UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form 10-Q



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



For the quarterly period ended September
30, 2017



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



For the transition period from             to



Commission File No. 0-54615



VII Peaks
Co-Optivist Income BDC II, Inc.

(Exact name of Registrant as specified in
its charter)



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



4 Orinda Way, Suite 125-A

Orinda, CA 94563

(Address of principal executive offices)



(855) 889-1778

(Registrant’s telephone number, including
area code)



Not applicable

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



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



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



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



If an emerging growth
company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.      
x



Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ̈ No
x



The number of shares of
the Registrant’s common stock, par value $0.001 per share, outstanding as of November 14,
2017 was 6,454,708.


















VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER
30, 2017



TABLE OF CONTENTS



|           |                                                                                                       | Page
|---------- | ----------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                       |     
|PART I.    | FINANCIAL INFORMATION                                                                                 | 3   
|Item 1.    | Financial Statements                                                                                  | 3   
|           | Statements of Assets and Liabilities as of September 30, 2017 (unaudited) and December 31, 2016       | 3   
|           | Statements of Operations for the three and nine months ended September 30, 2017 and 2016 (unaudited)  | 4   
|           | Statements of Changes in Net Assets for the nine months ended September 30, 2017 and 2016 (unaudited) | 5   
|           | Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited)            | 6   
|           | Schedule of Investments as of September 30, 2017 (unaudited)                                          | 7   
|           | Schedule of Investments as of December 31, 2016                                                       | 9   
|           | Notes to Financial Statements (unaudited)                                                             | 11  
|Item 2.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations                 | 33  
|Item 3.    | Quantitative and Qualitative Disclosures About Market Risk                                            | 50  
|Item 4.    | Controls and Procedures                                                                               | 51  
|PART II.   | OTHER INFORMATION                                                                                     | 53  
|Item 1.    | Legal Proceedings                                                                                     | 53  
|Item 1A.   | Risk Factors                                                                                          | 54  
|Item 2.    | Unregistered Sales of Equity Securities and Use of Proceeds                                           | 54  
|Item 3.    | Defaults Upon Senior Securities                                                                       | 54  
|Item 4.    | Mine Safety Disclosures                                                                               | 54  
|Item 5.    | Other Information                                                                                     | 54  
|Item 6.    | Exhibits                                                                                              | 55  
|Signatures | 56                                                                                                   



2







PART I – FINANCIAL INFORMATION



Item 1. Financial Statements



VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share and per share
data)



|                                                                                                                                           |  | As of              |        
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | -------
|                                                                                                                                           |  | September 30, 2017 |        
|                                                                                                                                           |  | (unaudited)        |        
|ASSETS                                                                                                                                     |  |                    |        
|                                                                                                                                           |  |                    |        
|Investments, at fair value                                                                                                                 |  |                    |        
|Non-controlled/non-affiliate investments (cost of $26,683 and $35,575, respectively)                                                       |  | $                  | 30,420 
|Affiliate investments (cost of $5,850 and $5,850, respectively)                                                                            |  |                    | 12,682 
|Investments, money market at fair value (cost of $781 and $157, respectively)                                                              |  |                    | 781    
|Total investments, at fair value                                                                                                           |  |                    | 43,883 
|Interest receivable                                                                                                                        |  |                    | 402    
|Prepaid expenses                                                                                                                           |  |                    | 20     
|Other assets                                                                                                                               |  |                    | 50     
|Due from related party, net                                                                                                                |  |                    | 198    
|Total assets                                                                                                                               |  |                    | 44,553 
|                                                                                                                                           |  |                    |        
|LIABILITIES                                                                                                                                |  |                    |        
|Priority credit line -Wells Fargo                                                                                                          |  | $                  | -      
|Deferred loan fee                                                                                                                          |  |                    | 246    
|Prepaid interest from investments                                                                                                          |  |                    | 397    
|Accounts payable and accrued liabilities                                                                                                   |  |                    | 27     
|Total liabilities                                                                                                                          |  |                    | 670    
|                                                                                                                                           |  |                    |        
|Commitments and Contingencies (Note 10)                                                                                                    |  |                    |        
|                                                                                                                                           |  |                    |        
|NET ASSETS                                                                                                                                 |  |                    |        
|Preferred stock, par value, $.001 per share, 50,000,000 authorized, none issued and outstanding                                            |  |                    | -      
|Common stock, par value, $.001 per share, 200,000,000 authorized;                                                                          |  |                    |        
|6,744,622 and 6,639,019 shares issued and 6,443,209 and 6,337,606 outstanding as of September 30, 2017 and December 31, 2016, respectively |  |                    | 6      
|Paid-in capital in excess of par value                                                                                                     |  |                    | 61,062 
|Treasury stock at cost, 301,413 and 301,413 shares, respectively                                                                           |  |                    | (2,891 
|Accumulated distribution in excess of net investment income and net realized gain (loss) on investments                                    |  |                    | (24,863
|Net unrealized appreciation (depreciation) on investments                                                                                  |  |                    | 10,569 
|Total net assets                                                                                                                           |  |                    | 43,883 
|Total liabilities and net assets                                                                                                           |  | $                  | 44,553 
|                                                                                                                                           |  |                    |        
|Net asset value per share                                                                                                                  |  | $                  | 6.81   



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



3







VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



STATEMENTS OF OPERATIONS

(in thousands, except share and per share
data)

(unaudited)



|                                                                                                                                                                |  | For the Three Months Ended September 30, |           |   | For the Three Months Ended September 30, |   |           | For the Nine Months Ended September 30, |  |   | For the Nine Months Ended September 30, |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | --------- | - | ---------------------------------------- | - | --------- | --------------------------------------- |  | - | --------------------------------------- | -
|                                                                                                                                                                |  | 2017                                     |           |   | 2016                                     |   |           | 2017                                    |  |   | 2016                                    |  
|                                                                                                                                                                |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Investment income:                                                                                                                                              |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Interest from investments                                                                                                                                       |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Non-controlled/non-affiliate investments                                                                                                                        |  | $                                        | 857       |   |                                          | $ | 772       |                                         |  | $ | 2,374                                   |  
|Affiliate investments                                                                                                                                           |  |                                          | 167       |   |                                          |   | 160       |                                         |  |   | 522                                     |  
|Fee income                                                                                                                                                      |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Non-controlled/non-affiliate investments                                                                                                                        |  |                                          | 49        |   |                                          |   | 19        |                                         |  |   | 129                                     |  
|Affiliate investments                                                                                                                                           |  |                                          | 32        |   |                                          |   | 8         |                                         |  |   | 61                                      |  
|Total investment income                                                                                                                                         |  |                                          | 1,105     |   |                                          |   | 959       |                                         |  |   | 3,086                                   |  
|                                                                                                                                                                |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Operating expenses:                                                                                                                                             |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Professional fees                                                                                                                                               |  |                                          | 46        |   |                                          |   | 177       |                                         |  |   | 448                                     |  
|Directors fees                                                                                                                                                  |  |                                          | 12        |   |                                          |   | 10        |                                         |  |   | 31                                      |  
|Insurance                                                                                                                                                       |  |                                          | 33        |   |                                          |   | 29        |                                         |  |   | 99                                      |  
|Interest expense                                                                                                                                                |  |                                          | -         |   |                                          |   | 39        |                                         |  |   | 58                                      |  
|Management fees - related parties                                                                                                                               |  |                                          | 223       |   |                                          |   | 168       |                                         |  |   | 626                                     |  
|Administrative services - related parties                                                                                                                       |  |                                          | 74        |   |                                          |   | 58        |                                         |  |   | 206                                     |  
|General and administrative (includes $36, $30, $118 and $90 of CFO salary (accounting) and $0, $14, $26 and $33 of related party travel expenses, respectively) |  |                                          | 119       |   |                                          |   | 136       |                                         |  |   | 363                                     |  
|Transfer agent fees                                                                                                                                             |  |                                          | 28        |   |                                          |   | 37        |                                         |  |   | 101                                     |  
|Total operating expenses                                                                                                                                        |  |                                          | 535       |   |                                          |   | 654       |                                         |  |   | 1,932                                   |  
|                                                                                                                                                                |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Net investment income                                                                                                                                           |  |                                          | 570       |   |                                          |   | 305       |                                         |  |   | 1,154                                   |  
|                                                                                                                                                                |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Realized and unrealized gain (loss) on investments:                                                                                                             |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Net realized loss on non-controlled/non-affiliate investments                                                                                                   |  |                                          | (498      | ) |                                          |   | (38       | )                                       |  |   | (400                                    | )
|Net unrealized appreciation on non-controlled/non-affiliate investments                                                                                         |  |                                          | 943       |   |                                          |   | 252       |                                         |  |   | 8,335                                   |  
|Net unrealized appreciation on affiliate investments                                                                                                            |  |                                          | -         |   |                                          |   | 1,416     |                                         |  |   | 3,314                                   |  
|Net realized and unrealized gain on investments                                                                                                                 |  |                                          | 445       |   |                                          |   | 1,630     |                                         |  |   | 11,249                                  |  
|                                                                                                                                                                |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Net increase in net assets resulting from operations                                                                                                            |  | $                                        | 1,015     |   |                                          | $ | 1,935     |                                         |  | $ | 12,403                                  |  
|                                                                                                                                                                |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Per share information - basic and diluted:                                                                                                                      |  |                                          |           |   |                                          |   |           |                                         |  |   |                                         |  
|Net investment income                                                                                                                                           |  | $                                        | 0.09      |   |                                          | $ | 0.05      |                                         |  | $ | 0.18                                    |  
|Net increase in net assets resulting from operations                                                                                                            |  | $                                        | 0.16      |   |                                          | $ | 0.31      |                                         |  | $ | 1.94                                    |  
|Weighted average common shares outstanding                                                                                                                      |  |                                          | 6,420,505 |   |                                          |   | 6,276,081 |                                         |  |   | 6,385,756                               |  



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



4







VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



STATEMENTS OF CHANGES IN NET ASSETS

(in thousands, except share and per share
data)

(unaudited)



|                                                                                                        |  | For the Nine Months Ended September 30, 2017 |           |   | For the Nine Months Ended September 30, 2016 |  
|------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | --------- | - | -------------------------------------------- | -
|                                                                                                        |  |                                              |           |   |                                              |  
|Operations:                                                                                             |  |                                              |           |   |                                              |  
|Net investment income                                                                                   |  | $                                            | 1,154     |   |                                              | $
|Net realized loss from investments                                                                      |  |                                              | (400      | ) |                                              |  
|Net unrealized appreciation on investments                                                              |  |                                              | 11,649    |   |                                              |  
|Net increase in net assets from operations                                                              |  |                                              | 12,403    |   |                                              |  
|Stockholder distributions:                                                                              |  |                                              |           |   |                                              |  
|Distributions from net investment income                                                                |  |                                              | (1,154    | ) |                                              |  
|Distributions from net realized gain on investments                                                     |  |                                              | (98       | ) |                                              |  
|Distributions from paid in capital                                                                      |  |                                              | (1,827    | ) |                                              |  
|Net decrease in net assets from stockholder distributions                                               |  |                                              | (3,079    | ) |                                              |  
|Capital share transactions:                                                                             |  |                                              |           |   |                                              |  
|Reinvestment of stockholder distributions                                                               |  |                                              | 877       |   |                                              |  
|Net increase in net assets from capital share transactions                                              |  |                                              | 877       |   |                                              |  
|                                                                                                        |  |                                              |           |   |                                              |  
|Total increase in net assets                                                                            |  |                                              | 10,201    |   |                                              |  
|Net assets at beginning of period                                                                       |  |                                              | 33,682    |   |                                              |  
|Net assets at end of period                                                                             |  | $                                            | 43,883    |   |                                              | $
|                                                                                                        |  |                                              |           |   |                                              |  
|Net asset value per common share                                                                        |  | $                                            | 6.81      |   |                                              | $
|Common shares outstanding at end of period                                                              |  |                                              | 6,443,209 |   |                                              |  
|                                                                                                        |  |                                              |           |   |                                              |  
|Accumulated distribution in excess of net investment income and net realized gain (loss) on investments |  | $                                            | (24,863   | ) |                                              | $



