) in net assets resulting from operations           |  | $                                            | (3,570    | ) |                                              | $
|Weighted average common shares outstanding                                |  |                                              | 6,058,931 |   |                                              |  
|Net increase (decrease) in net assets resulting from operations per share |  | $                                            | (0.59     | ) |                                              | $



The Fund had no potentially
dilutive securities as of September 30, 2015 or September 30, 2014, 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 the fourth
calendar quarter of 2013 and on a quarterly basis thereafter, as approved by the Board of Directors, we intend to offer to repurchase
shares of our common stock at a price equal to 90% of our offering price on the date of repurchase. We currently intend to limit
the number of shares to be repurchased during any calendar year to 20% of the weighted average number of shares outstanding in
the prior calendar year, or 5.0% in each quarter, though the actual number of shares that we offer to repurchase may be less in
light of the limitations noted above. We will offer to repurchase such shares on each date of repurchase at a price equal to 90%
of our offering price. For the three months ended March 31, 2015, 5,811 treasury shares were repurchased at $8.775 for the total
consideration of $0.05 million. A tender offer was conducted in the second quarter but because proper notifications were not distributed
to the shareholders in a timely manner, the offer was extended until July 29, 2015 in which, 215,935 treasury shares were repurchased
at $8.775 for aggregate consideration of $1.9 million. In the third quarter of 2015, no tender offer was approved by the Board
of Directors.



18







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



|For the Three Months Ended |  | Repurchase Date           |  | Shares
    Repurchased |  |  | Percent of
    Shares Tendered that were Repurchased |  |         | Repurchase
    Price Per Share |  |  | Aggregate
    Consideration for Repurchased  Shares ('000s) * |  
|-------------------------- |  | ------------------------- |  | ---------------------- |  |  | ---------------------------------------------------- |  | ------- | ------------------------------ |  |  | ------------------------------------------------------------- | -
|March 31, 2014             |  | March 14, 2014            |  |                        |  |  |                                                      |  | 550     |                                |  |  | 100                                                           | %
|June 30, 2014              |  | June 27, 2014             |  |                        |  |  |                                                      |  | 34,025  |                                |  |  | 100                                                           | %
|September 30, 2014         |  | September 30, 2014        |  |                        |  |  |                                                      |  | 38,482  |                                |  |  | 100                                                           | %
|December 31, 2014          |  | December 30, 2014         |  |                        |  |  |                                                      |  | 6,061   |                                |  |  | 100                                                           | %
|March 31, 2015             |  | March 30, 2015            |  |                        |  |  |                                                      |  | 5,811   |                                |  |  | 100                                                           | %
|June 30, 2015              |  | July 29, 2015             |  |                        |  |  |                                                      |  | 215,935 |                                |  |  | 69                                                            | %
|September 30, 2015         |  | September 30, 2015
    ** |  |                        |  |  |                                                      |  | —       |                                |  |  | —                                                             |  
|                           |  |                           |  |                        |  |  |                                                      |  |         |                                |  |  |                                                               |  



* The difference between
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 quarter ended September 30, 2015.



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



Note 9.  Distributions



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



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



As of September 30,
2015, the Fund has accrued $0.4 million in stockholder distributions that were unpaid. This amount with record date of September
29, 2015 and paid on October 31, 2015 has been accrued in the September 30, 2015 financial statements. As of December 31, 2014,
the Fund accrued $0.2 million in stockholder distributions that were unpaid. This amount, with record date of December 29, 2014
and paid on January 15, 2015 was accrued in the December 31, 2014 financial statements.



