UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549












Form 10-Q










|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------
|  |                                                                                            
|  | For the quarterly period ended March 31, 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 May 19, 2015 was 6,291,905.











VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



FORM 10-Q FOR THE QUARTER ENDED MARCH
31, 2015



TABLE OF CONTENTS



|           |                                                                                                                    | Page
|---------- | ------------------------------------------------------------------------------------------------------------------ | ----
|           |                                                                                                                    |     
|PART I.    | FINANCIAL
    INFORMATION                                                                                          | 3   
|           |                                                                                                                    |     
|Item 1.    | Financial
    Statements                                                                                           | 3   
|           |                                                                                                                    |     
|           | Statements
    of Assets and Liabilities as of March 31, 2015 (unaudited) and December 31, 2014                    | 3   
|           |                                                                                                                    |     
|           | Statements
    of Operations for the three months ended March 31, 2015 (unaudited) and 2014 (unaudited)            | 4   
|           |                                                                                                                    |     
|           | Statements
    of Changes in Net Assets for the three months ended March 31, 2015 (unaudited) and 2014 (unaudited) | 5   
|           |                                                                                                                    |     
|           | Statements
    of Cash Flows for the three months ended March 31, 2015 (unaudited) and 2014 (unaudited)            | 6   
|           |                                                                                                                    |     
|           | Schedule
    of Investments as of March 31, 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                          | 21  
|           |                                                                                                                    |     
|Item 3.    | Quantitative
    and Qualitative Disclosures about Market Risk                                                     | 31  
|           |                                                                                                                    |     
|Item 4.    | Controls
    and Procedures                                                                                        | 31  
|           |                                                                                                                    |     
|PART II.   | OTHER
    INFORMATION                                                                                              | 32  
|           |                                                                                                                    |     
|Item 1.    | Legal
    Proceedings                                                                                              | 32  
|           |                                                                                                                    |     
|Item 1A.   | Risk
    Factors                                                                                                   | 32  
|           |                                                                                                                    |     
|Item 2.    | Unregistered
    Sales of Equity Securities and Use of Proceeds                                                    | 32  
|           |                                                                                                                    |     
|Item 3.    | Defaults
    upon Senior Securities                                                                                | 32  
|           |                                                                                                                    |     
|Item 4.    | Mine Safety Disclosures                                                                                            | 32  
|           |                                                                                                                    |     
|Item 5.    | Other
    Information                                                                                              | 32  
|           |                                                                                                                    |     
|Item 6.    | Exhibits                                                                                                           | 32  
|           |                                                                                                                   
|Signatures | 33                                                                                                                



2







PART I – FINANCIAL
INFORMATION



Item 1. Financial Statements



VII PEAKS CO-OPTIVIST
INCOME BDC II, INC.



STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share and per share
data)



|                                                                                                                                          |  | As
    of          |       
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------
|                                                                                                                                          |  | March
    31, 2015 |       
|                                                                                                                                          |  | (Unaudited)        |       
|ASSETS                                                                                                                                    |  |                    |       
|Investments, at fair value (amortized cost of $45,291 and $44,302, respectively)                                                          |  | $                  | 38,393
|Investments, money market at fair value (cost of $3,747 and $3,104, respectively)                                                         |  |                    | 3,747 
|Total investments, at fair value                                                                                                          |  |                    | 42,140
|Interest receivable                                                                                                                       |  |                    | 1,328 
|Prepaid expenses                                                                                                                          |  |                    | 49    
|Due from related party                                                                                                                    |  |                    | 182   
|Receivable for common stock purchased                                                                                                     |  |                    | 414   
|Total assets                                                                                                                              |  | $                  | 44,113
|                                                                                                                                          |  |                    |       
|LIABILITIES                                                                                                                               |  |                    |       
|Payable for unsettled trades                                                                                                              |  | $                  | -     
|Management fees payable                                                                                                                   |  |                    | 7     
|Accounts payable and accrued liabilities                                                                                                  |  |                    | 249   
|Stockholder distributions payable                                                                                                         |  |                    | 177   
|Total liabilities                                                                                                                         |  | $                  | 433   
|                                                                                                                                          |  |                    |       
|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; 5,981,388 and 5,546,292 shares issued and outstanding, respectively |  |                    | 6     
|Paid-in capital in excess of par value                                                                                                    |  |                    | 54,996
|Treasury stock at cost, 85,478 and 79,667 shares, respectively                                                                            |  |                    | (837  
|Accumulated distribution in excess of net investment
    income and realized gain on investments                                          |  |                    | (3,587
|Net unrealized depreciation on investments                                                                                                |  |                    | (6,898
|Total net assets                                                                                                                          |  |                    | 43,680
|Total liabilities and net assets                                                                                                          |  | $                  | 44,113
|                                                                                                                                          |  |                    |       
|Net asset value per share                                                                                                                 |  | $                  | 7.30  



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 ThreeMonths EndedMarch 31, 2015 |           |   | For
the ThreeMonths EndedMarch 31, 2014 |  
|------------------------------------------------------------------- |  | --------------------------------------- | --------- | - | --------------------------------------- | -
|Investment
    income:                                              |  |                                         |           |   |                                         |  
|Interest from investments                                           |  | $                                       | 914       |   |                                         | $
|Total investment
    income                                         |  | $                                       | 914       |   |                                         | $
|                                                                    |  |                                         |           |   |                                         |  
|Operating
    expenses:                                             |  |                                         |           |   |                                         |  
|Professional fees                                                   |  |                                         | 96        |   |                                         |  
|Directors fees                                                      |  |                                         | 18        |   |                                         |  
|Insurance                                                           |  |                                         | 24        |   |                                         |  
|Management fees                                                     |  |                                         | 215       |   |                                         |  
|Administrative services - related parties                           |  |                                         | 54        |   |                                         |  
|General and administrative                                          |  |                                         | 298       |   |                                         |  
|Offering expense                                                    |  |                                         | 56        |   |                                         |  
|Total operating expenses                                            |  |                                         | 761       |   |                                         |  
|                                                                    |  |                                         |           |   |                                         |  
|Net investment
    income                                           |  |                                         | 153       |   |                                         |  
|                                                                    |  |                                         |           |   |                                         |  
|Realized
    and unrealized gain (loss) on investments:             |  |                                         |           |   |                                         |  
|Net realized gain from investments                                  |  |                                         | 52        |   |                                         |  
|Net unrealized depreciation
    on investments                      |  |                                         | (24       | ) |                                         |  
|Net realized
    and unrealized gain (loss) on investments          |  |                                         | 28        |   |                                         |  
|                                                                    |  |                                         |           |   |                                         |  
|Net increase (decrease) in net
    assets resulting from operations |  | $                                       | 181       |   |                                         | $
|                                                                    |  |                                         |           |   |                                         |  
|Per
    share information - basic and diluted:                      |  |                                         |           |   |                                         |  
|Net investment income                                               |  | $                                       | 0.03      |   |                                         | $
|Net increase (decrease) in net
    assets resulting from operations |  | $                                       | 0.03      |   |                                         | $
|Weighted average common shares outstanding                          |  |                                         | 5,763,005 |   |                                         |  



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 ThreeMonths EndedMarch 31, 2015 |           |   | For
the ThreeMonths EndedMarch 31, 2014 |  
|------------------------------------------------------------------- |  | --------------------------------------- | --------- | - | --------------------------------------- | -
|Operations:                                                         |  |                                         |           |   |                                         |  
|Net investment income                                               |  | $                                       | 153       |   |                                         | $
|Net realized gain from investments                                  |  |                                         | 52        |   |                                         |  
|Net unrealized depreciation
    on investments                      |  |                                         | (24       | ) |                                         |  
|Net increase (decrease) in net assets
    resulting from operations |  |                                         | 181       |   |                                         |  
|Stockholder distributions:                                          |  |                                         |           |   |                                         |  
|Distributions from net investment income                            |  |                                         | (153      | ) |                                         |  
|Distributions from net realized gain on investments                 |  |                                         | (52       | ) |                                         |  
|Distributions from paid in capital                                  |  |                                         | (824      | ) |                                         |  
|Net decrease in net assets from stockholder
    distributions       |  |                                         | (1,029    | ) |                                         |  
|Capital share transactions:                                         |  |                                         |           |   |                                         |  
|Issuance of common stock, net of issuance costs                     |  |                                         | 3,525     |   |                                         |  
|Reinvestment of stockholder distributions                           |  |                                         | 375       |   |                                         |  
|Total investment contributions transferred in-kind                  |  |                                         | -         |   |                                         |  
|Treasury capital/redemptions                                        |  |                                         | (59       | ) |                                         |  
|Net increase in net assets from capital
    share transactions      |  |                                         | 3,841     |   |                                         |  
|                                                                    |  |                                         |           |   |                                         |  
|Total increase in net assets                                        |  |                                         | 2,993     |   |                                         |  
|Net assets at beginning of period                                   |  |                                         | 40,687    |   |                                         |  
|Net assets at end of period                                         |  | $                                       | 43,680    |   |                                         | $
|                                                                    |  |                                         |           |   |                                         |  
|Net asset value per common share                                    |  | $                                       | 7.30      |   |                                         | $
|Common shares outstanding at end of period                          |  |                                         | 5,981,388 |   |                                         |  
|                                                                    |  |                                         |           |   |                                         |  
|Accumulated distribution in excess of net investment
    income     |  | $                                       | (3,587    | ) |                                         | $