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



5







VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                                                  |  | For the Nine Months Ended September 30, 2017 |         |   | For the Nine Months Ended September 30, 2016 |  
|----------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | ------- | - | -------------------------------------------- | -
|                                                                                                                  |  |                                              |         |   |                                              |  
|Operating activities:                                                                                             |  |                                              |         |   |                                              |  
|Net increase in net assets from operations                                                                        |  | $                                            | 12,403  |   |                                              | $
|Adjustments to reconcile net increase in net assets from operations to net cash provided by operating activities: |  |                                              |         |   |                                              |  
|Paid-in-kind interest income                                                                                      |  |                                              | (18     | ) |                                              |  
|Net accretion of discounts and amortization of premiums                                                           |  |                                              | (1,004  | ) |                                              |  
|Repayments of investments                                                                                         |  |                                              | 16,214  |   |                                              |  
|Purchase of investments                                                                                           |  |                                              | (6,700  | ) |                                              |  
|Repayments of investments - money market                                                                          |  |                                              | 19,609  |   |                                              |  
|Purchase of investments - money market                                                                            |  |                                              | (20,233 | ) |                                              |  
|Net realized loss from investments                                                                                |  |                                              | 400     |   |                                              |  
|Net unrealized appreciation on investments                                                                        |  |                                              | (11,649 | ) |                                              |  
|Proceeds from loan fees received                                                                                  |  |                                              | 148     |   |                                              |  
|Accretion of deferred loan fees                                                                                   |  |                                              | (170    | ) |                                              |  
|(Increase) decrease in operating assets:                                                                          |  |                                              |         |   |                                              |  
|Interest receivable                                                                                               |  |                                              | -       |   |                                              |  
|Prepaid expenses                                                                                                  |  |                                              | 56      |   |                                              |  
|Other assets                                                                                                      |  |                                              | (50     | ) |                                              |  
|Due from related party, net                                                                                       |  |                                              | 41      |   |                                              |  
|Origination fee receivable                                                                                        |  |                                              | -       |   |                                              |  
|Increase (decrease) in operating liabilities:                                                                     |  |                                              |         |   |                                              |  
|Prepaid interest from investments                                                                                 |  |                                              | (382    | ) |                                              |  
|Accounts payable and accrued liabilities                                                                          |  |                                              | (97     | ) |                                              |  
|Net cash provided by operating activities                                                                         |  |                                              | 8,568   |   |                                              |  
|                                                                                                                  |  |                                              |         |   |                                              |  
|Financing activities:                                                                                             |  |                                              |         |   |                                              |  
|Stockholder distributions                                                                                         |  |                                              | (2,202  | ) |                                              |  
|Borrowings - priority credit line                                                                                 |  |                                              | 2,201   |   |                                              |  
|Repayments - priority credit line                                                                                 |  |                                              | (8,567  | ) |                                              |  
|Net cash used in financing activities                                                                             |  |                                              | (8,568  | ) |                                              |  
|                                                                                                                  |  |                                              |         |   |                                              |  
|Net change in cash and cash equivalents                                                                           |  |                                              | -       |   |                                              |  
|Cash and cash equivalents, beginning of period                                                                    |  |                                              | -       |   |                                              |  
|Cash and cash equivalents, end of period                                                                          |  | $                                            | -       |   |                                              | $
|                                                                                                                  |  |                                              |         |   |                                              |  
|Supplemental disclosure of non-cash information:                                                                  |  |                                              |         |   |                                              |  
|Distribution reinvestment plan distribution payable                                                               |  | $                                            | -       |   |                                              | $
|Cash distribution payable                                                                                         |  | $                                            | -       |   |                                              | $
|Distribution reinvestment plan distribution paid                                                                  |  | $                                            | 877     |   |                                              | $
|                                                                                                                  |  |                                              |         |   |                                              |  
|Supplemental disclosure of cash flow information:                                                                 |  |                                              |         |   |                                              |  
|Cash interest paid during the period                                                                              |  | $                                            | 61      |   |                                              | $



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



6







VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



SCHEDULE OF INVESTMENTS

(dollars and shares in thousands)

(unaudited)



September 30, 2017



|Portfolio
    Company                               |  | Industry                                  |  | Investment
    CouponRate, Maturity
    Date |                       |  | Principal
    / No. ofShares |   |        | Amortized
    Cost |  |   | Fair
    Value |  |  | %
    of Net Assets |       
|--------------------------------------------------- |  | ----------------------------------------- |  | -------------------------------------------- | --------------------- |  | ---------------------------- | - | ------ | ------------------ |  | - | -------------- |  |  | ------------------- | ------
|Senior Secured First Lien Debt - 45.7% (b)          |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   |                |  |  |                     |       
|Ansgar Media, LLC (e) (h)                           |  | Media: Broadcasting & Subscription        |  |                                              | 12.00%, 1/11/2018     |  |                              | $ | 2,000  |                    |  | $ | 2,000          |  |  | $                   | 2,000 
|Ansgar Media, LLC (e) (h)                           |  | Media: Broadcasting & Subscription        |  |                                              | 12.00%, 9/18/2019     |  |                              |   | 2,000  |                    |  |   | 2,000          |  |  |                     | 2,000 
|Ansgar Media, LLC (e) (h)                           |  | Media: Broadcasting & Subscription        |  |                                              | 12.00%, 10/24/2018    |  |                              |   | 310    |                    |  |   | 310            |  |  |                     | 310   
|Ansgar Media, LLC (e) (h)                           |  | Media: Broadcasting & Subscription        |  |                                              | 12.00%, 10/27/2018    |  |                              |   | 1,540  |                    |  |   | 1,540          |  |  |                     | 1,540 
|Claire's Stores, Inc. Term Loan                     |  | Retail                                    |  |                                              | 9.00%, 9/20/2021      |  |                              |   | 125    |                    |  |   | 264            |  |  |                     | 125   
|CLSIP LLC Term Loan                                 |  | Retail                                    |  |                                              | 9.00%, 9/20/2021      |  |                              |   | 407    |                    |  |   | 856            |  |  |                     | 407   
|Digital Golf Technologies, LLC (h)                  |  | Services: Consumer                        |  |                                              | 13.00%, 1/11/2020     |  |                              |   | 1,000  |                    |  |   | 925            |  |  |                     | 1,000 
|GeoCommerce, Inc. (h)                               |  | Technology                                |  |                                              | 12.00%, 5/15/2018     |  |                              |   | 750    |                    |  |   | 501            |  |  |                     | 750   
|GeoCommerce, Inc. (h)                               |  | Technology                                |  |                                              | 12.00%, 4/27/2018     |  |                              |   | 750    |                    |  |   | 469            |  |  |                     | 750   
|GeoCommerce, Inc. (h)                               |  | Technology                                |  |                                              | 12.00%, 10/14/2018    |  |                              |   | 1,000  |                    |  |   | 867            |  |  |                     | 1,000 
|GeoCommerce, Inc. (h)                               |  | Technology                                |  |                                              | 12.00%, 12/21/2018    |  |                              |   | 1,500  |                    |  |   | 1,190          |  |  |                     | 1,500 
|Goodman Networks, Inc. (c) (i)                      |  | Telecommunications                        |  |                                              | 8.00%, 5/11/2022      |  |                              |   | 277    |                    |  |   | 849            |  |  |                     | 230   
|Nima, LLC (h)                                       |  | Consumer Electronics                      |  |                                              | 12.00%, 5/20/2018     |  |                              |   | 2,000  |                    |  |   | 1,561          |  |  |                     | 2,000 
|Nima, LLC (h)                                       |  | Consumer Electronics                      |  |                                              | 12.00%, 8/11/2018     |  |                              |   | 1,000  |                    |  |   | 1,000          |  |  |                     | 1,000 
|Nima, LLC (h)                                       |  | Consumer Electronics                      |  |                                              | 12.00%, 11/2/2018     |  |                              |   | 750    |                    |  |   | 750            |  |  |                     | 750   
|Nima, LLC (h)                                       |  | Consumer Electronics                      |  |                                              | 12.00%, 12/21/2018    |  |                              |   | 750    |                    |  |   | 750            |  |  |                     | 750   
|Nima, LLC (h)                                       |  | Consumer Electronics                      |  |                                              | 12.00%, 2/16/2019     |  |                              |   | 450    |                    |  |   | 450            |  |  |                     | 450   
|Nima, LLC (h)                                       |  | Consumer Electronics                      |  |                                              | 12.00%, 4/6/2019      |  |                              |   | 300    |                    |  |   | 300            |  |  |                     | 300   
|Nima, LLC (h)                                       |  | Consumer Electronics                      |  |                                              | 12.00%, 6/19/2019     |  |                              |   | 225    |                    |  |   | 225            |  |  |                     | 225   
|Nima, LLC (h)                                       |  | Consumer Electronics                      |  |                                              | 12.00%, 8/4/2019      |  |                              |   | 500    |                    |  |   | 500            |  |  |                     | 500   
|Nima, LLC (h)                                       |  | Consumer Electronics                      |  |                                              | 12.00%, 8/31/2019     |  |                              |   | 500    |                    |  |   | 500            |  |  |                     | 500   
|Vieste Group, LLC (f) (h)                           |  | Renewable Energy                          |  |                                              | 13.00%, 4/7/2019      |  |                              |   | 120    |                    |  |   | 110            |  |  |                     | 120   
|Vieste Group, LLC (f) (h)                           |  | Renewable Energy                          |  |                                              | 13.00%, 7/14/2019     |  |                              |   | 240    |                    |  |   | 220            |  |  |                     | 240   
|Vieste Group, LLC (f) (h)                           |  | Renewable Energy                          |  |                                              | 13.00%, 8/1/2019      |  |                              |   | 150    |                    |  |   | 137            |  |  |                     | 150   
|Vieste Group, LLC (f) (h)                           |  | Renewable Energy                          |  |                                              | 13.00%, 8/17/2019     |  |                              |   | 120    |                    |  |   | 109            |  |  |                     | 120   
|Vieste Group, LLC (f) (h)                           |  | Renewable Energy                          |  |                                              | 13.00%, 8/31/2019     |  |                              |   | 1,340  |                    |  |   | 1,243          |  |  |                     | 1,340 
|Sub Total Senior Secured First Lien Debt            |  |                                           |  |                                              |                       |  |                              | $ | 20,104 |                    |  | $ | 19,626         |  |  | $                   | 20,057
|                                                    |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   |                |  |  |                     |       
|Senior Secured Second Lien Debt - 0.4% (b)          |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   |                |  |  |                     |       
|Logan's Roadhouse, Inc. PIK Exit Facility Term Loan |  | Beverage, Food & Tobacco                  |  |                                              | 9.50% PIK, 11/23/2020 |  |                              | $ | 174    |                    |  | $ | 160            |  |  | $                   | 174   
|Saratoga Resources, Inc. (c) (i)                    |  | Energy: Oil & Gas                         |  |                                              | 12.50%, 7/1/2016      |  |                              |   | 885    |                    |  |   | 912            |  |  |                     | 2     
|Sub Total Senior Secured Second Lien Debt           |  |                                           |  |                                              |                       |  |                              | $ | 1,059  |                    |  | $ | 1,072          |  |  | $                   | 176   
|                                                    |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   |                |  |  |                     |       
|Senior Unsecured Debt - 0.8% (b)                    |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   |                |  |  |                     |       
|Claire’s (Gibraltar) Holdings Limited Term Loan     |  | Retail                                    |  |                                              | 9.00%, 9/20/2021      |  |                              | $ | 188    |                    |  | $ | 395            |  |  | $                   | 188   
|Colt Defense, LLC                                   |  | Aerospace and Defense                     |  |                                              | 8.00%, 7/12/2021      |  |                              |   | 148    |                    |  |   | 1,042          |  |  |                     | 148   
|DynCorp International Inc. (i)                      |  | Aerospace and Defense                     |  |                                              | 11.88%, 11/30/2020    |  |                              |   | 4      |                    |  |   | 3              |  |  |                     | 5     
|Gymboree Corp. (c)  (i)                             |  | Retail                                    |  |                                              | 9.13%, 12/1/2018      |  |                              |   | 810    |                    |  |   | 755            |  |  |                     | 19    
|Sub Total Senior Unsecured Debt                     |  |                                           |  |                                              |                       |  |                              | $ | 1,150  |                    |  | $ | 2,195          |  |  | $                   | 360   
|                                                    |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   |                |  |  |                     |       
|Equity Securities - 51.3% (b)                       |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   |                |  |  |                     |       
|Affinion Group, Inc. (c)  (i)                       |  | Media: Advertising, Printing & Publishing |  |                                              |                       |  |                              |   | 13     |                    |  | $ | 689            |  |  | $                   | 127   
|Aspire Holdings (c)                                 |  | Energy: Oil & Gas                         |  |                                              |                       |  |                              |   | 26     |                    |  |   | 551            |  |  |                     | 26    
|Aspect Software, Inc. (c)                           |  | Telecommunications                        |  |                                              |                       |  |                              |   | 8      |                    |  |   | 244            |  |  |                     | 331   
|Education Management, LLC (c)                       |  | Services: Consumer                        |  |                                              |                       |  |                              |   | 2,530  |                    |  |   | 4              |  |  |                     | -     
|Logan's Roadhouse, Inc. (c)                         |  | Beverage, Food & Tobacco                  |  |                                              |                       |  |                              |   | 87     |                    |  |   | 633            |  |  |                     | 86    
|NII Holdings, Inc. (a) (c)  (i)                     |  | Telecommunications                        |  |                                              |                       |  |                              |   | 17     |                    |  |   | 768            |  |  |                     | 8     
|Nuverra Environmental Solutions, Inc. (c) (g)       |  | Environmental Industries                  |  |                                              |                       |  |                              |   | 32     |                    |  |   | 1,368          |  |  |                     | -     
|UCI International, Inc. (c)                         |  | Automobile                                |  |                                              |                       |  |                              |   | 31     |                    |  |   | 1,354          |  |  |                     | 364   
|Total Common Stock                                  |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   | 5,611          |  |  |                     | 942   
|                                                    |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   |                |  |  |                     |       
|Ansgar Media, LLC - Class B Units (c) (d) (e)       |  | Media: Broadcasting & Subscription        |  |                                              |                       |  |                              |   | -      |                    |  |   | -              |  |  |                     | 6,832 
|Total Preferred Stock                               |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   | -              |  |  |                     | 6,832 
|                                                    |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   |                |  |  |                     |       
|GeoCommerce, Inc. (c)                               |  | Technology                                |  |                                              |                       |  |                              |   | 875    |                    |  |   | 1,883          |  |  |                     | 7,718 
|Digital Golf Technologies, LLC (c)                  |  | Services: Consumer                        |  |                                              |                       |  |                              |   | 22     |                    |  |   | 91             |  |  |                     | 100   
|Education Management, LLC (c)                       |  | Services: Consumer                        |  |                                              |                       |  |                              |   | 1,554  |                    |  |   | 876            |  |  |                     | -     
|Nima, LLC (c)                                       |  | Consumer Electronics                      |  |                                              |                       |  |                              |   | 2,000  |                    |  |   | 1,000          |  |  |                     | 6,720 
|Vieste Group, LLC (c)                               |  | Renewable Energy                          |  |                                              |                       |  |                              |   | 144    |                    |  |   | 179            |  |  |                     | 197   
|Total Warrants                                      |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   | 4,029          |  |  |                     | 14,735
|                                                    |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   |                |  |  |                     |       
|Sub Total Equity Securities                         |  |                                           |  |                                              |                       |  |                              |   |        |                    |  | $ | 9,640          |  |  | $                   | 22,509
|                                                    |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   |                |  |  |                     |       
|Investments - Money Market - 1.8% (b)               |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   |                |  |  |                     |       
|Investments - U.S. Bank Money Market                |  |                                           |  |                                              | 0.20%                 |  |                              | $ | 781    |                    |  | $ | 781            |  |  | $                   | 781   
|Sub Total Investments - Money Market                |  |                                           |  |                                              |                       |  |                              | $ | 781    |                    |  | $ | 781            |  |  | $                   | 781   
|                                                    |  |                                           |  |                                              |                       |  |                              |   |        |                    |  |   |                |  |  |                     |       
|TOTAL INVESTMENTS - 100.0% (b)                      |  |                                           |  |                                              |                       |  |                              |   |        |                    |  | $ | 33,314         |  |  | $                   | 43,883