19







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



Source of Distribution by Cash vs. DRIP:



|                                      |  |           |          |  | Net Investment |   |       | Realized 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   |  |           | 0.181452 |  |                |   | 144   |                    |  |   | 52        |  |  |       | 748   |  |         |   | 944   |      | 
|January 1, 2015 – March 31, 2015      |  |           | 0.179154 |  |                |   | 153   |                    |  |   | 52        |  |  |       | 824   |  |         |   | 1,029 |      | 
|April 1, 2015 - June 30, 2015         |  |           | 0.179154 |  |                |   | 705   |                    |  |   | 163       |  |  |       | 243   |  |         |   | 1,111 |      | 
|July 1, 2015 – September 30, 2015     |  |           | 0.209015 |  |                |   | 240   |                    |  |   | 142       |  |  |       | 904   |  |         |   | 1,286 |      | 
|TOTAL                                 |  | $         | 2.573049 |  |                | $ | 2,865 |                    |  | $ | 918       |  |  | $     | 4,728 |  |         | $ | 8,511 |      | 



* Includes a special distribution of $0.077
per share.



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



Percentage of Distributions by Source:



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



20







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



|                                         |  | Nine months ended  |       |  | Year ended        |  |       | Year ended        |  |   | Year ended        | 
|---------------------------------------- |  | ------------------ | ----- |  | ----------------- |  | ----- | ----------------- |  | - | ----------------- | 
|Source of Distributions:                 |  | September 30, 2015 |       |  | December 31, 2014 |  |       | December 31, 2013 |  |   | December 31, 2012 | 
|Distributions from net investment income |  | $                  | 1,098 |  |                   |  | 32.1  | %                 |  | $ | 819               | 
|Distributions from realized gains        |  |                    | 357   |  |                   |  | 10.4  | %                 |  |   | 166               | 
|Distributions from paid In capital       |  |                    | 1,971 |  |                   |  | 57.5  | %                 |  |   | 2,153             | 
|TOTAL                                    |  | $                  | 3,426 |  |                   |  | 100.0 | %                 |  | $ | 3,138             | 



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



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



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:



|     |  | Offering Expenses |     |  | Net Investment Income excluding offering costs |   |       | % Distribution from Net Investment Income excluding offering costs |  |  | % Distributions from Realized Gains excluding offering costs |   |  | % Distributions from Paid In Capital excluding offering costs |   
|---- |  | ----------------- | --- |  | ---------------------------------------------- | - | ----- | ------------------------------------------------------------------ |  |  | ------------------------------------------------------------ | - |  | ------------------------------------------------------------- | --
|2015 |  | $                 | 96  |  |                                                | $ | 1,194 |                                                                    |  |  | 35                                                           | % |  |                                                               | 10
|2014 |  | $                 | 352 |  |                                                | $ | 1,171 |                                                                    |  |  | 37                                                           | % |  |                                                               | 5 
|2013 |  | $                 | 322 |  |                                                | $ | 1,120 |                                                                    |  |  | 66                                                           | % |  |                                                               | 23
|2012 |  | $                 | 142 |  |                                                | $ | 292   |                                                                    |  |  | 100                                                          | % |  |                                                               | 0 



Note 10.  Financial Highlights



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



|                                                                       |  | For the nine months ended  September 30, 2015 |           |    | For the nine months ended September 30, 2014 |  
|---------------------------------------------------------------------- |  | --------------------------------------------- | --------- | -- | -------------------------------------------- | -
|Per share data:                                                        |  |                                               |           |    |                                              |  
|Net asset value, beginning of period                                   |  | $                                             | 7.34      |    |                                              | $
|                                                                       |  |                                               |           |    |                                              |  
|Results of operations (1)                                              |  |                                               |           |    |                                              |  
|Net investment income                                                  |  |                                               | 0.18      |    |                                              |  
|Net realized gain on investments                                       |  |                                               | 0.06      |    |                                              |  
|Net unrealized gain (loss) on investments                              |  |                                               | (0.83     | )  |                                              |  
|                                                                       |  |                                               |           |    |                                              |  
|Net increase (decrease) in net assets resulting from operations        |  |                                               | (0.59     | )  |                                              |  
|                                                                       |  |                                               |           |    |                                              |  
|Stockholder distributions (2)                                          |  |                                               |           |    |                                              |  
|Distributions from net investment income                               |  |                                               | (0.18     | )  |                                              |  
|Distributions from realized gains                                      |  |                                               | (0.06     | )  |                                              |  
|Distributions from capital                                             |  |                                               | (0.33     | )  |                                              |  
|Net decrease in net assets resulting from stockholder distributions    |  |                                               | (0.57     | )  |                                              |  
|                                                                       |  |                                               |           |    |                                              |  
|Capital share transactions                                             |  |                                               |           |    |                                              |  
|Impact from issuance of common stock (3)                               |  |                                               | 0.17      |    |                                              |  
|Net increase in net assets resulting from capital share transactions   |  |                                               | 0.17      |    |                                              |  
|Net asset value, end of period                                         |  | $                                             | 6.35      |    |                                              | $
|Shares outstanding at end of period                                    |  |                                               | 6,139,125 |    |                                              |  
|Total return (5)                                                       |  |                                               | (8.62     | )% |                                              |  
|Ratio/Supplemental data:                                               |  |                                               |           |    |                                              |  
|Net assets, end of period (in thousands)                               |  | $                                             | 38,964    |    |                                              | $
|Average net assets (in thousands)                                      |  | $                                             | 42,296    |    |                                              | $
|Ratio of net investment income to average net assets (4)(7)            |  |                                               | 3.47      | %  |                                              |  
|Ratio of operating expenses to average net assets (4)(7)               |  |                                               | 6.57      | %  |                                              |  
|Ratio of interest and debt financing expense to average net assets (7) |  |                                               | 0.02      | %  |                                              |  
|Portfolio turnover ratio (6)                                           |  |                                               | 41.96     | %  |                                              |  