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 ThreeMonths EndedMarch 31, 2015 |        |   | For
    the ThreeMonths EndedMarch 31, 2014 |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ------ | - | ------------------------------------------- | -
|Operating activities:                                                                                                        |  |                                             |        |   |                                             |  
|Net increase (decrease) in net assets from operations                                                                        |  | $                                           | 181    |   |                                             | $
|Adjustments to reconcile net increase (decrease) in
    net assets from operations to net cash used in operating activities: |  |                                             |        |   |                                             |  
|Paid-in-kind interest income                                                                                                 |  |                                             | -      |   |                                             |  
|Net accretion of discount on investments                                                                                     |  |                                             | (22    | ) |                                             |  
|Repayments of investments                                                                                                    |  |                                             | 1,993  |   |                                             |  
|Purchase of investments                                                                                                      |  |                                             | (2,909 | ) |                                             |  
|Repayments of investments - money market                                                                                     |  |                                             | 5,936  |   |                                             |  
|Purchase of investments - money market                                                                                       |  |                                             | (6,579 | ) |                                             |  
|Net realized gain from investments                                                                                           |  |                                             | (52    | ) |                                             |  
|Net unrealized depreciation on investments                                                                                   |  |                                             | 24     |   |                                             |  
|(Increase) decrease in operating assets:                                                                                     |  |                                             |        |   |                                             |  
|Interest receivable                                                                                                          |  |                                             | (278   | ) |                                             |  
|Prepaid expenses                                                                                                             |  |                                             | (31    | ) |                                             |  
|Due from related party                                                                                                       |  |                                             | (16    | ) |                                             |  
|Receivable for common stock purchased                                                                                        |  |                                             | 200    |   |                                             |  
|Increase (decrease) in operating liabilities:                                                                                |  |                                             |        |   |                                             |  
|Payable for unsettled trades                                                                                                 |  |                                             | (1,340 | ) |                                             |  
|Stockholder distributions payable                                                                                            |  |                                             | -      |   |                                             |  
|Management fees payable                                                                                                      |  |                                             | -      |   |                                             |  
|Accounts payable and accrued liabilities                                                                                     |  |                                             | 66     |   |                                             |  
|Net cash used in operating activities                                                                                        |  |                                             | (2,827 | ) |                                             |  
|                                                                                                                             |  |                                             |        |   |                                             |  
|Financing activities:                                                                                                        |  |                                             |        |   |                                             |  
|Proceeds from issuance of shares of common stock, net                                                                        |  |                                             | 3,526  |   |                                             |  
|Stockholder distributions                                                                                                    |  |                                             | (640   | ) |                                             |  
|Treasury stock                                                                                                               |  |                                             | (59    | ) |                                             |  
|Net cash provided by financing activities                                                                                    |  |                                             | 2,827  |   |                                             |  
|                                                                                                                             |  |                                             |        |   |                                             |  
|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                                                                                                    |  | $                                           | 62     |   |                                             | $
|Cash distribution payable                                                                                                    |  | $                                           | 115    |   |                                             | $
|DRIP distribution paid                                                                                                       |  | $                                           | 375    |   |                                             | $
|Investement contributions transferred in-kind                                                                                |  | $                                           | -      |   |                                             | $





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



6







VII PEAKS CO-OPTIVIST
INCOME BDC II, INC.



SCHEDULE OF INVESTMENTS

(dollars in thousands)

March 31, 2015

(Unaudited)



|Portfolio
Company                                 |  | Industry                                      |  | Investment
                                         Coupon Rate,Maturity Date |  | Principal |        |  | Amortized
    Cost |   |        | Fair
    Value |  |   | %
    ofNetAssets | 
|------------------------------------------------- |  | --------------------------------------------- |  | ----------------------------------------------------------------------------- |  | --------- | ------ |  | ------------------ | - | ------ | -------------- |  | - | ----------------- | 
|Senior
    Secured First Lien Debt - 29.9% (b)    |  |                                               |  |                                                                               |  |           |        |  |                    |   |        |                |  |   |                   | 
|Accuride Corp.                                    |  | Consumer Goods: Durable                       |  | 9.50%, 8/1/2018                                                               |  | $         | 1,400  |  |                    | $ | 1,433  |                |  | $ | 1,460             | 
|American Media, Inc.                              |  | Media: Advertising, Printing & Publishing     |  | 11.50%, 12/15/2017                                                            |  |           | 1,320  |  |                    |   | 1,377  |                |  |   | 1,346             | 
|APX Group, Inc.                                   |  | Services: Consumer                            |  | 6.38%, 12/1/2019                                                              |  |           | 825    |  |                    |   | 825    |                |  |   | 821               | 
|Caesars Entertainment Operating
    Co., Inc. (a) |  | Hotel, Gaming & Leisure                       |  | 11.25%, 6/1/2017                                                              |  |           | 860    |  |                    |   | 773    |                |  |   | 624               | 
|Cambrium Learning Group, Inc.                     |  | Services: Consumer                            |  | 9.75%, 2/15/2017                                                              |  |           | 1,375  |  |                    |   | 1,390  |                |  |   | 1,361             | 
|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  |  |                    |   | 1,466  |                |  |   | 1,387             | 
|Goodman Networks, Inc.                            |  | Telecommunications                            |  | 12.13%, 7/1/18                                                                |  |           | 800    |  |                    |   | 846    |                |  |   | 744               | 
|Kratos Defense & Security
    Solutions, Inc. (a) |  | Aerospace and Defense                         |  | 7.00%, 5/15/19                                                                |  |           | 1,550  |  |                    |   | 1,335  |                |  |   | 1,352             | 
|Ryerson Inc./Joseph T Ryerson
    & Son, Inc.     |  | Metals & Mining                               |  | 9.00%, 10/15/2017                                                             |  |           | 1,315  |  |                    |   | 1,371  |                |  |   | 1,328             | 
|Titan International, Inc. (a)                     |  | Automoile                                     |  | 6.88%, 10/1/2020                                                              |  |           | 1,500  |  |                    |   | 1,377  |                |  |   | 1,299             | 
|Toys
    R Us Property Co II LLC                  |  | Retail                                        |  | 8.50%, 12/1/2017                                                              |  |           | 725    |  |                    |   | 735    |                |  |   | 733               | 
|Sub
    Total Senior Secured First Lien Debt      |  |                                               |  |                                                                               |  | $         | 13,710 |  |                    | $ | 13,520 |                |  | $ | 13,074            | 
|                                                  |  |                                               |  |                                                                               |  |           |        |  |                    |   |        |                |  |   |                   | 
|Senior
    Secured Second Lien  Debt - 12.3% (b)  |  |                                               |  |                                                                               |  |           |        |  |                    |   |        |                |  |   |                   | 
|Aspect Software, Inc.                             |  | Telecommunications                            |  | 10.63%, 5/15/2017                                                             |  | $         | 1,302  |  |                    | $ | 1,320  |                |  | $ | 1,133             | 
|Bon-ton Department Stores,
    Inc.               |  | Retail                                        |  | 10.63%, 7/15/2017                                                             |  |           | 1,390  |  |                    |   | 1,385  |                |  |   | 1,376             | 
|Claire's Stores, Inc.                             |  | Retail                                        |  | 8.88%, 3/15/2019                                                              |  |           | 825    |  |                    |   | 806    |                |  |   | 470               | 
|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    |  |                    |   | 740    |                |  |   | 591               | 
|Radiation Therapy Services,
    Inc.              |  | Healthcare & Pharmaceuticals                  |  | 8.88%, 1/15/2017                                                              |  |           | 1,285  |  |                    |   | 1,278  |                |  |   | 1,318             | 
|Saratoga
    Resources, Inc. (d)                  |  | Energy: Oil & Gas                             |  | 12.50%, 7/1/2016                                                              |  |           | 885    |  |                    |   | 912    |                |  |   | 227               | 
|Sub
    Total Senior Secured Second Lien Debt     |  |                                               |  |                                                                               |  | $         | 7,182  |  |                    | $ | 7,149  |                |  | $ | 5,354             | 
|                                                  |  |                                               |  |                                                                               |  |           |        |  |                    |   |        |                |  |   |                   | 
|Senior
    Unsecured Debt - 35.6% (b)             |  |                                               |  |                                                                               |  |           |        |  |                    |   |        |                |  |   |                   | 
|APX Group, Inc.                                   |  | Services: Consumer                            |  | 8.75%, 12/1/2020                                                              |  | $         | 575    |  |                    | $ | 554    |                |  | $ | 530               | 
|Armored Autogroup, Inc.                           |  | Consumer Goods: Durable                       |  | 9.25%, 11/1/2018                                                              |  |           | 1,250  |  |                    |   | 1,247  |                |  |   | 1,280             | 
|Caesar's Entertainment Corp.
    (a)(d)           |  | Hotel, Gaming & Leisure                       |  | 10.75%, 2/1/2016                                                              |  |           | 495    |  |                    |   | 451    |                |  |   | 129               | 
|Cenveo Corp.                                      |  | Services: Business                            |  | 11.50%, 5/15/2017                                                             |  |           | 1,571  |  |                    |   | 1,576  |                |  |   | 1,571             | 
|Clear Channel Communications                      |  | Media: Broadcasting & Subscription            |  | 10.00%, 1/15/2018                                                             |  |           | 1,400  |  |                    |   | 1,340  |                |  |   | 1,190             | 
|Colt Defense LLC                                  |  | Aerospace and Defense                         |  | 8.75%, 11/15/2017                                                             |  |           | 1,253  |  |                    |   | 1,086  |                |  |   | 388               | 
|DynCorp International Inc.                        |  | Aerospace and Defense                         |  | 10.38%, 7/1/2017                                                              |  |           | 1,135  |  |                    |   | 1,147  |                |  |   | 993               | 
|EarthLink Holdings Corp.
    (a)                  |  | Telecommunications                            |  | 8.88%, 5/15/19                                                                |  |           | 375    |  |                    |   | 367    |                |  |   | 386               | 
|Gymboree Corp.                                    |  | Retail                                        |  | 9.13%, 12/1/2018                                                              |  |           | 810    |  |                    |   | 766    |                |  |   | 381               | 
|NII Capital Corp. (d)                             |  | Telecommunications                            |  | 10.00%, 8/15/2016                                                             |  |           | 960    |  |                    |   | 921    |                |  |   | 461               | 
|Nuverra Environmental Solutions,
    Inc.         |  | Environmental Industries                      |  | 9.88%, 4/15/2018                                                              |  |           | 1,325  |  |                    |   | 1,359  |                |  |   | 898               | 
|Ryerson Inc./Joseph T Ryerson
    & Son, Inc.     |  | Metals & Mining                               |  | 11.25%, 10/15/18                                                              |  |           | 1,500  |  |                    |   | 1,534  |                |  |   | 1,522             | 
|Seitel, Inc.                                      |  | Energy: Oil & Gas                             |  | 9.50%, 4/15/2019                                                              |  |           | 1,575  |  |                    |   | 1,574  |                |  |   | 1,370             | 
|Sitel LLC / Sitel Finance
    Corp                |  | Media: Advertising, Printing & Publishing     |  | 11.50%, 4/1/2018                                                              |  |           | 1,450  |  |                    |   | 1,413  |                |  |   | 1,320             | 
|Suntech Power Holdings Company,
    Ltd. (a)(c)   |  | Environmental Industries                      |  | 3.00%, 5/15/13                                                                |  |           | 100    |  |                    |   | 109    |                |  |   | 0                 | 
|Toys R Us Inc.                                    |  | Retail                                        |  | 10.38%, 8/15/2017                                                             |  |           | 860    |  |                    |   | 820    |                |  |   | 740               | 
|UCI International Inc                             |  | Automobile                                    |  | 8.63%, 2/15/2019                                                              |  |           | 1,400  |  |                    |   | 1,360  |                |  |   | 1,267             | 
|Visant
    Corp.                                  |  | Media: Advertising, Printing
    & Publishing |  | 10.00%, 10/1/2017                                                             |  |           | 1,275  |  |                    |   | 1,238  |                |  |   | 1,141             | 
|Sub
    Total Senior Unsecured Debt               |  |                                               |  |                                                                               |  | $         | 19,309 |  |                    | $ | 18,862 |                |  | $ | 15,567            | 
|                                                  |  |                                               |  |                                                                               |  |           |        |  |                    |   |        |                |  |   |                   | 
|Senior
    Subordinated Debt - 8.1% (b)           |  |                                               |  |                                                                               |  |           |        |  |                    |   |        |                |  |   |                   | 
|Affinion Group, Inc.                              |  | Media: Advertising, Printing & Publishing     |  | 13.50%, 8/15/2018                                                             |  | $         | 816    |  |                    | $ | 711    |                |  | $ | 498               | 
|Central Garden and Pet Co.                        |  | Retail                                        |  | 8.25%, 3/1/2018                                                               |  |           | 1,246  |  |                    |   | 1,280  |                |  |   | 1,275             | 
|Claires Stores, Inc                               |  | Retail                                        |  | 10.50%, 6/1/2017                                                              |  |           | 715    |  |                    |   | 712    |                |  |   | 440               | 
|DJO Finance, LLC.                                 |  | Healthcare & Pharmaceuticals                  |  | 9.75%, 10/15/2017                                                             |  |           | 1,265  |  |                    |   | 1,309  |                |  |   | 1,296             | 
|QuickSilver
    Resources, Inc.                   |  | Energy: Oil & Gas                             |  | 7.13%, 4/1/2016                                                               |  |           | 890    |  |                    |   | 868    |                |  |   | 15                | 
|Sub
    Total Senior Subordinated Debt            |  |                                               |  |                                                                               |  | $         | 4,932  |  |                    | $ | 4,880  |                |  | $ | 3,524             | 
|                                                  |  |                                               |  |                                                                               |  |           |        |  |                    |   |        |                |  |   |                   | 
|Equity
    Securities - 2.0% (b)                  |  |                                               |  |                                                                               |  |           |        |  |                    |   |        |                |  |   |                   | 
|Education
    Management LLC                      |  | Services: Consumer                            |  |                                                                               |  | $         | 1,562  |  |                    | $ | 880    |                |  | $ | 874               | 
|Sub
    Total Equity Securities                   |  |                                               |  |                                                                               |  | $         | 1,562  |  |                    | $ | 880    |                |  | $ | 874               | 
|                                                  |  |                                               |  |                                                                               |  |           |        |  |                    |   |        |                |  |   |                   | 
|Investments
    - Money Market - 8.6% (b)         |  |                                               |  |                                                                               |  |           |        |  |                    |   |        |                |  |   |                   | 
|Investments
    - U.S. Bank Money Market          |  |                                               |  | 0.03%                                                                         |  | $         | 3,747  |  |                    | $ | 3,747  |                |  | $ | 3,747             | 
|Sub
    Total Investments - Money Market          |  |                                               |  |                                                                               |  | $         | 3,747  |  |                    | $ | 3,747  |                |  | $ | 3,747             | 
|                                                  |  |                                               |  |                                                                               |  |           |        |  |                    |   |        |                |  |   |                   | 
|TOTAL
    INVESTMENTS - 96.5% (b)                 |  |                                               |  |                                                                               |  |           |        |  |                    | $ | 49,038 |                |  | $ | 42,140            | 