(a) Represents a non-qualifying investment as defined under Section
55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying investments represent 0.0% of the Fund's (VII Peaks Co-OptivistTM
Income BDC, II, Inc.) portfolio at fair value. As a BDC, the Fund can only invest 30% of its portfolio in non-qualifying assets.



(b) Percentages are based on net assets of $43,883 as of September
30, 2017.



(c) Non-income producing as of September 30, 2017.



(d) 2,500 Class B Units, which are not entitled to an allocation
of profits or losses until the earlier to occur of September 30, 2020 or a change of control of Ansgar Media, LLC.



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



|Portfolio Company |  | Principal/ Par Amount/ Shares |       |  | Net Realized Gain or
    Loss For nine months ended 
September 30, 2017 |  |   | Net Increase or Decrease in Unrealized  Appreciation or Depreciation 
For nine months ended 
September 30, 2017 |  |   | Dividends or 
Interest Earned  For nine months ended 
September 30, 2017 |  |  | Fair Value |    
|----------------- |  | ----------------------------- | ----- |  | ----------------------------------------------------------------------- |  | - | --------------------------------------------------------------------------------------------------------------- |  | - | ------------------------------------------------------------------------ |  |  | ---------- | ---
|Ansgar Media, LLC |  | $                             | 5,850 |  |                                                                         |  | - |                                                                                                                 |  | $ | 3,314                                                                    |  |  | $          | 522



(f) The Fund entered into a Senior Secured
First Lien Loan Agreement with Vieste Group, LLC on April 7, 2017, for a total loan amount of $4,250 thousand. As of September
30, 2017, the Fund has loaned Vieste Group, LLC $1,970 thousand; the time and amounts of the additional $2,280 thousand in funding
will be at the mutual agreement between the Fund and Vieste Group, LLC.







(g) On August 8, 2017, as part of
the mandatory reorganization, $1.44 million face value of 10% senior secured second lien bonds, due April 15, 2021 and
71,069 warrants of Nuverra Environmental Solutions, Inc. were exchanged for 31,989 shares of Nuverra Environmental Solutions,
Inc. The stock was not trading as of September 30, 2017, so was valued at $0. The stock started trading on October 12, 2017, and
closed at $15.12 at the end of trading session.



(h) Borrower also pays an end-of-term fee or exit fee, upon loan
maturity or full repayment of the principal amount equal to 1% of the total investment amount.



(i) Other than the investments noted by this footnote, the fair value of the Fund's investments is determined using unobservable
inputs that are significant to the overall fair value measurement. See Note 3 for more information regarding the fair value
of the Fund's investments.



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)

(unaudited)



September 30, 2017



The following table shows the portfolio composition
by industry grouping at fair value at September 30, 2017 (dollars in thousands):



|                                          |  | At September 30, 2017          |       
|----------------------------------------- |  | ------------------------------ | ------
|                                          |  | Investments at 
    Fair Value |       
|Consumer Electronics                      |  | $                              | 13,195
|Media: Broadcasting & Subscription        |  |                                | 12,682
|Technology                                |  |                                | 11,718
|Renewable Energy                          |  |                                | 2,167 
|Services: Consumer                        |  |                                | 1,100 
|Investments - Money Market                |  |                                | 781   
|Retail                                    |  |                                | 739   
|Telecommunications                        |  |                                | 569   
|Automobile                                |  |                                | 364   
|Beverage, Food & Tobacco                  |  |                                | 260   
|Aerospace and Defense                     |  |                                | 153   
|Media: Advertising, Printing & Publishing |  |                                | 127   
|Energy: Oil & Gas                         |  |                                | 28    
|Environmental Industries                  |  |                                | —     
|Total                                     |  | $                              | 43,883



8







VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



SCHEDULE OF INVESTMENTS

(dollars and shares in thousands)