21







| | (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 nine months ended September 30, 2015 and 2014.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | (4) | The ratios are after giving effect to amounts reimbursed by the Manager under an expense reimbursement
agreement. See “Note 4 – Related Party Transactions.” For the nine months ended September 30, 2015 and 2014,
there was no expense waiver and reimbursement.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Total return is calculated assuming a purchase of shares at the current net asset value on the
first day and a sale at the current net asset value on the last day of the periods reported. Distributions, if any, are assumed
for purposes of this calculation to be reinvested at prices obtained under the DRIP. For the nine months ended September 30, 2015
and 2014, there was no expense reimbursement.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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



Note 11.  Subsequent Events



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





On July 30, 2015, Relativity Media, LLC
(“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 VII Peaks breached a commitment to provide $30 million of financing as
part of a proposed reorganization of Relativity. VII Peaks is our investment manager. 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 bars 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, 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 Funds in escrow may be returned if VII Peaks determines that negotiations
are concluded with or without a settlement. Relativity’s motion for a temporary restraining order to freeze the
Fund’s accounts remains pending, and is set for hearing on November 24, 2015. VII Peaks is defending the case
vigorously, and contends, among other things, that the parties never reached a binding agreement on the terms of an
investment and that Relativity has suffered no harm since it has obtained alternative financing to replace the financing it
contends that VII Peaks did not provide. In response to the motion for temporary restraining order, VII Peaks is also arguing
that the Fund’s accounts should not be frozen since it is not even a party in the case and never signed any agreement
to make a further investment in Relativity of any nature.





22









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



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



Forward-Looking Statements



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



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



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



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



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



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



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



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



Overview



We invest
in discounted corporate debt and equity-linked debt and preferred equity securities of companies that have a perceived risk
of near term liquidity issues but have solid business fundamentals and prospects, including historical revenue growth,
positive cash flow, significant and sustainable market presence, and sufficient asset coverage.  With regard to our
discounted corporate debt investments, 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 financial
position. 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.



23







Critical Accounting
Policies



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



Valuation of Portfolio Investments



We have adopted Financial
Accounting Standards Board, or FASB, Accounting Standards Codification, or 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. Thirty-three of the forty investments were valued
using the closing market price at period end September 30, 2015. The exceptions were the two equity investments in Education Management
LLC, a common stock and a warrant, the two notes from Endeavour International Corp., one with a 12.00% interest rate and maturity
date of March 1, 2018, the second with a 12.00% interest rate and maturity date of June 1, 2018, the two investments in Ansgar
Media, LLC, one common stock, the second a note with a 12.00% interest rate and maturity date of September 8, 2017 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
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



24







| | • | 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.