(a) Represents a non-qualifying investment as defined under
Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 9.1% 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 $43,680 as of March
31, 2015.

(c) Non-U.S. company. The principal place of business for Suntech
Power Holdings Company, Ltd. Is China. Non-income producing as of March 31, 2015.

(d) Non-income producing as of March 31, 2015.



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



7







VII PEAKS CO-OPTIVIST
INCOME BDC II, INC.



SCHEDULE OF INVESTMENTS

(dollars in thousands)

December 31, 2014



|Portfolio
    Company                           |  | Industry                                  |  | Investment
    CouponRate, Maturity Date |  | Principal |        |  | Amortized
    Cost |   |        | Fair
    Value |  |   | %
    ofNetAssets | 
|----------------------------------------------- |  | ----------------------------------------- |  | ---------------------------------------- |  | --------- | ------ |  | ------------------ | - | ------ | -------------- |  | - | ----------------- | 
|Senior Secured First Lien Debt - 28.8% (b)      |  |                                           |  |                                          |  |           |        |  |                    |   |        |                |  |   |                   | 
|Accuride Corp.                                  |  | Consumer Goods: Durable                   |  | 9.50%, 8/1/2018                          |  | $         | 1,400  |  |                    | $ | 1,435  |                |  | $ | 1,442             | 
|American Media, Inc.                            |  | Media: Advertising, Printing & Publishing |  | 11.50%, 12/15/2017                       |  |           | 1,320  |  |                    |   | 1,382  |                |  |   | 1,307             | 
|APX Group, Inc.                                 |  | Services: Consumer                        |  | 6.38%, 12/1/2019                         |  |           | 825    |  |                    |   | 825    |                |  |   | 790               | 
|Caesars Entertainment Operating Co., Inc. (a)   |  | Hotel, Gaming & Leisure                   |  | 11.25%, 6/1/2017                         |  |           | 860    |  |                    |   | 765    |                |  |   | 630               | 
|Cambrium Learning Group, Inc.                   |  | Services: Consumer                        |  | 9.75%, 2/15/2017                         |  |           | 1,375  |  |                    |   | 1,392  |                |  |   | 1,347             | 
|EarthLink Holdings Corp. (a)                    |  | Telecommunications                        |  | 7.38%, 6/1/2020                          |  |           | 40     |  |                    |   | 41     |                |  |   | 41                | 
|Endeavour International Corp. (d)               |  | Energy: Oil & Gas                         |  | 12.00%, 3/1/2018                         |  |           | 525    |  |                    |   | 551    |                |  |   | 578               | 
|EuraMax International, Inc.                     |  | Metals & Mining                           |  | 9.50%, 4/1/2016                          |  |           | 1,475  |  |                    |   | 1,464  |                |  |   | 1,371             | 
|Goodman Networks, Inc.                          |  | Telecommunications                        |  | 12.13%, 7/1/18                           |  |           | 800    |  |                    |   | 849    |                |  |   | 826               | 
|Kratos Defense & Security Solutions, Inc. (a)   |  | Aerospace and Defense                     |  | 7.00%, 5/15/19                           |  |           | 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            | 
|                                                |  |                                           |  |                                          |  |           |        |  |                    |   |        |                |  |   |                   | 
|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             | 
|                                                |  |                                           |  |                                          |  |           |        |  |                    |   |        |                |  |   |                   | 
|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%, 5/15/19                           |  |           | 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,                        |  |           |        |  |                    |   |        |                |  |   |                   | 
|                                                |  |                                           |  | puttable on 01/15/2015                   |  |           | 858    |  |                    |   | 819    |                |  |   | 858               | 
|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%, 5/15/13                           |  |           | 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            | 
|                                                |  |                                           |  |                                          |  |           |        |  |                    |   |        |                |  |   |                   | 
|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             | 
|                                                |  |                                           |  |                                          |  |           |        |  |                    |   |        |                |  |   |                   | 
|Equity Securities - 2.1% (b)                    |  |                                           |  |                                          |  |           |        |  |                    |   |        |                |  |   |                   | 
|Education Management LLC                        |  | Services: Consumer                        |  |                                          |  | $         | 874    |  |                    | $ | 880    |                |  | $ | 874               | 
|Sub Total Equity Securities                     |  |                                           |  |                                          |  | $         | 874    |  |                    | $ | 880    |                |  | $ | 874               | 
|                                                |  |                                           |  |                                          |  |           |        |  |                    |   |        |                |  |   |                   | 
|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  |                |  | $ | 3,104             | 
|                                                |  |                                           |  |                                          |  |           |        |  |                    |   |        |                |  |   |                   | 
|TOTAL INVESTMENTS
    - 99.6% (b)               |  |                                           |  |                                          |  |           |        |  |                    | $ | 47,406 |                |  | $ | 40,532            | 