December 31, 2016



|Portfolio Company                                       |  | Industry                                  |  | Investment Coupon Rate,  Maturity Date |                       |  | Principal / No. of Shares |   |        | Amortized Cost |  |   | Fair Value |  |  | % of Net Assets |       
|------------------------------------------------------- |  | ----------------------------------------- |  | -------------------------------------- | --------------------- |  | ------------------------- | - | ------ | -------------- |  | - | ---------- |  |  | --------------- | ------
|Senior Secured First Lien Debt -50.6% (b)               |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|Ansgar Media, LLC (e)                                   |  | Media: Broadcasting & Subscription        |  |                                        | 12.00%, 1/11/2018     |  |                           | $ | 2,000  |                |  | $ | 2,000      |  |  | $               | 2,000 
|Ansgar Media, LLC (e)                                   |  | Media: Broadcasting & Subscription        |  |                                        | 12.00%, 9/18/2017     |  |                           |   | 2,000  |                |  |   | 2,000      |  |  |                 | 2,000 
|Ansgar Media, LLC (e)                                   |  | Media: Broadcasting & Subscription        |  |                                        | 12.00%, 10/24/2018    |  |                           |   | 310    |                |  |   | 310        |  |  |                 | 310   
|Ansgar Media, LLC (e)                                   |  | Media: Broadcasting & Subscription        |  |                                        | 12.00%, 10/27/2018    |  |                           |   | 1,540  |                |  |   | 1,540      |  |  |                 | 1,540 
|APX Group, Inc.                                         |  | Services: Consumer                        |  |                                        | 6.38%, 12/1/2019      |  |                           |   | 825    |                |  |   | 825        |  |  |                 | 849   
|Claire's Stores, Inc. Term Loan (h)                     |  | Retail                                    |  |                                        | 9.00%, 9/20/2021      |  |                           |   | 125    |                |  |   | 263        |  |  |                 | 125   
|CLSIP LLC Term Loan (h)                                 |  | Retail                                    |  |                                        | 9.00%, 9/20/2021      |  |                           |   | 407    |                |  |   | 856        |  |  |                 | 407   
|GeoCommerce, Inc.                                       |  | Technology                                |  |                                        | 12.00%, 4/27/2018     |  |                           |   | 1,000  |                |  |   | 745        |  |  |                 | 1,000 
|GeoCommerce, Inc.                                       |  | Technology                                |  |                                        | 12.00%, 5/15/2018     |  |                           |   | 1,500  |                |  |   | 898        |  |  |                 | 1,500 
|GeoCommerce, Inc.                                       |  | Technology                                |  |                                        | 12.00%, 10/14/2018    |  |                           |   | 750    |                |  |   | 390        |  |  |                 | 750   
|GeoCommerce, Inc.                                       |  | Technology                                |  |                                        | 12.00%, 12/21/2018    |  |                           |   | 750    |                |  |   | 368        |  |  |                 | 750   
|Nima, LLC                                               |  | Consumer Electronics                      |  |                                        | 12.00%, 5/20/2018     |  |                           |   | 2,000  |                |  |   | 1,201      |  |  |                 | 2,000 
|Nima, LLC                                               |  | Consumer Electronics                      |  |                                        | 12.00%, 8/11/2018     |  |                           |   | 1,000  |                |  |   | 1,000      |  |  |                 | 1,000 
|Nima, LLC                                               |  | Consumer Electronics                      |  |                                        | 12.00%, 11/2/2018     |  |                           |   | 750    |                |  |   | 750        |  |  |                 | 750   
|Nima, LLC                                               |  | Consumer Electronics                      |  |                                        | 12.00%, 12/21/2018    |  |                           |   | 750    |                |  |   | 750        |  |  |                 | 750   
|Goodman Networks, Inc.                                  |  | Telecommunications                        |  |                                        | 12.13%, 7/1/2018      |  |                           |   | 800    |                |  |   | 823        |  |  |                 | 240   
|Kratos Defense & Security Solutions, Inc.               |  | Aerospace and Defense                     |  |                                        | 7.00%, 5/15/2019      |  |                           |   | 1,112  |                |  |   | 1,015      |  |  |                 | 1,079 
|Sub Total Senior Secured First Lien Debt                |  |                                           |  |                                        |                       |  |                           | $ | 17,619 |                |  | $ | 15,734     |  |  | $               | 17,050
|                                                        |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|Senior Secured Second Lien Debt - 1.5% (b)              |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|Nuverra Environmental Solutions, Inc.                   |  | Environmental Industries                  |  |                                        | 12.50%, 4/15/2022     |  |                           | $ | 1,408  |                |  | $ | 1,362      |  |  | $               | 269   
|Logan's Roadhouse, Inc. (c) (f)                         |  | Beverage, Food & Tobacco                  |  |                                        | 10.75%, 10/15/2017    |  |                           |   | 674    |                |  |   | 633        |  |  |                 | 87    
|Logan's Roadhouse, Inc. PIK Exit Facility Term Loan (f) |  | Beverage, Food & Tobacco                  |  |                                        | 9.50% PIK, 11/23/2020 |  |                           |   | 162    |                |  |   | 146        |  |  |                 | 162   
|Saratoga Resources, Inc. (c)                            |  | Energy: Oil & Gas                         |  |                                        | 12.50%, 7/1/2016      |  |                           |   | 885    |                |  |   | 912        |  |  |                 | 2     
|Sub Total Senior Secured Second Lien Debt               |  |                                           |  |                                        |                       |  |                           | $ | 3,129  |                |  | $ | 3,053      |  |  | $               | 520   
|                                                        |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|Senior Unsecured Debt - 14.5% (b)                       |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|APX Group, Inc.                                         |  | Services: Consumer                        |  |                                        | 8.75%, 12/1/2020      |  |                           | $ | 575    |                |  | $ | 559        |  |  | $               | 579   
|Claire’s (Gibraltar) Holdings Limited Term Loan (h)     |  | Retail                                    |  |                                        | 9.00%, 9/20/2021      |  |                           |   | 188    |                |  |   | 395        |  |  |                 | 188   
|Clear Channel Communications                            |  | Media: Broadcasting & Subscription        |  |                                        | 10.00%, 1/15/2018     |  |                           |   | 1,400  |                |  |   | 1,375      |  |  |                 | 1,050 
|Colt Defense, LLC                                       |  | Aerospace and Defense                     |  |                                        | 8.00%, 7/12/2021      |  |                           |   | 137    |                |  |   | 1,033      |  |  |                 | 137   
|DynCorp International Inc.                              |  | Aerospace and Defense                     |  |                                        | 11.88%, 11/30/2020    |  |                           |   | 1,020  |                |  |   | 1,032      |  |  |                 | 908   
|Gymboree Corp.                                          |  | Retail                                    |  |                                        | 9.13%, 12/1/2018      |  |                           |   | 810    |                |  |   | 785        |  |  |                 | 364   
|Seitel, Inc.                                            |  | Energy: Oil & Gas                         |  |                                        | 9.50%, 4/15/2019      |  |                           |   | 1,575  |                |  |   | 1,575      |  |  |                 | 1,418 
|UCI International, Inc. (c) (i)                         |  | Automobile                                |  |                                        | 8.63%, 2/15/2019      |  |                           |   | 1,400  |                |  |   | 1,354      |  |  |                 | 238   
|Sub Total Senior Unsecured Debt                         |  |                                           |  |                                        |                       |  |                           | $ | 7,105  |                |  | $ | 8,108      |  |  | $               | 4,882 
|                                                        |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|Senior Subordinated Debt - 3.1% (b)                     |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|DJO Finance, LLC                                        |  | Healthcare & Pharmaceuticals              |  |                                        | 10.75%, 4/15/2020     |  |                           | $ | 1,265  |                |  | $ | 1,320      |  |  | $               | 1,050 
|Sub Total Senior Subordinated Debt                      |  |                                           |  |                                        |                       |  |                           | $ | 1,265  |                |  | $ | 1,320      |  |  | $               | 1,050 
|                                                        |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|Equity Securities - 28.7% (b)                           |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|Affinion Group, Inc. (c)                                |  | Media: Advertising, Printing & Publishing |  |                                        |                       |  |                           |   | 13     |                |  | $ | 689        |  |  | $               | 50    
|Aspire Holdings (c)                                     |  | Energy: Oil & Gas                         |  |                                        |                       |  |                           |   | 26     |                |  |   | 551        |  |  |                 | 40    
|Aspect Software, Inc. (c) (g)                           |  | Telecommunications                        |  |                                        |                       |  |                           |   | 8      |                |  |   | 244        |  |  |                 | 331   
|Education Management, LLC (c)                           |  | Services: Consumer                        |  |                                        |                       |  |                           |   | 2,530  |                |  |   | 4          |  |  |                 | -     
|NII Holdings, Inc. (a) (c)                              |  | Telecommunications                        |  |                                        |                       |  |                           |   | 17     |                |  |   | 768        |  |  |                 | 36    
|Total Common Stock                                      |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   | 2,256      |  |  |                 | 457   
|                                                        |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|Ansgar Media, LLC - Class B Units (c) (d) (e)           |  | Media: Broadcasting & Subscription        |  |                                        |                       |  |                           |   | -      |                |  |   | -          |  |  |                 | 3,519 
|Total Preferred Stock                                   |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   | -          |  |  |                 | 3,519 
|                                                        |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|GeoCommerce, Inc. (c)                                   |  | Technology                                |  |                                        |                       |  |                           |   | 875    |                |  |   | 1,883      |  |  |                 | 3,684 
|Nuverra Environmental Solutions, Inc. (c)               |  | Environmental Industries                  |  |                                        |                       |  |                           |   | 61     |                |  |   | -          |  |  |                 | 10    
|Nima, LLC (c)                                           |  | Consumer Electronics                      |  |                                        |                       |  |                           |   | 2,000  |                |  |   | 1,000      |  |  |                 | 2,000 
|Education Management, LLC (c)                           |  | Services: Consumer                        |  |                                        |                       |  |                           |   | 1,554  |                |  |   | 876        |  |  |                 | -     
|Total Warrants                                          |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   | 3,759      |  |  |                 | 5,694 
|                                                        |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|Sub Total Equity Securities                             |  |                                           |  |                                        |                       |  |                           |   |        |                |  | $ | 6,015      |  |  | $               | 9,670 
|                                                        |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|U.S. Government Securities - 21.3% (b)                  |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|U.S. Treasury Bill                                      |  |                                           |  |                                        | 0.63%, 8/31/2017      |  |                           | $ | 800    |                |  | $ | 799        |  |  | $               | 799   
|U.S. Treasury Bill                                      |  |                                           |  |                                        | 0.75%, 10/31/2017     |  |                           |   | 1,600  |                |  |   | 1,599      |  |  |                 | 1,598 
|U.S. Treasury Bill                                      |  |                                           |  |                                        | 0.75%, 8/15/2019      |  |                           |   | 1,710  |                |  |   | 1,700      |  |  |                 | 1,684 
|U.S. Treasury Bill                                      |  |                                           |  |                                        | 0.63%, 11/30/2017     |  |                           |   | 1,700  |                |  |   | 1,699      |  |  |                 | 1,696 
|U.S. Treasury Bill                                      |  |                                           |  |                                        | 0.75%, 4/15/2018      |  |                           |   | 1,400  |                |  |   | 1,398      |  |  |                 | 1,396 
|Sub Total U.S. Government Securities                    |  |                                           |  |                                        |                       |  |                           | $ | 7,210  |                |  | $ | 7,195      |  |  | $               | 7,173 
|                                                        |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|Investments - Money Market - 0.5% (b)                   |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|Investments - U.S. Bank Money Market                    |  |                                           |  |                                        | 0.10%                 |  |                           | $ | 34     |                |  | $ | 34         |  |  | $               | 34    
|Investments - Wells Fargo Money Market                  |  |                                           |  |                                        | 0.01%                 |  |                           |   | 123    |                |  |   | 123        |  |  |                 | 123   
|Sub Total Investments - Money Market                    |  |                                           |  |                                        |                       |  |                           | $ | 157    |                |  | $ | 157        |  |  | $               | 157   
|                                                        |  |                                           |  |                                        |                       |  |                           |   |        |                |  |   |            |  |  |                 |       
|TOTAL INVESTMENTS - 120.2% (b)                          |  |                                           |  |                                        |                       |  |                           |   |        |                |  | $ | 41,582     |  |  | $               | 40,502



(a) Represents a non-qualifying investment as defined under Section
55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying investments represent 0.1% of the Fund's (VII Peaks Co-OptivistTM
Income BDC, II, Inc.) portfolio at fair value. As a BDC, the Fund can only invest 30% of its portfolio in non-qualifying assets.