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



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



25







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



U.S. Federal Income Taxes



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



Portfolio and Investment Activity



During the
three months ended September 30, 2015, we made $2.0 million of investments in new and existing portfolio companies and had
$3.4 million in aggregate amount of exits and repayments, resulting in net repayments of $1.4 million for the period. During
the three months ended September 30, 2014, we made $8.0 million of investments in new and existing portfolio companies and
had $3.4 million in aggregate amount of exits and repayments, resulting in net investments of $4.6 million for the
period.



During the
nine months ended September 30, 2015, we made $16.9 million of investments in new and existing portfolio companies and had
$15.7 million in aggregate amount of exits and repayments, resulting in net investments of $1.2 million for the period.
During the nine months ended September 30, 2014, we made $23.3 million of investments in new and existing portfolio companies
and had $10.8 million in aggregate amount of exits and repayments, resulting in net investments of $12.5 million for the
period.



26







As of
September 30, 2015, we have invested an aggregate of approximately $41.5 million in 40 investment positions in 31 portfolio
companies. At September 30, 2015, the fair value of our investment positions was $35.0 million (excluding money market
investments and including the accrued interest and dividends of $0.8 million). As of such date, our estimated gross annual
portfolio yield was 5.5% (9.05% on our debt portfolio) and gross annual portfolio yield to maturity was 10.8% (excluding
equity investments and non-accrual investments) based on the purchase price of our investments. The average duration of our
debt portfolio was approximately 2.6 years. During the nine months ended September 30, 2015, we exited 9 portfolio companies
in full and 4 partially for aggregate sales proceeds of $15.7 million. As of September 30, 2015, we had one portfolio
investment in default of payment of its par value at maturity date, Suntech Power Holdings Company, with a fair value of $10
which represented a negligible amount of our total portfolio. As of September 30, 2015, in addition to the investment in
maturity date default, seven additional debt investments had not paid coupon interest as due beyond the thirty day grace
period. These investments are Colt Defense LLC, 8.75%, November 15, 2017; Caesars Entertainment Corp, 11.25%, June 1, 2017;
Caesars Entertainment Corp, 10.75%, February 1, 2016; Endeavour International Corp., 12%, March 1, 2018; Endeavour
International Corp., 12%, June 1, 2018; QuickSilver Resources, Inc., 7.13%, April 1, 2016; and Saratoga Resources, Inc.,
12.50% July 1, 2016. Interest on these investments was accrued through the date that the last coupon payment was received.
There are five equity investments which are non-income producing as of September 30, 2015. These five are Ansgar Media, LLC,
common stock; 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 based on fair value of our investments as of September 30, 2015:



|                                |  | As of September 30, 2015      |      
|------------------------------- |  | ----------------------------- | -----
|                                |  | Percentage of Total Portfolio |      
|Investments – Money Market      |  |                               | 16.0 
|Senior Secured First Lien Debt  |  |                               | 24.2 
|Senior Secured Second Lien Debt |  |                               | 5.5  
|Senior Unsecured Debt           |  |                               | 22.5 
|Senior Subordinated Debt        |  |                               | 8.3  
|Equity Securities               |  |                               | 23.5 
|Total                           |  |                               | 100.0



* 6.5% yield is on invested capital and
excludes money market investments.



As of September 30, 2015, our debt
investment portfolio had a yield to maturity of 10.8%, and an average duration of 2.57 years.



The following table shows the weighted
average yield of our portfolio based on fair value of our investments as of December 31, 2014:



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



* 9.6% yield is on invested capital
and excludes money market investments.