(a) Represents a non-qualifying investment as defined under
Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 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 $40,687 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

March 31, 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 March 31, 2015, we issued 6.1 million
shares of common stock, including 0.2 million shares under our distribution reinvestment plan (“DRIP”) and less
0.09 million shares redeemed under our tender offer. Gross proceeds from our common stock issuances total $60.4 million,
including $2.2 million under our DRIP less $0.8 million paid to redeem shares in our quarterly tender offers.



Note 2.  Summary of Significant
Accounting Policies



Basis of Presentation



The
financial statements of the Fund included herein were prepared in conformity with accounting principles generally accepted in
the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP
for complete financial statements. In the opinion of management, these financial statements include all adjustments, consisting
only of normal recurring adjustments and accruals, necessary for a fair presentation of the results for the interim period. This
Form 10-Q should be read in conjunction with the Fund’s annual report on Form 10-K for the year ended December 31, 2014,
which was filed with the SEC on March 5, 2015. The current period’s results of operations will not necessarily be indicative
of results that ultimately may be achieved for the fiscal year ending December 31, 2015.



Use of Estimates in the Preparation
of Financial Statements



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



Investments - Money Market



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



Organizational and Offering Costs



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





9







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



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



Revenue Recognition



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



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



Our total interest income
was $0.9 million for the three months ended March 31, 2015, as compared to $0.7 million for the three months ended March 31, 2014,
respectively. The increase is due to a larger note portfolio earning interest in 2015 as compared to 2014. At March 31, 2015,
the weighted average coupon yield was 8.9%, as compared to the 10.5% as of March 31, 2014. For the three months ended March 31,
2015, the average net assets were $39.0 million as compared to $26.0 million for the three months ended March 31, 2014.



For the three months
ended March 31, 2015, six of the investments in the portfolio did not accrue interest as the issuers were in default of the
coupon payment for more than the thirty day grace period. Interest income was accrued through the date of the last coupon
payment received for these investments. These six are Caesars Entertainment Corp, 10.75%, February 1, 2016; Endeavor
International Corp., 12%, March 1, 2018; Endeavor International Corp., 12%, June 1, 2018; NII Capital Corp, 10%, August 15,
2016; Saratoga Resources, Inc., 12.50% July 1, 2016; and Suntech Power Holdings Company, Ltd., 3%, May 15, 2013. The
investment in Education Management, LLC has been restructured to private equity. The instrument does not accrue or
pay interest.





10







Expense Reimbursement Agreement



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



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



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



Note 3. Valuation of Portfolio Investments



The investment portfolio
is recorded on a trade date basis. The Fund determines the net asset value of its investment portfolio each quarter. Securities
that are publicly-traded are valued at the reported closing price on the valuation date. Forty of the forty four investments were
valued using the closing market price at period end March 31, 2015. The exceptions were the investments in Education Management
LLC, 15% Notes due July 1, 2018; Endeavor International Corp., 12%, March 1, 2018; Endeavor International Corp. 12%, June 1, 2018;
and Saratoga Resources, Inc., 12.50% July 1, 2016. The market did not have a sufficient amount of trades to use the quoted price
for these positions.



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



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



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



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



Investments are valued utilizing a market approach,
an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated
by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses
valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted)
calculated based on an appropriate discount rate. The measurement is based on the net present value indicated by current market
expectations about those future amounts.



In following these approaches,
the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current
market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples,
security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio
company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does
business, comparisons of financial ratios of peer companies that are public, mergers and acquisition comparables, the principal
market and enterprise values, among other factors.





11







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



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



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



Level 2:  Quoted prices
for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets
that are not active, or other observable inputs other than quoted prices. USBank is the fund custodian. Through USBank, the fund
uses FT Interactive, a third party valuation firm, to price the notes. The prices are reviewed by the CEO.



Level 3: Unobservable inputs for the asset or liability. These
investments for the fund are an equity security, a Senior Secured First Lien Note, and two Senior Secured Lien Notes. The equity
investment has been issued by a company with terms settled. Its fair value was determined by its relative amount of the total company
enterprise value. The terms of Senior secured First Lien Note and one of the Senior Secured Second Lien Note, however, have not
been finalized. The fair value was derived from the relative amounts of the notes to the total enterprise value as indicated would
be the intended restructuring by the issuer. The valuation of other Senior Secured Second Lien Note is based on the relevant trades
(over $100,000) that occurred during the first quarter in 2015 in the secondary market.



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



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



|                                |  | Level 1 |       |  | Level 2 |   |        | Level 3 |  |   | Total | 
|------------------------------- |  | ------- | ----- |  | ------- | - | ------ | ------- |  | - | ----- | 
|Investments – Money Market      |  | $       | 3,747 |  |         | $ | —      |         |  | $ | —     | 
|Senior Secured First Lien Debt  |  |         | —     |  |         |   | 12,496 |         |  |   | 578   | 
|Senior Secured Second Lien Debt |  |         | —     |  |         |   | 4,888  |         |  |   | 466   | 
|Senior Unsecured Debt           |  |         | —     |  |         |   | 15,567 |         |  |   | —     | 
|Senior Subordinated
    Debt    |  |         | —     |  |         |   | 3,524  |         |  |   | —     | 
|Equity Securities               |  |         | —     |  |         |   | —      |         |  |   | 874   | 
|Total                           |  | $       | 3,747 |  |         | $ | 36,475 |         |  | $ | 1,918 | 



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 | 



There was one transfer between levels for the
period ending March 31, 2015. This transfer was Saratoga Resources, Inc., 12.50%, July 1, 2016 from Level 2 to Level 3.



During the three months ended March 31,
2015, the following were the transfers in or out of levels:





12







|                                    |  | Level
    1 |   |  | Level
    2 |   |      | Level
    3 |  |   | Total | 
|----------------------------------- |  | ----------- | - |  | ----------- | - | ---- | ----------- |  | - | ----- | 
|Senior Secured
    Second Lien Debt |  | $           | — |  |             | $ | (227 | )           |  | $ | 227   | 
|Total                               |  | $           | — |  |             | $ | (227 | )           |  | $ | 227   | 



There were three transfers between
levels for the period ended December 31, 2014. One transfer was Education Management, LLC, originally, 15%, July 1, 2018.
The interest bearing note was restructured by the company to a non-interest bearing private equity holding. The other
transfers were two Endeavor 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.



Changes in Level 3 assets measured at fair
value for the three months ended March 31, 2015 are as follows:



|                                |  | Fair
    Value at December 31, 2014 |       |  | Transfer
    
    In/(Out) |   |     | Purchases
    (Sales and Settlements) |  |   | Amortization
    and Accretion of Fixed Income Premiums and Discounts |  |  | Realized
    and Unrealized Gains  (Losses) |   |  | Fair
    Value at March 31, 2015 |   |   | Change in
    Unrealized Gains (Losses) for Investments held as of March 31, 2015 | 
|------------------------------- |  | ----------------------------------- | ----- |  | -------------------------- | - | --- | ------------------------------------- |  | - | --------------------------------------------------------------------- |  |  | ------------------------------------------- | - |  | -------------------------------- | - | - | --------------------------------------------------------------------------------- | 
|Senior Secured First Lien Debt  |  | $                                   | 578   |  |                            | $ | —   |                                       |  | $ | —                                                                     |  |  | $                                           | — |  |                                  | $ | — |                                                                                   | 
|Senior Secured Second Lien Debt |  |                                     | 239   |  |                            |   | 227 |                                       |  |   | —                                                                     |  |  |                                             | — |  |                                  |   | — |                                                                                   | 
|Equity Securities               |  |                                     | 874   |  |                            |   | —   |                                       |  |   | —                                                                     |  |  |                                             | — |  |                                  |   | — |                                                                                   | 
|Total                           |  | $                                   | 1,691 |  |                            | $ | 227 |                                       |  | $ | —                                                                     |  |  | $                                           | — |  |                                  | $ | — |                                                                                   | 



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. There was no change in unrealized losses for Level 3 investments still
held as of March 31, 2015.