(b) Percentages are based on net assets of $33,682 as of December
31, 2016.

(c) Non-income producing as of December 31, 2016.

(d) 2,500 Class B Units, which are not entitled to an allocation
of profits or losses until the earlier to occur of September 30, 2020 or a change of control of Ansgar Media, LLC.

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

(f) The company filed for bankruptcy in Delaware on August 8, 2016
and is in the final stages of restructuring. The Fund participated in DIP financing as part of company’s restructuring process
during bankruptcy and has received PIK Second Lien Exit Facility T/L in exchange. Equity exchange is still in process.

(g) On November 25, 2016, 3.00% PIK senior unsecured convertible
notes were exchanged out for mandatory conversion to shares of common stock of Aspect Software Parent, Inc. at a rate of 1/30 i.e.
one common share per $30.00 in principal amount of notes outstanding.

(h) On September 20, 2016, Claire's Stores 10.50% senior subordinated
notes and 8.875% senior secured second lien notes were exchanged out for mandatory conversion to Claire's Stores, Inc. First Lien
Term Loan, CLSIP LLC Term Loan and Claire's (Gibraltar) Holdings Limited Term Loan.

(i) On December 31, 2016, the bankruptcy court entered an order
confirming the plan of reorganization of UCI International, LLC according to which the holders of senior unsecured notes will receive
new common stock at the rate of $21.94 per $1,000 par value of notes. The Fund received notification of delivery of shares on April
10, 2017.



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



9







VII
                                         PEAKS CO-OPTIVIST INCOME BDC II, INC.



SCHEDULE OF INVESTMENTS

(dollars in thousands)

(unaudited)



December 31, 2016



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



|                                          |  | At December 31, 2016       |       
|----------------------------------------- |  | -------------------------- | ------
|                                          |  | Investments at  Fair Value |       
|Media: Broadcasting & Subscription        |  | $                          | 10,418
|Technology                                |  |                            | 7,684 
|U.S. Government                           |  |                            | 7,173 
|Consumer Electronics                      |  |                            | 6,500 
|Aerospace and Defense                     |  |                            | 2,124 
|Energy: Oil & Gas                         |  |                            | 1,460 
|Services: Consumer                        |  |                            | 1,428 
|Retail                                    |  |                            | 1,084 
|Healthcare & Pharmaceuticals              |  |                            | 1,050 
|Telecommunications                        |  |                            | 607   
|Environmental Industries                  |  |                            | 279   
|Beverage, Food & Tobacco                  |  |                            | 249   
|Automobile                                |  |                            | 238   
|Investments – Money Market                |  |                            | 157   
|Media: Advertising, Printing & Publishing |  |                            | 51    
|Total                                     |  | $                          | 40,502



10







VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



NOTES TO FINANCIAL STATEMENTS



September 30, 2017



(unaudited)



Note 1.  Nature of Operations



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



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



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



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



11







We make investments in
target companies that meet our investment criteria. The size of an individual investment will vary based on numerous factors, including
the amount of funds raised in our offering. However, assuming we raise the maximum offering amount of $750.0 million, we expect
to hold at least 50 investments, and we anticipate that the minimum investment size will be approximately $250,000. We do not anticipate
being heavily invested in any one industry, and generally, we do not expect to invest in more than two different classes of debt
of the same target company. We invest in debt and equity-linked debt of target companies with a minimum enterprise value of $200.0
million and whose debt and equity-linked debt is actively traded in the secondary loan market. We also make senior secured direct
loan investments in companies with a minimum enterprise value of $5.0 million. For such senior secured direct loan investments,
we may receive equity securities to boost overall returns. We expect our portfolio to be predominantly composed of senior secured
term loans and high-yield corporate debt securities. However, we may also purchase senior secured corporate debt securities which
may have variable interest rates. We currently anticipate that the portion of our portfolio composed of variable rate corporate
debt securities, if any, will not exceed 20%, but we may increase that to 33% of our aggregate portfolio at the time of any purchase
depending on market opportunities.



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



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



On August 9, 2011, we filed
a registration statement on Form N-2 to sell up to 75,000,000 shares of common stock, $0.001 par value per share, at an initial
public offering price of $10.00 per share. The registration statement was declared effective by the SEC on March 1, 2012. We commenced
operations when we raised gross offering proceeds of over $1.0 million, all of which was from persons who were not affiliated with
us or our Manager by one year from the date the registration statement was declared effective by the SEC. Prior to the successful
satisfaction of that condition, all subscription payments were placed in an account held by the escrow agent, UMB Bank, N.A., in
trust for the benefit of our subscribers, pending release to us. We achieved the minimum offering requirement on July 10, 2012
and commenced operations on such date. As of September 30, 2017, we issued 6.7 million shares of common stock, including 0.6 million
shares under our distribution reinvestment plan (“DRIP”), less 0.3 million shares redeemed under our tender offer.
Gross proceeds from our common stock issuances total $66.4 million, including $5.6 million under our DRIP less $2.9 million paid
to redeem shares in our prior quarterly tender offers.



Note 2.  Summary of Significant Accounting Policies



Basis of Presentation



The Fund
is considered an investment company as defined in Accounting Standards Codification (“ASC”) Topic 946 – Financial
Services – Investment Companies (“ASC 946”). 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. The
statement of assets and liabilities at December 31, 2016 has been derived from our audited financial statements at that date
but does not include all disclosures as required by U.S. GAAP. 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, 2016, which was filed with the SEC on June 2, 2017.
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, 2017. Certain prior period amounts have been reclassified to conform to the
current period presentation.



12







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.



Prepaid Interest from Investments



The Fund receives prepaid
interest when it makes direct senior secured first lien loans. The total prepaid interest of $397 and $779 at September 30, 2017
and December 31, 2016, respectively (in thousands) is comprised of $151 and $333, respectively, from Nima, LLC; $23 and $258, respectively,
from GeoCommerce, Inc.; $14 and $188, respectively, from Ansgar Media, LLC; $47 and zero, respectively, from Digital Golf Technologies,
LLC; and $162 and zero, respectively, from Vieste Group, LLC.



Investment Classification



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



Organizational and Offering Costs



The Fund is a closed-end
fund with a continuous offering period. Under the investment advisory agreement between the Fund and the Manager, our Manager fronts
the initial cost of the organizational and offering expenses, but the Fund is obligated to reimburse the Manager for such costs
to the extent of 1.5% of the gross offering proceeds in our continuous offering. The Fund also agreed to reimburse the Manager
for organization and offering expenses incurred by a prior manager in consideration for the Manager’s agreement to pay $1.3
million owed to the Fund by the prior manager under an expense reimbursement agreement, which amount the Manager paid in full during
the year ended December 31, 2014. 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 (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.



13







The Fund has evaluated
the implications of Accounting Standards Codification (“ASC”) Topic 740, Accounting for Income Taxes, (“ASC
Topic 740”) for all tax years and in all major tax jurisdictions, and determined that there is no material impact on the
financial statements.



New Accounting Pronouncements



In October 2016, the SEC
adopted new rules and amended existing rules (together, “final rules”) intended to modernize the reporting and disclosure
of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced
disclosures about derivatives in investment company financial statements, as well as other amendments. The compliance date for
the amendments to Regulation S-X was August 1, 2017. As such, Management has adopted those amendments of Regulation S-X that
impact the Fund’s financial statements and related disclosures.



In November 2016, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows (Topic
230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that the statements of cash flows explain the change
during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash
equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with
cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash
flows. The new guidance is effective for annual and interim periods, beginning after December 15, 2017, and early adoption is permitted
and is to be applied on a retrospective basis. Management is currently evaluating the impact this guidance will have on the Fund's
financial statements.



In January 2016, the
FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for
the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting
related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain
fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements
associated with the fair value of financial instruments. This guidance is effective for annual and interim periods beginning
after December 15, 2017, and early adoption is not permitted for public business entities. Management is currently evaluating
the impact this guidance  will have on the Fund's financial statements.



In August 2014, FASB
issued ASU No. 2014-15, Presentation of Financial Statements- Going Concern (Subtopic 205-40) ("ASU 2014-15").
ASU 2014-15 requires management to assess an entity's ability to continue as a going concern by incorporating and expanding upon
certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the
term substantial doubt, (2) require an evaluation every reporting period, including interim periods, (3) provide principles for
considering the mitigating effect of Management's plans, (4) require certain disclosures when substantial doubt is alleviated as
a result of consideration of Management's plans, (5) require an express statement and other disclosures when substantial doubt
is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued
(or available to be issued). The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016,
and for any annual periods and interim periods thereafter. We adopted the provisions of ASU 2014-15 in 2016. The adoption of ASU
2014-15 did not require any additional disclosures in the Fund’s financial statements.



In May 2014, the FASB issued
ASU No. 2014-09, Revenue with Contracts from Customers (Topic 606). ASU No. 2014-09 provides clarification on the principles
to recognize revenue and to develop a common standard between GAAP and IFRS. In August 2015, the FASB issued ASU 2015-14, which
defers the effective date of ASU 2014-09, Revenue with Contracts from Customers, to annual reporting periods beginning after
December 15, 2017, including interim reporting periods within that reporting period. Management continues to review the requirements
and believes the adoption of the ASU will not have a material impact on the Fund’s financial statements.



14







Revenue Recognition



We generate investment
income in the form of interest, dividend and fees earned on senior secured loans, senior secured notes, subordinated debt, senior
unsecured debt, senior unsecured convertible debt and collateralized securities in our portfolio. Fee income received is non-recurring
in nature. The level of income we receive is directly related to the balance of collectible income producing investments multiplied
by the coupon rate of our investments. Coupon interest income is adjusted for the amortization of premiums and accretion of discounts.
We record interest income on an accrual basis to the extent that we expect to collect such amounts. The Fund stops accruing when
the invested company defaults in payment and has passed the 30-day grace period, files for bankruptcy or goes through reorganization
converting bonds to equity. We expect the dollar amount of interest and any dividend income that we earn to increase as the size
of our investment portfolio increases.



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



In connection with our
debt investments, we may receive warrants or similar equity-related securities ("Warrants"). We determine the cost basis
of Warrants based upon their fair values on the date of receipt relative to the total fair value of the debt and Warrants received.
Any resulting difference between the face amount of the debt and its recorded cost resulting from the assignment of value to the
Warrants is treated as original issue discount (“OID”), and accreted into interest income over the life of the debt
investment using a method that approximates the effective interest method. Similarly, loan origination fees are capitalized and
amortized as other income over the life of the loan.



For loans and debt securities
with contractual 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 when we receive
such amounts.



Our total investment income was $1.1 million
and $3.1 million for the three and nine months ended September 30, 2017, respectively, as compared to $1.0 million and $2.3 million
for the three and nine months ended September 30, 2016, respectively. The increase in 2017 as compared to 2016 was attributable
to the increase in interest income and fee income from direct lending investments in senior secured notes. At September 30, 2017,
the weighted average coupon yield was 11.9%, as compared to 9.3% at September 30, 2016. This coupon yield is for the non-defaulted
and non-equity positions. At September 30, 2017, the weighted average coupon yield of all the securities in the portfolio was 5.6%,
as compared to 6.5% at September 30, 2016. Based on current and prior three quarters’ net assets, average net assets as of
September 30, 2017 were $39.6 million, as compared to $30.5 million as of September 30, 2016.