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



27







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



|                                          |  | As of September 30, 2015  |       
|----------------------------------------- |  | ------------------------- | ------
|                                          |  | Investments at Fair Value |       
|Media: Broadcasting & Subscription        |  | $                         | 11,293
|Investments – Money Market                |  |                           | 6,489 
|Retail                                    |  |                           | 3,626 
|Media: Advertising, Printing & Publishing |  |                           | 2,823 
|Metals & Mining                           |  |                           | 2,592 
|Automobile                                |  |                           | 2,377 
|Energy: Oil & Gas                         |  |                           | 2,202 
|Services: Consumer                        |  |                           | 2,158 
|Telecommunications                        |  |                           | 1,945 
|Aerospace and Defense                     |  |                           | 1,831 
|Healthcare and Pharmaceuticals            |  |                           | 1,265 
|Hotel, Gaming & Leisure                   |  |                           | 805   
|Environmental Industries                  |  |                           | 775   
|Beverage, Food & Tobacco                  |  |                           | 508   
|Total                                     |  | $                         | 40,689



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



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



Our fair value
of total investments was $40.7 million as of September 30, 2015 as compared to $40.5 million as of December 31, 2014. The
portfolio increase in the nine months ending September 30, 2015 is mainly due to invested proceeds from continuous
investor closings through April 30, 2015, offset by unrealized depreciation in certain investments in the portfolio.



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.



28







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



|                                                                |  | For the three months ended September 30, 2015 |        |   | For the three months ended September 30, 2014 |  
|--------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | --------------------------------------------- | -
|Total investment income                                         |  | $                                             | 851    |   |                                               | $
|Total expenses, net                                             |  |                                               | 611    |   |                                               |  
|Net investment income                                           |  |                                               | 240    |   |                                               |  
|Net realized gains from investments                             |  |                                               | 142    |   |                                               |  
|Net unrealized appreciation (depreciation) on investments       |  |                                               | (4,475 | ) |                                               |  
|Net increase (decrease) in net assets resulting from operations |  | $                                             | (4,093 | ) |                                               | $



|                                                                |  | For the nine months ended September 30, 2015 |        |   | For the nine months ended September 30, 2014 |  
|--------------------------------------------------------------- |  | -------------------------------------------- | ------ | - | -------------------------------------------- | -
|Total investment income                                         |  | $                                            | 3,177  |   |                                              | $
|Total expenses, net                                             |  |                                              | 2,079  |   |                                              |  
|Net investment income                                           |  |                                              | 1,098  |   |                                              |  
|Net realized gains from investments                             |  |                                              | 357    |   |                                              |  
|Net unrealized appreciation (depreciation) on investments       |  |                                              | (5,025 | ) |                                              |  
|Net increase (decrease) in net assets resulting from operations |  | $                                            | (3,570 | ) |                                              | $



Revenues





We generated investment income of $0.9
million and $3.2 million for the three and nine months ended September 30, 2015, as compared to $0.7 million and $2.4 million
for the three and nine months ended September 30, 2014. Interest revenue was $0.7 million and $2.3 million for the three and
nine months ended September 30, 2015, as compared to $0.7 million and $2.3 million for the three and nine months ended
September 30, 2014. The decrease in interest revenue in 2015 as compared to 2014 was attributable to an increase in debt
investments placed on non-accrual status as well as a reallocation of portfolio investments from debt investments to
preferred stock investments in 2015. Dividend income was $0.1 million and $0.3 million for the three and nine months ended
September 30, 2015, as compared to $0 million for both the three and nine months ended September 30, 2014. The substantial
increase in dividend income in 2015 as compared to 2014 was the result of a significant investment made by the Fund in
preferred stock of Relativity Media, LLC in 2015, which is entitled to PIK cumulative dividends of 12.5% per annum on our
investment amount. However, we ceased accruing dividends on our investment in Relativity Media, LLC as of July 30, 2015, when
it entered Chapter 11 proceedings. Other income was $3 thousand and $0.6 million for the three and nine months ended
September 30, 2015, as compared to $0 and $0.1 million for the three and nine months ended September 30, 2014. The
substantial increase in other income in 2015 as compared to 2014 was attributable to fee income earned on the Fund’s
investment in preferred stock in Relativity Media, LLC in 2015.



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 60.6% of investment portfolio at September 30, 2015
(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. With the continuous offerings and periodic closings through April 30, 2015, the assets available for and deployed
to investment received a boost. The average balance of the debt portfolio during the three and nine months ended September 30,
2015 was significantly higher than the same periods in fiscal 2014, although that was offset by an increase in debt investments
held on nonaccrual status, thereby resulting in a decrease in interest income in 2015 as compared to 2014. At September 30, 2015,
the weighted average coupon yield of our debt investments was 6.5%, as compared to the 10.1% as of September 30, 2014. For the
nine months ended September 30, 2015, the average net assets were $42.3 million, as compared to $33.4 million for the nine months
ended September 30, 2014.