13







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



|                                |  |            |       |  |           |             |              |                   |      |   |       | Range   | 
|------------------------------- |  | ---------- | ----- |  | --------- | ----------- | ------------ | ----------------- | ---- | - | ----- | ------- | 
|                                |  |            |       |  | Valuation |             | Unobservable |                   |      |   |       |         | 
|                                |  | Fair Value |       |  | Technique |             | Input        |                   | Mean |   |       | Minimum | 
|Senior Secured First Lien Debt  |  | $          | 578   |  |           | Liquidation |              | Transaction Value |      | $ | 578   |         | 
|Senior Secured Second Lien Debt |  |            | 466   |  |           | Liquidation |              | Transaction Value |      |   | 485   |         | 
|Equity Securities               |  |            | 874   |  |           | Liquidation |              | Transaction Value |      |   | 1,143 |         | 
|Total                           |  | $          | 1,918 |  |           |             |              |                   |      |   |       |         | 



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



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



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



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



|                                |  | Investments at Amortized
    Cost |        |  | Investments at
    Fair Value |   |        | Fair Value Percentage
    of Total 
    Portfolio | 
|------------------------------- |  | --------------------------------- | ------ |  | ----------------------------- | - | ------ | ------------------------------------------------- | 
|Investments – Money Market      |  | $                                 | 3,747  |  |                               | $ | 3,747  |                                                   | 
|Senior Secured First Lien Debt  |  |                                   | 13,520 |  |                               |   | 13,074 |                                                   | 
|Senior Secured Second Lien Debt |  |                                   | 7,149  |  |                               |   | 5,354  |                                                   | 
|Senior Unsecured Debt           |  |                                   | 18,862 |  |                               |   | 15,567 |                                                   | 
|Senior Subordinated Debt        |  |                                   | 4,880  |  |                               |   | 3,524  |                                                   | 
|Equity Securities               |  |                                   | 880    |  |                               |   | 874    |                                                   | 
|Total                           |  | $                                 | 49,038 |  |                               | $ | 42,140 |                                                   | 



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 |                                              | 





14







Note 4.  Related Party Transactions



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



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



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



Investment Advisory Agreement



The Fund has entered into
an investment advisory agreement with the Manager to manage the Fund’s investment activities. Pursuant to the investment
advisory agreement, the Manager implements the Fund’s business strategy on a day-to-day basis and performs certain services
for us, subject to oversight by our Board of Directors, or a committee thereof. The Manager is responsible for, among other duties,
determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing
asset management duties. Under the investment advisory agreement, the Manager is entitled to a base management and incentive fee
as outlined in the investment advisory agreement with the Fund. The base management fee is 2% of net assets below $100 million;
1.75% of net assets between $100 million and $250 million; and 1.5% of net assets over $250 million. For the three months ended
March 31, 2015 and 2014, the Fund incurred $0.2 million and $0.2 million of base management fees, respectively.



The incentive fee has
two parts. The first part, the subordinated incentive fee on income, is calculated and payable quarterly in arrears based upon
the Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter. The subordinated
incentive fee on income is 20% of pre-incentive net investment income subject to a quarterly return to investors, expressed as
a rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 2.0% (8.0% annualized).
The second part of the incentive fee, the incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated
investments from the portfolio and is determined and payable in arrears as of the end of each calendar year (or upon termination
of the investment advisory agreement). This fee equals 20% of the Fund’s incentive fee capital gains, which will equal the
Fund’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed
net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any
previously paid capital gains incentive fees. For the three months ended March 31, 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.





15







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



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



Administration Agreement



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



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



Under
the administration agreement, our Manager will also provide on our behalf managerial assistance to portfolio companies that request
such assistance. The amount of reimbursements to our Manager or services charged directly are captured in the Statement of Operations
under “Administrative Services”. During the three months ended March 31, 2015 and 2014, the Fund reimbursed the Manager
or was charged directly for $0.05 million and $0.04million
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 three months
ended March 31, 2015, the Fund sold 435,096 shares of common stock in its offering for net proceeds of $3.9 million, including
shares issued under the DRIP.





16







Note 6. Earnings (Loss) Per Share



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



The following information
sets forth the computation of the weighted average basic and diluted net increase (decrease) in net assets per share from operations
for the three months ended March 31, 2015 and 2014 (dollars in thousands except share and per share amounts):



|                                                                          |  | For the three
    months ended March 31, 2015 |           |  | For the
    three months ended March 31, 2014 |  
|------------------------------------------------------------------------- |  | --------------------------------------------- | --------- |  | --------------------------------------------- | -
|Basic and diluted                                                         |  |                                               |           |  |                                               |  
|Net increase (decrease) in net assets resulting from operations           |  | $                                             | 181       |  |                                               | $
|Weighted average common shares outstanding                                |  |                                               | 5,763,005 |  |                                               |  
|Net increase (decrease) in net assets resulting from operations per share |  | $                                             | 0.03      |  |                                               | $



The Fund had no potentially
dilutive securities as of March 31, 2015 or March 31, 2014, resulting in the same number of shares for basic and diluted.



Note 7. Tender Offer Program



We do not currently intend
to list our shares on any securities exchange and do not expect a public market for them to develop in the foreseeable future.
Therefore, shareholders should not expect to be able to sell their shares promptly or at a desired price. Beginning with fourth
calendar quarter of 2013 and on a quarterly basis thereafter, 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 $8.78 for the total consideration of $0.05 million.



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



|For the Three Months Ended |  | Repurchase Date   |  | SharesRepurchased |       |  | Percent ofSharesTendered thatwereRepurchased |  |     | RepurchasePrice PerShare |  |   | AggregateConsiderationforRepurchasedShares ('000s) * | 
|-------------------------- |  | ----------------- |  | ----------------- | ----- |  | -------------------------------------------- |  | --- | ------------------------ |  | - | ---------------------------------------------------- | 
|December 31, 2014          |  | December 30, 2014 |  |                   | 6,061 |  |                                              |  | 100 | %                        |  | $ | 8.775                                                | 
|March 31, 2015             |  | March 30, 2015    |  |                   | 5,811 |  |                                              |  | 100 | %                        |  | $ | 8.775                                                | 
|                           |  |                   |  |                   |       |  |                                              |  |     |                          |  |   |                                                      | 





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





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



Note 8.  Distributions



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





17







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. 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 March 31, 2015,
the Fund has accrued $0.2 million in stockholder distributions that were unpaid. All amounts with record date in March 2015 and
paid in April 2015 have been accrued in the March 31, 2015 financial statements. As of December 31, 2014, the Fund has accrued
$0.2 million in stockholder distributions that were unpaid. All amounts with record dates in December 2014 and paid in January
2015 have been accrued in the December 31, 2014 financial statements.



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



Source of Distribution by Cash vs. DRIP:



|                                      |  |           |          |  | NetInvestment |   |       | RealizedGain From |  |   | Return of |  |  |       |       |  | Paid in |   |       |      | 
|------------------------------------- |  | --------- | -------- |  | ------------- | - | ----- | ----------------- |  | - | --------- |  |  | ----- | ----- |  | ------- | - | ----- | ---- | 
|Period                                |  | Per Share |          |  | Income        |   |       | Investments       |  |   | Capital   |  |  | Total |       |  | Cash    |   |       | DRIP | 
|July 12, 2012 - September 30, 2012    |  | $         | 0.183750 |  |               | $ | 32    |                   |  | $ | -         |  |  | $     | 18    |  |         | $ | 50    |      | 
|October 1, 2012 - December 31, 2012 * |  |           | 0.260750 |  |               |   | 118   |                   |  |   | -         |  |  |       | 82    |  |         |   | 200   |      | 
|January 1, 2013 -March 31. 2013 *     |  |           | 0.262586 |  |               |   | 247   |                   |  |   | 47        |  |  |       | 76    |  |         |   | 370   |      | 
|April 1, 2013 - June 30, 2013         |  |           | 0.186504 |  |               |   | 235   |                   |  |   | 43        |  |  |       | 26    |  |         |   | 304   |      | 
|July 1, 2013 - September 30, 2013     |  |           | 0.186504 |  |               |   | 244   |                   |  |   | 47        |  |  |       | 183   |  |         |   | 474   |      | 
|October 1, 2013 - December 31, 2013   |  |           | 0.186504 |  |               |   | 20    |                   |  |   | 258       |  |  |       | 271   |  |         |   | 549   |      | 
|January 1, 2014 - March 31, 2014      |  |           | 0.186504 |  |               |   | 168   |                   |  |   | 85        |  |  |       | 379   |  |         |   | 632   |      | 
|April 1, 2014 - June 30, 2014         |  |           | 0.186504 |  |               |   | 348   |                   |  |   | -         |  |  |       | 406   |  |         |   | 754   |      | 
|July 1, 2014 - September 30, 2014     |  |           | 0.184668 |  |               |   | 135   |                   |  |   | 28        |  |  |       | 645   |  |         |   | 808   |      | 
|October 1, 2014 – December 31, 2014   |  |           | 0.181452 |  |               |   | 124   |                   |  |   | 53        |  |  |       | 767   |  |         |   | 944   |      | 
|January 1, 2015 – March 31, 2015      |  |           | 0.179154 |  |               |   | 153   |                   |  |   | 52        |  |  |       | 824   |  |         |   | 1,029 |      | 
|TOTAL                                 |  | $         | 2.184880 |  |               | $ | 1,824 |                   |  | $ | 613       |  |  | $     | 3,677 |  |         | $ | 6,114 |      | 



* Includes a special distribution of $0.077
per share.