15







For the nine months ended
September 30, 2017, sixteen of the investments in the portfolio did not accrue interest as either the investment was an equity security
or 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 the debt investments. The following table presents those sixteen investments:



|Portfolio Company                         |  | Asset Type                      |  | Investment Coupon Rate |       |   | Maturity Date | 
|----------------------------------------- |  | ------------------------------- |  | ---------------------- | ----- | - | ------------- | 
|Affinion Group, Inc. (2)                  |  | Equity – Common Stock           |  |                        | -     |   |               | 
|Ansgar Media, LLC - Class B Units         |  | Equity – Preferred Stock        |  |                        | -     |   |               | 
|Aspect Software, Inc. (3)                 |  | Equity – Common Stock           |  |                        | -     |   |               | 
|Aspire Holdings (1)                       |  | Equity – Common Stock           |  |                        | -     |   |               | 
|Digital Golf Technologies, LLC            |  | Warrant                         |  |                        | -     |   |               | 
|Education Management, LLC (4)             |  | Equity – Common Stock           |  |                        | -     |   |               | 
|Education Management, LLC (4)             |  | Warrant                         |  |                        | -     |   |               | 
|GeoCommerce, Inc.                         |  | Warrant                         |  |                        | -     |   |               | 
|Gymboree Corp.                            |  | Senior Unsecured Debt           |  |                        | 9.13  | % |               | 
|Logan's Roadhouse, Inc. (7)               |  | Equity – Common Stock           |  |                        | -     |   |               | 
|NII Holdings, Inc. (5)                    |  | Equity – Common Stock           |  |                        | -     |   |               | 
|Nima, LLC                                 |  | Warrant                         |  |                        | -     |   |               | 
|Nuverra Environmental Solutions, Inc. (6) |  | Equity – Common Stock           |  |                        | -     |   |               | 
|Saratoga Resources, Inc. (9)              |  | Senior Secured Second Lien Debt |  |                        | 12.50 | % |               | 
|UCI International, Inc. (8)               |  | Equity – Common Stock           |  |                        | -     |   |               | 
|Vieste Group, LLC                         |  | Warrant                         |  |                        | -     |   |               | 



| | (1) | Converted from exchange of 12.00% Endeavour International
Corp first lien bonds.
| | --- | --------------------------------------------------------------------------------

| | (2) | Received in exchange of 13.50% senior subordinated bonds.
| | --- | ---------------------------------------------------------

| | (3) | Converted from exchange of 3.00% PIK senior unsecured convertible
notes.
| | --- | ------------------------------------------------------------------------

| | (4) | Received in exchange of 15.00% Cash/PIK bonds.
| | --- | ----------------------------------------------

| | (5) | Received in exchange of 10.00% senior unsecured debt.
| | --- | -----------------------------------------------------

| | (6) | Received in exchange of 10% senior secured second lien
bonds, due April 15, 2021 and warrants of Nuverra Environmental Solutions, Inc. as part of the mandatory reorganization.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (7) | The company filed for bankruptcy in Delaware on August
8, 2016. The Fund participated in DIP financing as part of the company’s restructuring process during bankruptcy and has
received a PIK Second Lien Exit Facility T/L in exchange. On April 28, 2017, the remaining unexchanged bonds were converted to
equity.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (8) | Received in exchange of 8.625% senior unsecured notes.
| | --- | ------------------------------------------------------

| | (9) | Saratoga Resources 12.50% senior secured second lien bonds
are in maturity default.
| | --- | -----------------------------------------------------------------------------------



Note 3. Valuation of Portfolio Investments



The Fund has adopted FASB
ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”), which defines fair value, establishes
a framework for measuring fair value in accordance with U.S. GAAP 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:



16







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



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



Level 3: Unobservable inputs for
the asset or liability.



The investment portfolio
is recorded on a trade date basis. The Fund determines the net asset value of its investment portfolio each quarter. Securities
that are publicly-traded are valued at the reported closing price on the valuation date. Six investments were valued using the
closing market price at period end September 30, 2017.



Due to the inherent
uncertainty of determining the fair value of Level 3 investments, the fair value of the investments may differ significantly from
the values that would have been used had a ready market or observable inputs existed for such investments and may differ materially
from the values that may ultimately be received or settled. If the Company were required to liquidate a portfolio in a forced or
liquidation sale, the Company might realize significantly less than the value at which such investment had previously been recorded.



The following table presents
investments that are not publically-traded or have no closing market price, as of September 30, 2017.



|Portfolio Company                                       |  | Asset Type                      |  | Investment  Coupon Rate |       |   | Maturity Date | 
|------------------------------------------------------- |  | ------------------------------- |  | ----------------------- | ----- | - | ------------- | 
|Ansgar Media, LLC - Class B Units                       |  | Equity – Preferred Stock        |  |                         | -     |   |               | 
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|Aspire Holdings (1)                                     |  | Equity – Common Stock           |  |                         | -     |   |               | 
|Aspect Software, Inc. (2)                               |  | Equity – Common Stock           |  |                         | -     |   |               | 
|Claire's Stores, Inc. Term Loan (3)                     |  | Senior Secured First Lien Debt  |  |                         | 9.00  | % |               | 
|CLSIP LLC Term Loan (3)                                 |  | Senior Secured First Lien Debt  |  |                         | 9.00  | % |               | 
|Claire’s (Gibraltar) Holdings Limited Term Loan (3)     |  | Senior Unsecured Debt           |  |                         | 9.00  | % |               | 
|Colt Defense, LLC (4)                                   |  | Senior Unsecured Debt           |  |                         | 8.00  | % |               | 
|Digital Golf Technologies, LLC                          |  | Senior Secured First Lien Debt  |  |                         | 13.00 | % |               | 
|Digital Golf Technologies, LLC                          |  | Warrant                         |  |                         | -     |   |               | 
|Education Management LLC                                |  | Equity – Common Stock           |  |                         | -     |   |               | 
|Education Management LLC                                |  | Warrant                         |  |                         | -     |   |               | 
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|GeoCommerce, Inc.                                       |  | Warrant                         |  |                         | -     |   |               | 
|Logan's Roadhouse, Inc. (5)                             |  | Equity – Common Stock           |  |                         | -     |   |               | 
|Logan's Roadhouse, Inc. PIK Exit Facility Term Loan (5) |  | Senior Secured Second Lien Debt |  |                         | 9.50  | % |               | 
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |               | 
|Nima, LLC                                               |  | Warrant                         |  |                         | -     |   |               | 
|Nuverra Environmental Solutions, Inc. (6)               |  | Equity – Common Stock           |  |                         | -     |   |               | 
|UCI International, Inc. (7)                             |  | Equity – Common Stock           |  |                         | -     |   |               | 
|Vieste Group, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 13.00 | % |               | 
|Vieste Group, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 13.00 | % |               | 
|Vieste Group, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 13.00 | % |               | 
|Vieste Group, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 13.00 | % |               | 
|Vieste Group, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 13.00 | % |               | 
|Vieste Group, LLC                                       |  | Warrant                         |  |                         | -     |   |               | 



17







|(1) | Converted from exchange of 12.00% Endeavour International Corp, senior secured first lien debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The original 10.63% senior secured second lien notes due on May 15, 2017 defaulted. As part of Aspect’s bankruptcy and planned reorganization process, the Fund participated in a rights offering to purchase a new 3.00% PIK senior unsecured convertible note maturing on May 23, 2023 in an effort to facilitate recovery of its previous investment in the senior secured lien notes in Aspect. On November 25, 2016, 3.00% PIK senior unsecured convertible notes were exchanged out for mandatory conversion to shares of common stock of Aspect Software Parent, Inc. at a rate of 1/30 i.e. one common share per $30.00 in principal amount of notes outstanding.
|(3) | On September 20, 2016, all of 10.50% senior subordinated notes and 8.88% senior secured second lien notes were exchanged for 9.00% of Claire’s Stores, Inc. Term Loan, CLSIP Term Loans and of Claire’s Gibralter Term Loans.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(4) | On January 19, 2016, there was a mandatory exchange offer to exchange all of the 8.75% senior unsecured notes to 8.00% PIK third lien notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(5) | The company filed for bankruptcy in Delaware on August 8, 2016. The Fund participated in DIP financing as part of the company’s restructuring process during bankruptcy and has received a PIK second lien exit facility T/L in exchange. On April 28, 2017, the remaining unexchanged bonds were converted to equity.                                                                                                                                                                                                                                                                                                                                                   
|(6) | On March 11, 2016, the company announced that it had entered into a privately negotiated Restructuring Support Agreement with holders of more than 80% of the company’s 2018 unsecured Senior Notes to initiate a proposed debt restructuring plan. On August 8, 2017, as part of the mandatory reorganization, $1.44 million face value of 10% senior secured second lien bonds, due April 15, 2021 and 71,069 warrants of Nuverra Environmental Solutions, Inc. were exchanged for 31,989 shares of Nuverra Environmental Solutions Inc.                                                                                                                               
|(7) | On June 2, 2016, UCI International, LLC and certain of its affiliates filed voluntary petitions for relief under Chapter 11 Bankruptcy in the District of Delaware. As per the Plan of Reorganization and based on Rank contribution being reached, the fund received 30,714 shares of the company on March 29, 2017.                                                                                                                                                                                                                                                                                                                                                    



Securities that are not
publicly-traded are valued at fair value as determined in good faith by the Management, or a committee thereof, and submitted to
the Board of Directors or a committee thereof, for review. In connection with that determination, the 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, the Fund undertakes a multi-step valuation process
each quarter, as described below:



18







| | · | 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.



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



The following table presents
fair value measurements of investments, by major class, as of September 30, 2017 per the fair value hierarchy (dollars in thousands):



|                                |  | Level 1 |     |  | Level 2 |   |     | Level 3 |  |   | Total  | 
|------------------------------- |  | ------- | --- |  | ------- | - | --- | ------- |  | - | ------ | 
|Investments – Money Market      |  | $       | 781 |  |         | $ | —   |         |  | $ | —      | 
|Senior Secured First Lien Debt  |  |         | —   |  |         |   | 230 |         |  |   | 19,827 | 
|Senior Secured Second Lien Debt |  |         | —   |  |         |   | 2   |         |  |   | 174    | 
|Senior Unsecured Debt           |  |         | —   |  |         |   | 24  |         |  |   | 336    | 
|Equity Securities               |  |         | —   |  |         |   | 135 |         |  |   | 22,374 | 
|Total                           |  | $       | 781 |  |         | $ | 391 |         |  | $ | 42,711 | 



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



|                                |  | Level 1 |     |  | Level 2 |   |        | Level 3 |  |   | Total  | 
|------------------------------- |  | ------- | --- |  | ------- | - | ------ | ------- |  | - | ------ | 
|Investments – Money Market      |  | $       | 157 |  |         | $ | —      |         |  | $ | —      | 
|U.S. Government Securities      |  |         | —   |  |         |   | 7,173  |         |  |   | —      | 
|Senior Secured First Lien Debt  |  |         | —   |  |         |   | 2,168  |         |  |   | 14,882 | 
|Senior Secured Second Lien Debt |  |         | —   |  |         |   | 2      |         |  |   | 518    | 
|Senior Unsecured Debt           |  |         | —   |  |         |   | 4,557  |         |  |   | 325    | 
|Senior Subordinated Debt        |  |         | —   |  |         |   | 1,050  |         |  |   | —      | 
|Equity Securities               |  |         | —   |  |         |   | 86     |         |  |   | 9,584  | 
|Total                           |  | $       | 157 |  |         | $ | 15,036 |         |  | $ | 25,309 | 



19







There was one transfer
from Level 2 to Level 3 for the nine months ended September 30, 2017. The transfer was UCI International, Inc. 8.63% senior unsecured
debt, due February 15, 2019, which was converted to equity. There was one transfer from Level 3 to Level 2 for the nine months
ended September 30, 2017. The transfer was Nuverra Environmental Solutions, Inc. 10% senior secured second lien debt, due April
15, 2021. There were five transfers from Level 2 to Level 3 for the year ended December 31, 2016. Transfers were Claire’s
Stores, Inc. Term Loan 9.00% senior secured first lien debt, due September 20, 2021; CLSIP, LLC Term Loan 9.00% senior secured
first lien debt, due September 20, 2021; Claire’s (Gibraltar) Holdings Limited Term Loan 9.00% senior unsecured debt, due
September 20, 2021; Nuverra Environmental Solutions, Inc. senior secured second lien debt 12.50%, due April 15, 2022; and Logan’s
Roadhouse, Inc. 10.75% senior secured second lien debt, due October 15, 2017, which will be converted to senior secured term loans
once the company’s restructuring completes. There was one transfer from Level 3 to Level 2 for the year ended December 31,
2016. The transfer was Affinion Group, Inc. common stock equity.