For the nine months ended September 30,
2015, eight of the investments in the debt portfolio did not accrue interest as the issuers were in default of the coupon payment
for more than the thirty day grace period. Interest income was accrued through the date of the last coupon payment received for
these investments These nine are Colt Defense LLC, 8.75%, November 15, 2017; Caesars Entertainment Corp, 11.25%, June 1, 2017;
Caesars Entertainment Corp, 10.75%, February 1, 2016; Endeavour International Corp., 12%, March 1, 2018; Endeavour International
Corp., 12%, June 1, 2018; QuickSilver Resources, Inc., 7.13%, April 1, 2016; Saratoga Resources, Inc., 12.50% July 1, 2016; and
Suntech Power Holdings Company, Ltd., 3%, May 15, 2013. At September 30, 2015, there were five equity common stock; Education
Management, LLC, common stock and warrant; NII Holdings, Inc., common stock and Relativity Media LLC, preferred stock, none of
which accrued dividends as of that date.







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.



29







Expenses



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



|                                          |  | For the three months ended September 30, 2015 |     |  | For the three months ended September 30, 2014 |  
|----------------------------------------- |  | --------------------------------------------- | --- |  | --------------------------------------------- | -
|Professional fees                         |  | $                                             | 149 |  |                                               | $
|Director fees                             |  |                                               | 12  |  |                                               |  
|Insurance                                 |  |                                               | 24  |  |                                               |  
|Interest expense                          |  |                                               | 6   |  |                                               |  
|Management fees                           |  |                                               | 195 |  |                                               |  
|Administrative services – related parties |  |                                               | 54  |  |                                               |  
|General and administrative                |  |                                               | 171 |  |                                               |  
|Offering expense                          |  |                                               | —   |  |                                               |  
|Total operating expenses                  |  | $                                             | 611 |  |                                               | $



|                                          |  | For the nine months ended September 30, 2015 |       |  | For the nine months ended September 30, 2014 |  
|----------------------------------------- |  | -------------------------------------------- | ----- |  | -------------------------------------------- | -
|Professional fees                         |  | $                                            | 379   |  |                                              | $
|Director fees                             |  |                                              | 42    |  |                                              |  
|Insurance                                 |  |                                              | 72    |  |                                              |  
|Interest expense                          |  |                                              | 6     |  |                                              |  
|Management fees                           |  |                                              | 639   |  |                                              |  
|Administrative services – related parties |  |                                              | 162   |  |                                              |  
|General and administrative                |  |                                              | 683   |  |                                              |  
|Offering expense                          |  |                                              | 96    |  |                                              |  
|Total operating expenses                  |  | $                                            | 2,079 |  |                                              | $



For the
three months ended September 30, 2015 and 2014, our operating expenses were $0.6 million and $0.6 million, respectively. For
the nine months ended September 30, 2015 and 2014, our operating expenses were $2.1 million and $1.7 million, respectively.
The rise in expenses for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014,
was due to higher professional fees and general and administrative fees. Since the Fund did not close any new business in the
three months ended September 30, 2015, there were no offering expenses incurred. The increase in expenses in the nine months
ended September 30, 2015 as compared to September 30, 2014 was offset by lower offering expenses as an update to our
registration statement was delayed approval, which reduced the gross proceeds in our continuous offering. The amount of
offering costs is directly related to the gross offering price of shares sold in the period. Professional fees were lower in
2014, as less legal and audit support was needed.



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



Net Investment Income



Our net investment
income totaled $0.2 million and $0.1 million for the three months ended September 30, 2015 and 2014, respectively. Our net investment
income totaled $1.1 million and $0.7 million for the nine months ended September 30, 2015 and 2014, respectively. Our net investment
income is derived from investment income less operating expenses for the period.