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



Percentage of Distributions by Source:



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



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
three months ended March 31, 2015 and the fiscal years ended December 31, 2014, 2013 and 2012:





18







|                                         |  | Three months ended |       |  | Year ended        |  |       | Year ended        |  |   | Year ended        | 
|---------------------------------------- |  | ------------------ | ----- |  | ----------------- |  | ----- | ----------------- |  | - | ----------------- | 
|Source of Distributions:                 |  | March 31, 2015     |       |  | December 31, 2014 |  |       | December 31, 2013 |  |   | December 31, 2012 | 
|Distributions from net investment income |  | $                  | 153   |  |                   |  | 14.8  | %                 |  | $ | 775               | 
|Distributions from realized gains        |  |                    | 52    |  |                   |  | 5.1   | %                 |  |   | 166               | 
|Distributions from paid In capital       |  |                    | 824   |  |                   |  | 80.1  | %                 |  |   | 2,197             | 
|TOTAL                                    |  | $                  | 1,029 |  |                   |  | 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:







| |      |  | OfferingExpenses |   |     | Net
    InvestmentIncomeexcludingoffering costs |  |   | %
    Distributionfrom NetInvestmentIncome excludingoffering costs |  |  | %
    Distributionsfrom RealizedGains excludingoffering costs |     |   | %
    Distributionsfrom Paid InCapital excludingoffering costs | 
| | ---- |  | ---------------- | - | --- | ----------------------------------------------- |  | - | ------------------------------------------------------------------ |  |  | ------------------------------------------------------------- | --- | - | -------------------------------------------------------------- | 
| | 2015 |  |                  | $ | 56  |                                                 |  | $ | 209                                                                |  |  |                                                               | 20  | % |                                                                | 
| | 2014 |  |                  | $ | 524 |                                                 |  | $ | 1,299                                                              |  |  |                                                               | 41  | % |                                                                | 
| | 2013 |  |                  | $ | 373 |                                                 |  | $ | 1,119                                                              |  |  |                                                               | 66  | % |                                                                | 
| | 2012 |  |                  | $ | 142 |                                                 |  | $ | 292                                                                |  |  |                                                               | 100 | % |                                                                | 



Note 9.  Financial Highlights



The following is a schedule of financial highlights
for the three months ended March 31, 2015 and 2014:



|                                                                         |  | For the three
    months ended  March 31, 2015 |           |   | For the three
    months ended March 31, 2014 |  
|------------------------------------------------------------------------ |  | ---------------------------------------------- | --------- | - | --------------------------------------------- | -
|Per share data:                                                          |  |                                                |           |   |                                               |  
|Net asset value, beginning of period                                     |  | $                                              | 7.34      |   |                                               | $
|                                                                         |  |                                                |           |   |                                               |  
|Results of operations (1)                                                |  |                                                |           |   |                                               |  
|Net investment income                                                    |  |                                                | 0.03      |   |                                               |  
|Net realized gain on investments                                         |  |                                                | 0.01      |   |                                               |  
|Net unrealized loss on investments                                       |  |                                                | (0.00     | ) |                                               |  
|                                                                         |  |                                                |           |   |                                               |  
|Net increase (decrease) in net assets resulting from
    operations      |  |                                                | 0.04      |   |                                               |  
|                                                                         |  |                                                |           |   |                                               |  
|Stockholder distributions (2)                                            |  |                                                |           |   |                                               |  
|Distributions from net investment income                                 |  |                                                | (0.03     | ) |                                               |  
|Distributions from realized gains                                        |  |                                                | (0.01     | ) |                                               |  
|Distributions from capital                                               |  |                                                | (0.14     | ) |                                               |  
|Net decrease in net assets resulting from stockholder
    distributions  |  |                                                | (0.18     | ) |                                               |  
|                                                                         |  |                                                |           |   |                                               |  
|Capital share transactions                                               |  |                                                |           |   |                                               |  
|Impact from issuance
    of common stock (3)                             |  |                                                | 0.10      |   |                                               |  
|Net increase in net assets resulting from capital
    share transactions |  |                                                | 0.10      |   |                                               |  
|Net asset value, end of period                                           |  | $                                              | 7.30      |   |                                               | $
|Shares outstanding at end of period                                      |  |                                                | 5,981,388 |   |                                               |  
|Total return (5)                                                         |  |                                                | 1.39      | % |                                               |  
|Ratio/Supplemental data:                                                 |  |                                                |           |   |                                               |  
|Net assets, end of period (in thousands)                                 |  | $                                              | 43,680    |   |                                               | $
|Average net assets (in thousands)                                        |  | $                                              | 39,074    |   |                                               | $
|Ratio of net investment income to average
    net assets (4)(7)          |  |                                                | 1.59      | % |                                               |  
|Ratio of operating expenses to average net
    assets (4)(7)             |  |                                                | 7.90      | % |                                               |  
|Portfolio turnover ratio (6)                                             |  |                                                | 5.72      | % |                                               |  





19







|(1) | The per share amounts were
    derived by using the weighted average shares outstanding during the period. There was no expense waiver and reimbursement
    for the three months ended March 31, 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 three months ended March 31, 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 three months ended March 31, 2015 and 2014, there was no expense reimbursement.
|(6) | Portfolio turnover rate is calculated
    using the lesser of year-to-date sales or purchases over the average of the invested assets at fair value. Not annualized.                                                                                                                                                                                                                                                   
|(7) | Ratios are annualized based on average
    net assets using current and prior 3 quarters net assets.                                                                                                                                                                                                                                                                                                                   





Note 10.  Revision of Prior Period Financial
Statements



In
the first quarter of 2015, the Company identified approximately $138,000 of costs which were incurred by the Fund in 2013 and 2014,
which are deemed offering costs that should have been borne by the manager, and reimbursed only along with all other offering costs
at the rate of 1.5% of gross offering proceeds. Accordingly, a receivable from the manager has been set up as of March 31, 2015
included in the amount Due from related party in the statements of assets and liabilities. The effect of this error on the Company's
net loss was determined to be immaterial to previously reported annual and quarterly financial results. The Company has retroactively
corrected the impact of the error on the financial statements for the period ended December 31, 2014 and the results of the quarter
ended March 31, 2014. The revision had no impact on the Company's total cash flows from operating, investing or financing activities
for the quarter ended March 31, 2014.



The
line items within the financial statements as of December 31, 2014 and as of and for the quarter ended March 31, 2014 that
were impacted by the revisions are set forth below (in thousands, except per share amounts):





|                                                                                             |  | As ofDecember 31, 2014 |       
|-------------------------------------------------------------------------------------------- |  | ---------------------- | ------
|                                                                                             |  | As Reported            |       
|Statement of Assets and Liabilities:                                                         |  |                        |       
|Due from related party                                                                       |  | $                      | 28    
|Accumulated distribution in excess of net investment income and realized gain on investments |  |                        | (2,901
|                                                                                             |  |                        |       
|Net asset value per share                                                                    |  | $                      | 7.31  









|                                                      |  |  |  |  | As of and for the three months ended March 31, 2014 |  
|----------------------------------------------------- |  |  |  |  | --------------------------------------------------- | -
|                                                      |  |  |  |  | As Reported                                         |  
|Statement of Operations:                              |  |  |  |  |                                                     |  
|Offering expense                                      |  |  |  |  |                                                     | $
|Net investment income                                 |  |  |  |  |                                                     |  
|Net decrease in net assets resulting from operations  |  |  |  |  |                                                     |  
|                                                      |  |  |  |  |                                                     |  
|Per share information – basic and diluted:            |  |  |  |  |                                                     |  
|Net investment income                                 |  |  |  |  |                                                     | $
|Net decrease in net assets resulting from operations: |  |  |  |  |                                                     |  
|                                                      |  |  |  |  |                                                     |  
|Statement of Changes in Net Assets:                   |  |  |  |  |                                                     |  
|Total increase in net assets                          |  |  |  |  |                                                     | $
|Net assets at beginning of period                     |  |  |  |  |                                                     | $
|Net assets at end of period                           |  |  |  |  |                                                     | $







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 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.



On April 20, 2015, the Fund received a
notice for voluntary exchange from Colt Defense LLC to exchange each $1,000 principal of 8.75% senior notes due 2017 into
$300 of new 10.00% junior priority senior secured notes due 2023. The Fund did not give its consent to the proposed amendment
and rejected the plan of reorganization.

On April 21,
2015, the Fund received a notice for voluntary exchange from DJO Finance LLC to exchange its 9.75% Senior Subordinated notes
due 2017 for new 10.75% third lien notes due 2020 plus $30 per $1,000 of principal as part of exchange and early consent. The
Fund gave its consent to the proposed amendment and accepted the plan of reorganization.

On April 24, 2015, the Fund received a notice
of mandatory full call from Radiation Therapy Services, Inc. 8.875% Senior Secured Second Lien Notes due January 15, 2017 for
$102.219 per share.