During the nine months
ended September 30, 2017, the following were the transfers in or out of levels (dollars in thousands):



|                                |  | Level 1 |   |  | Level 2 |   |      | Level 3 |  |   | Total |  
|------------------------------- |  | ------- | - |  | ------- | - | ---- | ------- |  | - | ----- | -
|Senior Secured First Lien Debt  |  | $       | — |  |         | $ | —    |         |  | $ | —     |  
|Senior Secured Second Lien Debt |  |         | — |  |         |   | 269  |         |  |   | (269  | )
|Senior Unsecured Debt           |  |         | — |  |         |   | (238 | )       |  |   | —     |  
|Equity Securities               |  |         | — |  |         |   | —    |         |  |   | 238   |  
|Total                           |  | $       | — |  |         | $ | 31   |         |  | $ | (31   | )



During the year ended December
31, 2016, the following were the transfers in or out of levels (dollars in thousands):



|                                |  | Level 1 |   |  | Level 2 |   |        | Level 3 |  |   | Total |  
|------------------------------- |  | ------- | - |  | ------- | - | ------ | ------- |  | - | ----- | -
|Senior Secured First Lien Debt  |  | $       | — |  |         | $ | (533   | )       |  | $ | 533   |  
|Senior Secured Second Lien Debt |  |         | — |  |         |   | (356   | )       |  |   | 356   |  
|Senior Unsecured Debt           |  |         | — |  |         |   | (188   | )       |  |   | 188   |  
|Equity Securities               |  |         | — |  |         |   | 51     |         |  |   | (51   | )
|Total                           |  | $       | — |  |         | $ | (1,026 | )       |  | $ | 1,026 |  



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 appreciation
(depreciation) 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 nine months September 30, 2017 are as follows (dollars in thousands):



|                                |  | Fair
    Value at  December  31, 2016 |        |  | Transfers
    in / (out) |   |      | Reclassification |  |   | Purchases(Sales andSettlement)(1) |   |  | Amortization
    and Accretion of Fixed Income Premiums and Discounts |       |  | Realized
    and Unrealized Gains (Losses) |   |       | Fair Valueat September
                                         30,
 2017 |  |   | Change inUnrealizedappreciation (depreciation)
                                                                                              for
 Investmentsheld as ofSeptember
                                                                                              30, 2017 |  
|------------------------------- |  | ------------------------------------- | ------ |  | ------------------------ | - | ---- | ---------------- |  | - | --------------------------------- | - |  | --------------------------------------------------------------------- | ----- |  | ------------------------------------------ | - | ----- | ------------------------------------------------------------------------- |  | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -
|Senior Secured First Lien Debt  |  | $                                     | 14,882 |  |                          | $ | -    |                  |  | $ | -                                 |   |  | $                                                                     | 4,675 |  |                                            | $ | 1,032 |                                                                           |  | $ | (762                                                                                                                                                                                                                                                                                    | )
|Senior Secured Second Lien Debt |  |                                       | 518    |  |                          |   | (269 | )                |  |   | (87                               | ) |  |                                                                       | 12    |  |                                            |   | 1     |                                                                           |  |   | (1                                                                                                                                                                                                                                                                                      | )
|Senior Unsecured Debt           |  |                                       | 325    |  |                          |   | -    |                  |  |   | -                                 |   |  |                                                                       | 5     |  |                                            |   | 4     |                                                                           |  |   | 2                                                                                                                                                                                                                                                                                       |  
|Equity Securities               |  |                                       | 9,584  |  |                          |   | 238  |                  |  |   | 87                                |   |  |                                                                       | 270   |  |                                            |   | -     |                                                                           |  |   | 12,195                                                                                                                                                                                                                                                                                  |  
|Total                           |  | $                                     | 25,309 |  |                          | $ | (31  | )                |  | $ | -                                 |   |  | $                                                                     | 4,962 |  |                                            | $ | 1,037 |                                                                           |  | $ | 11,434                                                                                                                                                                                                                                                                                  |  



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





20







Realized and unrealized
gains and losses are included in net realized gain (loss) from investments and net unrealized appreciation on investments in the
statements of operations. The change in unrealized appreciation for Level 3 investments still held as of September 30, 2017 of
$11.4 million is included in net unrealized appreciation on investments in the statements of operations for the nine months ended
September 30, 2017.



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



|                                |  | Fair
    Value at  December  31, 2015 |       |  | Transfers
    in / (out) |   |       | Reclassification |  |   | Purchases(Sales andSettlement)(1) |   |  | Amortization
    and Accretion of Fixed Income Premiums and Discounts |        |  | Realized
    and Unrealized Gains (Losses) |   |   | Fair Valueat December 31,
                                         2016 |  |   | Change inUnrealizedappreciation (depreciation) forInvestmentsheld as ofDecember 31, 2016 | 
|------------------------------- |  | ------------------------------------- | ----- |  | ------------------------ | - | ----- | ---------------- |  | - | --------------------------------- | - |  | --------------------------------------------------------------------- | ------ |  | ------------------------------------------ | - | - | ----------------------------------------------------------------------- |  | - | ---------------------------------------------------------------------------------------- | 
|Senior Secured First Lien Debt  |  | $                                     | 2,525 |  |                          | $ | 533   |                  |  | $ | (525                              | ) |  | $                                                                     | 12,349 |  |                                            | $ | - |                                                                         |  | $ | -                                                                                        | 
|Senior Secured Second Lien Debt |  |                                       | 8     |  |                          |   | 356   |                  |  |   | -                                 |   |  |                                                                       | 139    |  |                                            |   | - |                                                                         |  |   | 15                                                                                       | 
|Senior Unsecured Debt           |  |                                       | 132   |  |                          |   | 188   |                  |  |   | -                                 |   |  |                                                                       | -      |  |                                            |   | 4 |                                                                         |  |   | 1                                                                                        | 
|Equity Securities               |  |                                       | 3,126 |  |                          |   | (51   | )                |  |   | 525                               |   |  |                                                                       | 244    |  |                                            |   | - |                                                                         |  |   | 5,740                                                                                    | 
|Total                           |  | $                                     | 5,791 |  |                          | $ | 1,026 |                  |  | $ | -                                 |   |  | $                                                                     | 12,732 |  |                                            | $ | 4 |                                                                         |  | $ | 5,756                                                                                    | 



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



Realized and unrealized
gains and losses are included in net realized gain (loss) from investments and net unrealized appreciation (depreciation) on investments
in the statements of operations. The change in unrealized appreciation for Level 3 investments still held as of December 31, 2016
of $4.4 million is included in net unrealized appreciation on investments in the statements of operations for the year ended December
31, 2016.



21







The following table provides
quantitative information regarding Level 3 fair value measurements as of September 30, 2017 (dollars in thousands):



|                                |  |            |        |  |                     |                                                                     |                    |                                                         |      |   |        | Range   | 
|------------------------------- |  | ---------- | ------ |  | ------------------- | ------------------------------------------------------------------- | ------------------ | ------------------------------------------------------- | ---- | - | ------ | ------- | 
|                                |  | Fair Value |        |  | Valuation Technique |                                                                     | Unobservable Input |                                                         | Mean |   |        | Minimum | 
|Senior Secured First Lien Debt  |  | $          | 19,827 |  |                     | Discounted Cash Flow analysis / EBITDA multiples / Enterprise Value |                    | Transaction Value Market premium for loan interest rate |      | $ | 19,827 |         | 
|Senior Secured Second Lien Debt |  |            | 174    |  |                     | Liquidation                                                         |                    | Transaction Value                                       |      |   | 174    |         | 
|Senior Unsecured Debt           |  |            | 336    |  |                     | Liquidation                                                         |                    | Transaction Value                                       |      |   | 336    |         | 
|Equity Securities               |  |            | 22,374 |  |                     | Income Approach/Market Approach                                     |                    | Transaction Value / Discounted Cash Flows               |      |   | 24,240 |         | 
|Total                           |  | $          | 42,711 |  |                     |                                                                     |                    |                                                         |      |   |        |         | 



As part of liquidation analysis, the Fund performs
a leveraged buyout analysis of its portfolio companies and calculates asset coverage and recovery value for each individual loan.



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



|                                |  |            |        |  |                     |                                                                     |                    |                                                         |      |   |        | Range   | 
|------------------------------- |  | ---------- | ------ |  | ------------------- | ------------------------------------------------------------------- | ------------------ | ------------------------------------------------------- | ---- | - | ------ | ------- | 
|                                |  | Fair Value |        |  | Valuation Technique |                                                                     | Unobservable Input |                                                         | Mean |   |        | Minimum | 
|Senior Secured First Lien Debt  |  | $          | 14,882 |  |                     | Discounted Cash Flow analysis / EBITDA multiples / Enterprise Value |                    | Transaction Value Market premium for loan interest rate |      | $ | 14,882 |         | 
|Senior Secured Second Lien Debt |  |            | 518    |  |                     | Liquidation                                                         |                    | Transaction Value                                       |      |   | 518    |         | 
|Senior Unsecured Debt           |  |            | 325    |  |                     | Liquidation                                                         |                    | Transaction Value                                       |      |   | 325    |         | 
|Equity Securities               |  |            | 9,584  |  |                     | Income Approach/ Market Approach                                    |                    | Transaction Value / Discounted Cash Flows               |      |   | 12,825 |         | 
|Total                           |  | $          | 25,309 |  |                     |                                                                     |                    |                                                         |      |   |        |         | 



The primary significant
unobservable inputs used in the fair value measurement of the Fund's senior secured second lien debt and senior unsecured debt
were the fair value of the exchanged bonds/equity offered by the issuer or the price as evidenced by trades in the secondary market
(Colt Defense, LLC, Claire's Stores Gibraltar T/L, two Logan's Roadhouse, Inc. and Nuverra Environmental Co.).