30







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



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



Net Realized Gains or Losses from Investments



For the three and
nine months ended September 30, 2015, we had $3.4 million and $15.7 million of exits and principal repayments, resulting in
$0.1 million and $0.4 million of realized gains, respectively. For the three and nine months ended September 30, 2014, we had
$3.5 million and $10.8 million of exits and principal repayments, resulting in $0.03 million and $0.1 million of
realized gains, respectively.



Net Change in Unrealized Appreciation or Depreciation
on Investments



For the three and nine
months ended September 30, 2015, we experienced $4.5 million and $5.0 million of unrealized depreciation, respectively. For the
three and nine months ended September 30, 2014, we experienced $2.4 million and $3.7 million of unrealized depreciation, respectively.
Growing concern about the pace of global growth was the main catalyst behind the risk-off sentiment and falling interest rates
during the third quarter of 2015. The devaluation of the Chinese currency was, in many ways, the tipping point as this action triggered
heightened nervousness about the global slowdown and the potential for other Asian countries in order to remain competitive. Uncertainty
about whether weakness aboard could impact the U.S. economy intensified after September’s weaker- than-expected payroll report.
Global equity markets tumbled as a result with the S&P 500 Index suffering one of its worst quarters since 2011, declining
6.44%. Treasury securities were the benefactors of the flight-to-quality with yields falling below 2%.



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



Changes in Net Assets from Operations



For the three and nine
months ended September 30, 2015, we recorded a net decrease in net assets resulting from operations of $4.1 million and $3.6 million,
respectively. For the three and nine months ended September 30, 2015, this decrease is mainly due to net unrealized depreciation
of $4.5 million and $5.0 million, respectively, partially offset by increase in net investment income of $0.2 million and $1.1
million, respectively, and by net realized gain from investments of $0.1 million and $0.4 million, respectively, earned on our
portfolio investments. Based on 6,193,309 and 6,058,931 weighted average common shares outstanding for the three and nine months
ended September 30, 2015, our per share net decrease in net assets resulting from operations was $0.66 and $0.59, respectively.



For the three and nine
months ended September 30, 2014, we recorded a net decrease in net assets resulting from operations of $2.3 million and $2.9 million,
respectively. This decrease is due to the reduction in fair value of our investment portfolio. Consistent with the high yield bond
market, the portfolio experienced a market value reduction, with a net unrealized depreciation on investments of $2.4 million for
the three months ending September 30, 2014 and $3.7 million for the nine months ending September 30, 2014. Based on 4,365,342 and
3,962,809 weighted average common shares outstanding for the three and nine months ended September 30, 2014, respectively, our
per share net decrease in net assets resulting from operations was $0.52 and $0.72, respectively.



Liquidity and Capital Resources





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 serve as collateral for the loan.  On August
28, 2015, the Fund drew down $2.0 million. As of September 30, 2015, the outstanding balance under this credit line was $2.0 million.
The interest rate on the outstanding balance is currently 2.75%.



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 September 30, 2015, there was no outstanding balance under this credit line.  The
interest rate on borrowings under the line of credit will be determined at the time of the borrowing.





31







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 September 30, 2015, we had issued 6.4 million shares of common stock, including
0.3 million shares under our distribution reinvestment plan (“DRIP”) less 0.3 million shares redeemed under our tender
offer. As of September 30, 2015, we had received gross proceeds from our continuous offering of total $63.8 million, including
$3.0 million under our DRIP less $2.9 million paid to redeem shares in our quarterly tender offers.



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



Prior to investing
in portfolio securities, we invest the net proceeds from our continuous offering primarily in money market funds that invest in
U.S. government securities and high-quality debt instruments maturing in one year or less from the time of investment. As of September
30, 2015 and December 31, 2014, we had $6.5 million and $3.1 million, respectively, invested in money market investments pending
investment in debt instruments.



For the nine months
ended September 30, 2015, we experienced a net increase in money market investments of $3.4 million. For the nine months ended
September 30, 2015, approximately $4.0 million was generated from our financing activities, which primarily consisted of $6.2 million
in net offering proceeds received, offset by $2.1 million in distributions. We used approximately $4.0 million of cash in our operating
activities primarily as the result of the purchase of new portfolio debt investments of $16.9 million, offset by the receipt of
proceeds from the sale of, repayment of and principal payments on portfolio debt investments of $15.7 million.