In April 2015,
the Fund entered into agreements to acquire the net assets of three private funds: VII Peaks Co-Optivist B Fund I, LLC, VII Peaks
Co-Optivist B Fund II, LLC and VII Peaks Co-Optivist R Fund I, LLC (The “Target Funds”). Each of the Target Funds
is managed by a subsidiary of our Manager. Each of the Target Funds hold investment positions substantially similar to the investments
held by the Fund. The agreements provide that the Fund will acquire the net assets of each Target Fund for shares of common stock
with a value equal to the most recently published net asset value per share. On April 20, 2015, the Fund filed a registration
statement on Form N-14 to register the shares that will be issued in the acquisitions of the Target Funds. Closing of the acquisitions
is subject to approval of the Form N-14 registration statement, as well as the approval of a majority of the interests of the
members of each Target Fund. The acquisition of any Target Fund is not dependent on member approval of the other Target Funds.
The combined net assets of the Target Funds were $8,033,851. If the members of each of the Target Funds approve the acquisition,
the Fund would be required to issue 1,098,870 shares of common stock based upon its net asset value at December 31, 2014 of $7.31
per share.



20







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-Optivist approach in executing our investment strategy;
| | - | ------------------------------------------------------------------------------------------------------



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



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



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



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



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



Overview



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



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



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



Critical Accounting Policies



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





21







Valuation of Portfolio Investments



The investment portfolio
is recorded on a trade date basis. We determine the net asset value of our investment portfolio each quarter. Securities that
are publicly-traded are valued at the reported closing price on the valuation date. Forty of the forty four investments were valued
using the closing market price at period end March 31, 2015. The exceptions were the investment in Education Management LLC, restructured
to private equity in the quarter, and the two notes from Endeavour International Corp., one with a 12.00% interest rate and maturity
date of June 1, 2018, the second with a 12.00% interest rate and maturity date of March 1, 2018 and 12.50% Notes of Saratoga Resources,
Inc. Endeavour International Corp. made its intent to restructure during the quarter, with the specific terms not yet finalized.



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



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



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



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



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



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



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



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



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





22







Level 2:  Quoted prices
for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets
that are not active, or other observable inputs other than quoted prices. USBank is the fund custodian. Through USBank, the fund
uses FT Interactive, a third party valuation firm, to price the notes. The prices are reviewed by the CEO.



Level 3: Unobservable inputs for the asset
or liability. These investments for the fund are an equity security, a Senior Secured First Lien Note, and two Senior Secured Lien
Notes. The equity investment has been issued by a company with terms settled. Its fair value was determined by its relative amount
of the total company enterprise value. The terms of Senior secured First Lien Note and one of the Senior Secured Second Lien Note,
however, have not been finalized. The fair value was derived from the relative amounts of the notes to the total enterprise value
as indicated would be the intended restructuring by the issuer. The valuation of other Senior Secured Second Lien Note is based
on the relevant trades (over $100,000) that occurred during the first quarter in 2015 in the secondary market.





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 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.



For loans and debt securities
with contractual payment-in-kind (“PIK”) interest, which represents contractual interest accrued and added to the
principal balance, we generally will not accrue PIK interest for accounting purposes if the portfolio company valuation indicates
that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities for accounting
purposes if we have reason to doubt our ability to collect such interest. Original issue discounts, market discounts or premiums
are accreted or amortized using the effective interest method as interest income. We record prepayment premiums on loans and debt
securities as interest income. Dividend income, if any, is recognized on an accrual basis to the extent that we expect to collect
such amount. We record prepayment premiums on loans and debt securities as interest income when we receive such amounts. In addition,
we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing
managerial assistance and possibly consulting fees and performance-based fees. Any such fees generated in connection with investments
will be recognized when earned.



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



Our total interest
income was $0.9 million for the three months ended March 31, 2015, as compared to $0.7 million for the three months ended
March 31, 2014. The increase is due to a larger note portfolio earning interest in 2015 as compared to 2014. At March 31,
2015, the weighted average coupon yield was 8.9%, as compared to the 10.5% as of March 31, 2014. For the three months ended
March 31, 2015, six of the investments in the portfolio did not accrue interest as the issuers were in default of the coupon
payment for more than the thirty day grace period. Interest income was accrued through the date of the last coupon payment
received for these investments. These six are Caesars Entertainment Corp, 10.75%, February 1, 2016; Endeavor International
Corp., 12%, March 1, 2018; Endeavor International Corp., 12%, June 1, 2018; NII Capital Corp, 10%, August 15, 2016;
Saratoga Resources, Inc., 12.50% July 1, 2016; and Suntech Power Holdings Company, Ltd., 3%, May 15, 2013. The investment in
Education Management, LLC has been restructured to private equity. The instrument does not accrue or pay interest.



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.





23







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 March 31, 2015, we made $2.9 million of investments in new portfolio companies and had $2.0 million in aggregate amount
of exits and repayments, resulting in net investments of $0.9 million for the period. During the three months ended March 31,
2014, we made $9.9 million of investments in new portfolio companies and had $4.3 million in aggregate amount of exits and repayments,
resulting in net investments of $5.6 million for the period.



As of March 31, 2015,
we have invested an aggregate of approximately $46.3 million in 44 investment positions in 37 portfolio companies. At March
31, 2015, the fair value of our investment positions was $39.8 million (excluding cash and including the accrued interest of
$1.4 million). As of such date, our estimated gross annual portfolio current yield was 8.74% and gross annual portfolio yield
to maturity was 10.26% based on the purchase price of our investments. The average duration of our portfolio was
approximately 2.48 years. During the three months ended March 31, 2015, we have exited 2 portfolio companies in full and
1 partially for aggregate sales proceeds of $2.0 million. During the three months ended March 31, 2015, we had one
portfolio investment in default of payment of its par value at maturity date, Suntech Power Holdings Company, with a fair
value of $1 which represented a negligible amount of our total portfolio. As of March 31, 2015, in addition to the investment
in maturity date default, six additional investments had not paid coupon interest as due beyond the thirty day grace
period. Interest on these investments was accrued through the date that the last coupon payment was received. These
investments were placed in a nonaccrual status. Another investment, Education Management, LLC was restructured as a private
equity instrument, and no longer has income producing attributes.



The following table presents our portfolio
composition based on fair value as of March 31, 2015:



|                                |  | As of March 31, 2015              |      
|------------------------------- |  | --------------------------------- | -----
|                                |  | Percentage of
    Total Portfolio |      
|Investments – Money Market      |  |                                   | 8.9  
|Senior Secured First Lien Debt  |  |                                   | 31.0 
|Senior Secured Second Lien Debt |  |                                   | 12.7 
|Senior Unsecured Debt           |  |                                   | 36.9 
|Senior Subordinated Debt        |  |                                   | 8.4  
|Equity Securities               |  |                                   | 2.1  
|Total                           |  |                                   | 100.0





24







As of March 31, 2015, our investment
portfolio had a yield to maturity of 10.26%, and an average duration of 2.48 years.



The following table presents our portfolio
composition based on fair value 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



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



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



|                                          |  | As of March 31, 2015           |       
|----------------------------------------- |  | ------------------------------ | ------
|                                          |  | Investments at  Fair
    Value |       
|Retail                                    |  | $                              | 5,414 
|Media: Advertising, Printing & Publishing |  |                                | 4,305 
|Metals & Mining                           |  |                                | 4,237 
|Investments - Money Market                |  |                                | 3,747 
|Services: Consumer                        |  |                                | 3,587 
|Telecommunications                        |  |                                | 2,765 
|Consumer Goods: Durable                   |  |                                | 2,739 
|Aerospace and Defense                     |  |                                | 2,734 
|Healthcare and Pharmaceuticals            |  |                                | 2,615 
|Automobile                                |  |                                | 2,566 
|Energy: Oil & Gas                         |  |                                | 2,429 
|Services: Business                        |  |                                | 1,571 
|Media: Broadcasting & Subscription        |  |                                | 1,190 
|Environmental Industries                  |  |                                | 898   
|Hotel, Gaming & Leisure                   |  |                                | 752   
|Beverage, Food & Tobacco                  |  |                                | 591   
|Total                                     |  | $                              | 42,140







25







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 $42.1 million as of March 31, 2015 as compared to $40.5 million as of December 31, 2014. The portfolio increase
in the three months ending March 31, 2015 is mainly due to invested proceeds from continuous investor closings.



Results of Operations



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



Operating results for the three months ended
March 31, 2015 and 2014 are as follows (dollars in thousands):



|                                                                    |  | For the three
    months ended March 31, 2015 |     |   | For the three
    months ended March 31, 2014 |  
|------------------------------------------------------------------- |  | --------------------------------------------- | --- | - | --------------------------------------------- | -
|Total investment income                                             |  | $                                             | 914 |   |                                               | $
|Total expenses, net                                                 |  |                                               | 761 |   |                                               |  
|Net investment income                                               |  |                                               | 153 |   |                                               |  
|Net realized gains from investments                                 |  |                                               | 52  |   |                                               |  
|Net unrealized depreciation on investments                          |  |                                               | (24 | ) |                                               |  
|Net increase (decrease) in net assets resulting
    from operations |  | $                                             | 181 |   |                                               | $



Revenues



We generated investment
income of $0.9 million for the three months ended March 31, 2015, as compared to $0.7 million for the three months ended March
31, 2014.



Interest from investments
is in the form of interest and fees earned on senior secured loans, senior secured notes, subordinated debt, senior unsecured
debt and collateralized securities in our 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. 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 throughout 2014, the assets available for and deployed to investment received a boost. The average balance
of the March 31, 2015 note portfolio was significantly higher than the March 31, 2014 balance, resulting in the increase in interest
income. At March 31, 2015, the weighted average coupon yield was 8.9%, as compared to the 10.5% as of March 31, 2014. For the
three months ended March 31, 2015, the average net assets were $39.0 million, as compared to $26.0 million for the three months
ended March 31, 2014.



For the three months
ended March 31, 2015, six of the investments in the portfolio did not accrue interest as the issuers were in default of the
coupon payment for more than the thirty day grace period. Interest income was accrued through the date of the last coupon
payment received for these investments. These six are Caesars Entertainment Corp, 10.75%, February 1, 2016; Endeavor
International Corp., 12%, March 1, 2018; Endeavor International Corp., 12%, June 1, 2018; NII Capital Corp, 10%, August 15,
2016; Saratoga Resources, Inc., 12.50% July 1, 2016; and Suntech Power Holdings Company, Ltd., 3%, May 15, 2013. The
investment in Education Management, LLC has been restructured to private equity. The instrument does not accrue or
pay interest.





26







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



Expenses



The composition of our
operating expenses for the three months ended March 31, 2015 and 2014 was as follows (dollars in thousands):



|                                          |  | For the three
    months ended March 31, 2015 |     |  | For the three
    months ended March 31, 2014 |  
|----------------------------------------- |  | --------------------------------------------- | --- |  | --------------------------------------------- | -
|Professional fees                         |  | $                                             | 96  |  |                                               | $
|Director fees                             |  |                                               | 18  |  |                                               |  
|Insurance                                 |  |                                               | 24  |  |                                               |  
|Management fees                           |  |                                               | 215 |  |                                               |  
|Administrative services – related parties |  |                                               | 54  |  |                                               |  
|General and administrative                |  |                                               | 298 |  |                                               |  
|Offering expense                          |  |                                               | 56  |  |                                               |  
|Total operating expenses                  |  | $                                             | 761 |  |                                               | $



For the three
months ended March 31, 2015 and 2014, our operating expenses were $0.8 million and $0.5 million, respectively. The rise in
expenses for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 was due to higher
management fees, administrative services, professional fees and general and administrative in 2014 as the operation of the
Fund have increased, offset with a reduction in offering expense. 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 months ended March 31, 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 March 31, 2015 and 2014.



The Chief
Financial Officer, or (“CFO”), salary was transferred to the manager and paid to the CFO through the
manager’s payroll service.



Expense Reimbursement



We
entered into an expense reimbursement agreement with our prior manager under which the prior manager agreed to reimburse us for
all U.S. GAAP compliant expenses recognized on our quarterly financial statements for 2012, retroactive to the date of formation
on August 3, 2011. In 2013, the expense reimbursement agreement was modified to exclude management fees and incentive fees payable
to the Manager effective as of January 1, 2013. We recognized a receivable on our books for the amount due from the prior manager
under the expense reimbursement agreement, and the prior manager recognized a liability on its books in the same amount. The expense
reimbursement agreement allowed the prior manager and us to offset the related receivables from and payables to each other resulting
in a net receivable, or payable position. Our prior manager was obligated to reimburse us for $0.0 million in 2014 and $0.8 million
in 2013.



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



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



Net Investment Income



Our net investment income
totaled $0.2 million and $0.2 million for the three months ended March 31, 2015 and 2014, respectively. The balance of our net
investment income was attributable to investment income less operating expenses for the period. For the three months ended March
31, 2015 and 2014, total investment income was $0.9 million and $0.7 million, respectively.



The increase in net investment
income in the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 is due to a higher earning
asset average balance in the investment portfolio. For the three months ended March 31, 2015 and 2014, total expenses were $0.8
million and $0.5 million, respectively.





27







Net Realized Gains or Losses from Investments



For the three months ended
March 31, 2015 and 2014, we had $2.0 million and $4.3 million of principal repayments, resulting in $0.05 million and $0.09 million
of realized gains, respectively.



Net Change in Unrealized Appreciation or Depreciation on
Investments



For the three months ended March 31, 2015,
we had $0.01 million of unrealized depreciation. For the three months ended March 31, 2014, we had $0.3 million of unrealized depreciation.
The decrease in unrealized depreciation was mainly due to fairly better performance of high-yield bond market in the first quarter
of 2015. Following a weak start at the beginning of January, as the price of crude oil added to its steep losses from the previous
quarter, the high-yield market trended higher through the end of February amid a stabilization in oil’s price and relatively
favorable corporate earnings reports. High-yield bonds gave back some of their gains in March. For one thing, a stronger-than-expected
February employment report fueled fear that the U.S. Federal Reserve might accelerate its timetable for boosting short-term interest
rates. Concern about Greece’s debt negotiations with its European Union partners also put investors in a defensive mood,
as did air strikes in Yemen by Saudi Arabia.





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



Changes in Net Assets from Operations





For the three months ended March 31, 2015,
we recorded a net increase in net assets resulting from operations of $0.2 million. This increase is mainly due to Net Investment
Income of $0.15 million and Net realized gain from investment of $0.05 million earned on our portfolio investments, partially offset
by Net unrealized depreciation of 0.01 million. Based on 5,763,005 weighted average common shares outstanding for the three months
ended March 31, 2015, our per share net increase in net assets resulting from operations was $0.03.





Liquidity and Capital Resources



We generate
cash primarily from the net proceeds of our ongoing continuous public offering and from cash flows from fees, interest
and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. On July
10, 2012, we satisfied our minimum offering requirement of raising gross offering proceeds in excess of $1.0 million from
persons who are not affiliated with us or our Manager, and commenced operations. As of March 31, 2015, we had issued 6.1
million shares of common stock, including 0.2 million shares under our distribution reinvestment plan (“DRIP”)
less 0.09 million shares redeemed under our tender offer. As of March 31, 2015, we had received gross proceeds from our
continuous offering of total $60.4 million, including $2.2 million under our DRIP less $0.8 paid to redeem shares in our
quarterly tender offers.



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



Prior to investing in
debt securities, we invest the net proceeds from our continuous offering primarily in money market funds that invest in U.S. government
securities and high-quality debt instruments maturing in one year or less from the time of investment. As of March 31, 2015 and
December 31, 2014, we had $3.7 million and $3.1 million, respectively, invested in money market investments pending investment
in debt instruments.



For
the three months ended March 31, 2015, we experienced a net increase in money market investments of $0.6 million. For the three
months ended March 31, 2015, approximately $2.8 million was generated from our financing activities, which primarily consisted
of $3.5 million in net offering proceeds received, offset by $0.7 million in distributions. We used approximately $2.8 million
of cash in our operating activities primarily as the result of the purchase of new portfolio debt investments of $2.9 million,
offset by the receipt of proceeds from the sale of, repayment of and principal payments on portfolio debt investments of $2.0
million.





28







We
have thus far not borrowed any funds to make
investments. In the future, however, if the market for debt financing presents attractively priced debt financing
opportunities, or if our Board of Directors determines that leveraging our portfolio would be in our best interests and the
best interests of our shareholders, we may decide to borrow funds to make investments. We do not currently anticipate issuing
any preferred shares.



Distributions



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



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



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



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



The
determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our taxableincome 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.





29







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 |  |  | $                | 56  |  |                                                 | $ | 209   |                                                                   |  |  | 20                                                            | % |  |                                                               | 5 
|2014 |  |  | $                | 524 |  |                                                 | $ | 1,299 |                                                                   |  |  | 41                                                            | % |  |                                                               | 5 
|2013 |  |  | $                | 373 |  |                                                 | $ | 1,119 |                                                                   |  |  | 66                                                            | % |  |                                                               | 23
|2012 |  |  | $                | 142 |  |                                                 | $ | 292   |                                                                   |  |  | 100                                                           | % |  |                                                               | 0 







Election as a RIC



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



Related-Party Transactions and Agreements



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



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



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



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



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





30







Off-Balance Sheet Arrangements



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



Item 3. Quantitative and Qualitative Disclosures
about Market Risk



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



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



Assuming that our current
balance sheet was to remain constant and no actions were taken to alter our existing interest rate sensitivity, a 100 basis point
move in interest rates up or down from their March 31, 2015 levels would result in an increase or decrease in net asset value
of $0.5 million or 1.03%.



Item 4. Controls and
Procedures



Disclosure Controls



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



Change in Internal Control over Financial
Reporting





No change occurred
in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter
ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting, except as follows.  For the quarter ended March 31, 2015, we determined
that a deficiency in internal control over financial reporting existed relating to the determination of offering expenses that
should initially be borne by our 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 manager. In response, we have implemented additional controls whereby
officers will map out financial statement line items to the relevant portions of the agreements with our manager to ensure compliance
and proper accounting for amounts due thereunder.



31







PART II



OTHER INFORMATION



Item 1. Legal Proceedings



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



Item 1A. Risk Factors



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



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



Not applicable.



Item 3. Defaults upon Senior Securities



Not applicable.



Item 4. Mine Safety Disclosures



Not applicable.



Item 5. Other Information



Not applicable.



Item 6. Exhibits



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



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



*    Filed herewith.



32







SIGNATURES



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



|                   | VII Peaks Co-Optivist Income
    BDC II, Inc.
|------------------ | ---------------------------------------------
|                   |                                              
|Date: May 20, 2015 | By                                           
|                   |                                              
|                   |                                              
|                   |                                              
|                   |                                              



|                   | VII Peaks Co-Optivist Income
    BDC II, Inc.
|------------------ | ---------------------------------------------
|                   |                                              
|Date: May 20, 2015 | By                                           
|                   |                                              
|                   |                                              
|                   |                                              
|                   |                                              



33