Distributions



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



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



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



32







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



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



Distribution Reinvestment Plan



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



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







|     |  |  | OfferingExpenses |     |  | Net InvestmentIncomeexcludingoffering costs |   |       | % Distributionfrom NetInvestmentIncomeexcludingoffering costs |  |  | % Distributionsfrom RealizedGains excludingoffering costs |   |  | % Distributionsfrom Paid InCapitalexcludingoffering costs
|---- |  |  | ---------------- | --- |  | ------------------------------------------- | - | ----- | ------------------------------------------------------------- |  |  | --------------------------------------------------------- | - |  | ---------------------------------------------------------
|2015 |  |  | $                | 96  |  |                                             | $ | 1,194 |                                                               |  |  | 35                                                        | % |  |                                                          
|2014 |  |  | $                | 352 |  |                                             | $ | 1,171 |                                                               |  |  | 37                                                        | % |  |                                                          
|2013 |  |  | $                | 322 |  |                                             | $ | 1,120 |                                                               |  |  | 66                                                        | % |  |                                                          
|2012 |  |  | $                | 142 |  |                                             | $ | 292   |                                                               |  |  | 100                                                       | % |  |                                                          







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.



33







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



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



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



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



Off-Balance Sheet Arrangements



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



Item 3. Quantitative and Qualitative Disclosures about Market
Risk



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



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 September 30, 2015 levels would result in an increase or decrease in net asset
value of $0.3 million or 0.78%.



Item 4. Controls and Procedures



Disclosure Controls



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



34







Change in Internal Control over Financial
Reporting



No change occurred
in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter
ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting, except as follows. However, during the quarter ending June 30, 2015, we determined that a material weakness
in internal control over financial reporting existed relating to the determination of offering expenses that should have been borne
by our Fund manager instead of us, and reimbursed to our manager at the rate of 1.5% of gross offering proceeds in accordance with
our investment management agreement with the Fund manager, and that the material weakness existed from the fourth quarter of 2013
to the end of fiscal 2014, including at December 31, 2013 and 2014 when management had previously concluded that its internal controls
were effective.  In response, in 2015 we implemented additional controls whereby officers will map out financial statement
line items to the relevant portions of the agreements with our Fund manager to ensure compliance and proper accounting for amounts
due thereunder.  We believe the material weakness has been remediated by the additional controls and procedures that have
been implemented.



35







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 VII Peaks breached a commitment to provide $30 million of financing as part of a proposed reorganization
of Relativity. VII Peaks is our investment manager. 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 bars 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,
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 Funds in escrow may be returned if VII Peaks determines that negotiations are concluded with
or without a settlement. Relativity’s motion for a temporary restraining order to freeze the Fund’s accounts remains
pending, and is set for hearing on November 24, 2015. VII Peaks is defending the case vigorously, and contends, among other
things, that the parties never reached a binding agreement on the terms of an investment and that Relativity has suffered no harm
since it has obtained alternative financing to replace the financing it contends that VII Peaks did not provide. In response to
the motion for temporary restraining order, VII Peaks is also arguing that the Fund’s accounts should not be frozen since
it is not even a party in the case and never signed any agreement to make a further investment in Relativity of any nature.



Item 1A. Risk Factors



There have been no
material changes from the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2014.



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



Not applicable.



Item 3. Defaults upon Senior Securities



Not applicable.



Item 4. Mine Safety Disclosures



Not applicable.



Item 5. Other Information



Not applicable.



Item 6. Exhibits



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



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



*    Filed herewith.



36







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: November 16, 2015 | By                                       
|                        |                                          
|                        |                                          
|                        |                                          
|                        |                                          



|                            | VII Peaks Co-Optivist Income BDC II, Inc.
|--------------------------- | -----------------------------------------
|                            |                                          
|Date: November 16,
    2015 | By                                       
|                            |                                          
|                            |                                          
|                            |                                          
|                            |                                          



37