22







The composition of the
Fund’s investments as of September 30, 2017, 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      |  | $                             | 781    |  |                           | $ | 781    |                                          | 
|Senior Secured First Lien Debt  |  |                               | 19,626 |  |                           |   | 20,057 |                                          | 
|Senior Secured Second Lien Debt |  |                               | 1,072  |  |                           |   | 176    |                                          | 
|Senior Unsecured Debt           |  |                               | 2,195  |  |                           |   | 360    |                                          | 
|Equity Securities               |  |                               | 9,640  |  |                           |   | 22,509 |                                          | 
|Total                           |  | $                             | 33,314 |  |                           | $ | 43,883 |                                          | 



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



|                                |  | Investments at Amortized Cost |        |  | Investments at Fair Value |   |        | Fair Value Percentage of  Total Portfolio | 
|------------------------------- |  | ----------------------------- | ------ |  | ------------------------- | - | ------ | ----------------------------------------- | 
|Investments – Money Market      |  | $                             | 157    |  |                           | $ | 157    |                                           | 
|U.S. Government Securities      |  |                               | 7,195  |  |                           |   | 7,173  |                                           | 
|Senior Secured First Lien Debt  |  |                               | 15,734 |  |                           |   | 17,050 |                                           | 
|Senior Secured Second Lien Debt |  |                               | 3,053  |  |                           |   | 520    |                                           | 
|Senior Unsecured Debt           |  |                               | 8,108  |  |                           |   | 4,882  |                                           | 
|Senior Subordinated Debt        |  |                               | 1,320  |  |                           |   | 1,050  |                                           | 
|Equity Securities               |  |                               | 6,015  |  |                           |   | 9,670  |                                           | 
|Total                           |  | $                             | 41,582 |  |                           | $ | 40,502 |                                           | 





Purchases and sales of
securities during the nine months ended September 30, 2017, other than short-term securities and U.S. government obligations,
were $6.7 million and $16.2 million, respectively. Purchases and sales of securities during the nine months ended September
30, 2016, other than short-term securities and U.S. government obligations, were $25.7 million and $25.3 million, respectively.



Note 4.  Related Party Transactions



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



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



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



Due from
related party of $198,000 consists of approximately $38,000 of true up for management fees from writing down certain
portfolio investments at the end of a quarter in prior quarters, $50,000 in Blue Sky state filing fees by the Fund instead of
our Manager, $25,000 in allocation of the Directors and Officers insurance policy costs to our Manager, and $85,000 in
expenses related to legal and other operational costs allocated to our Manager instead of the Fund.



23







Due diligence fees received
by the Fund from the borrowers related to the Fund’s direct lending transactions are remitted to our Manager, VII Peaks Capital,
LLC, as the collateral and administrative agent for the loans. Due diligence fees received are not revenues or expenses of the
Fund and therefore are not reflected in the financial statements. Fees for the three and nine months ended September 30, 2017 totaled
$0 and $222,500, respectively. Fees for the three and nine months ended September 30, 2016 totaled $50,000 and $212,500, respectively.



Investment Advisory Agreement



The Fund has entered into
an investment advisory agreement with the Manager to manage the Fund’s investment activities. Pursuant to the investment
advisory agreement, the Manager implements the Fund’s business strategy on a day-to-day basis and performs certain services
for us, subject to oversight by our Board of Directors, or a committee thereof. The Manager is responsible for, among other duties,
determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing
asset management duties. The initial investment advisory agreement was signed on August 20, 2013 and was effective for two years.
The agreement must be re-approved annually thereafter by a majority of the non-interested members of the Board of Directors. On
September 12, 2017, the non-interested members of the Board of Directors re-approved the agreement between the Manager and the
Fund under the agreement’s existing terms.



Under the investment advisory
agreement, the Manager is entitled to a base management and incentive fee as outlined in the investment advisory agreement with
the Fund. The single rate base management fee is 2% of net assets below $100.0 million; 1.75% of net assets between $100.0 million
and $250.0 million; and 1.5% of net assets over $250.0 million. For the three months and nine months ended September 30, 2017,
the Fund incurred $0.2 million and $0.6 million of base management fees, respectively. For the three months and nine months ended
September 30, 2016, the Fund incurred $0.2 million and $0.5 million of base management fees, respectively.



The incentive fee has two parts. The first part,
the subordinated incentive fee on income, is calculated and payable quarterly in arrears based upon the Fund’s “pre-incentive
fee net investment income” for the immediately preceding quarter. The subordinated incentive fee on income is 20% of pre-incentive
net investment income subject to a quarterly return to investors, expressed as a rate of return on adjusted capital at the beginning
of the most recently completed calendar quarter, of 2.0% (8.0% annualized). The second part of the incentive fee, the incentive
fee on capital gains, is an incentive fee on capital gains earned on liquidated investments from the portfolio and is determined
and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement). This fee
equals 20% of the Fund’s incentive fee capital gains, which will equal the Fund’s realized capital gains on a cumulative
basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized
capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains and incentive fees.
For the three and nine months ended September 30, 2017 and 2016, the Fund did not incur any incentive fees related to net investment
income or capital gains.



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



Under the investment advisory
agreement, the Manager bears all offering and organizational expenses. Pursuant to the terms of the investment advisory agreement,
the Fund has agreed to reimburse the Manager for any such organizational and offering expenses incurred by the Manager not to exceed
1.5% of the gross subscriptions raised by the Fund over the course of the offering period. 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.



24







Administration Agreement



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



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 September 30, 2017, the Fund has sold 6.7 million shares
of common stock for gross proceeds of $66.4 million including the purchases made by the Manager.



During the nine months
ended September 30, 2017, the Fund did not sell any shares of common stock as its prospectus was not effective. Also, for the nine
months ended September 30, 2017, there were no treasury shares repurchased.



25







Note 6. Borrowings



Wells Fargo Credit Facility



On August 4, 2015, the Fund entered an agreement
with Wells Fargo Advisors, LLC for a revolving line of credit. The amount the Fund could borrow was based upon the value of cash
deposited in an account at Wells Fargo Advisors, LLC and the treasury notes that Wells Fargo purchased, which served as collateral
for the loan. As of September 30, 2017 and December 31, 2016, the outstanding balance under this credit line was $0.0 million and
$6.4 million, respectively.



At the end of March 2017,
the Fund began selling the treasury notes that Wells Fargo held as collateral for the line of credit. The line was paid off in
April 2017 and the remaining securities held at Wells Fargo were transferred to U.S. Bank National Association, the Fund’s administrator. In May
2017, the line of credit and corresponding collateral account were closed at Wells Fargo.



Note 7.  Earnings Per Share



In accordance with
the provisions of FASB ASC 260, Earnings per Share (“ASC 260”), net increase in net assets per share is
computed by dividing net increase in net assets resulting from operations available to common shareholders by the weighted
average number of shares outstanding during the period. Other potentially dilutive common shares, and their related impact,
are considered when calculating diluted net increase in net assets from operations per share.



The following
information sets forth the computation of the weighted average basic and diluted net increase in net assets from operations
per share for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands, except share and per share
amounts):



|                                                               |  | For the Three Months Ended September 30, |           |  | For the Three Months Ended September 30, |  
|-------------------------------------------------------------- |  | ---------------------------------------- | --------- |  | ---------------------------------------- | -
|                                                               |  | 2017                                     |           |  | 2016                                     |  
|Basic and diluted:                                             |  |                                          |           |  |                                          |  
|Net increase in net assets resulting from operations           |  | $                                        | 1,015     |  |                                          | $
|Weighted average common shares outstanding                     |  |                                          | 6,420,505 |  |                                          |  
|Net increase in net assets resulting from operations per share |  | $                                        | 0.16      |  |                                          | $





|                                                               |  | For the Nine Months Ended September 30, |           |  | For the Nine Months Ended September 30, |  
|-------------------------------------------------------------- |  | --------------------------------------- | --------- |  | --------------------------------------- | -
|                                                               |  | 2017                                    |           |  | 2016                                    |  
|Basic and diluted:                                             |  |                                         |           |  |                                         |  
|Net increase in net assets resulting from operations           |  | $                                       | 12,403    |  |                                         | $
|Weighted average common shares outstanding                     |  |                                         | 6,385,756 |  |                                         |  
|Net increase in net assets resulting from operations per share |  | $                                       | 1.94      |  |                                         | $



The Fund had no potentially
dilutive securities as of September 30, 2017, resulting in the same number of shares for basic and diluted.



26







Note 8. Tender Offer Program



We do not currently intend
to list our shares on any securities exchange and do not expect a public market for them to develop in the foreseeable future.
Therefore, shareholders should not expect to be able to sell their shares promptly or at a desired price. Beginning with the fourth
calendar quarter of 2013, and on a quarterly basis through June 30, 2015, the Board of Directors approved a tender offer to repurchase
shares of our common stock at a price equal to 90% of our offering price on the date of repurchase. In the third quarter of 2015,
the Board of Directors decided to suspend the repurchase program, as the Fund was not raising any new capital. When a tender offer
is approved by the Board of Directors, we intend to limit the number of shares to be repurchased during any calendar year to 20%
of the weighted average number of shares outstanding in the prior calendar year, or 5.0% in each quarter, though the actual number
of shares that we offer to repurchase may be less considering 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 nine months ended September 30, 2017, no tender
offer was approved by the Board of Directors.



The following table reflects
certain information regarding the tender offers that we have conducted since January 2015:



|For the period ended |  | Repurchase Date      |  | Shares Repurchased |         |  | Percent of Shares Tendered that were Repurchased |  |     | Repurchase Price Per Share |  |   | Aggregate Consideration For Repurchased Shares (‘000s)* | 
|-------------------- |  | -------------------- |  | ------------------ | ------- |  | ------------------------------------------------ |  | --- | -------------------------- |  | - | ------------------------------------------------------- | 
|March 31, 2015       |  | March 30, 2015       |  |                    | 5,811   |  |                                                  |  | 100 | %                          |  | $ | 8.775                                                   | 
|June 30, 2015        |  | June 29, 2015        |  |                    | 215,935 |  |                                                  |  | 69  | %                          |  |   | 8.775                                                   | 
|September 30, 2015   |  | September 30, 2015** |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|December 31, 2015    |  | December 31, 2015**  |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|March 31, 2016       |  | March 31, 2016**     |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|June 30, 2016        |  | June 30, 2016**      |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|September 30, 2016   |  | September 30, 2016** |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|December 31, 2016    |  | December 31, 2016**  |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|March 31, 2017       |  | March 31, 2017**     |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|June 30, 2017        |  | June 30, 2017**      |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|September 30, 2017   |  | September 30, 2017** |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|                     |  |                      |  |                    |         |  |                                                  |  |     |                            |  |   |                                                         | 



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



**The Board of Directors
did not declare a tender offer for the quarters ended September 30, 2015, December 31, 2015, March 31, 2016, June 30, 2016, September
30, 2016, December 31, 2016, March 31, 2017, June 30, 2017, and September 30, 2017.



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



27







Note 9.  Distributions



Subject to our Board of
Director’s discretion and applicable legal restrictions, we have historically declared and paid ordinary cash distributions
at a rate equal to 7.35% of our latest offering price per share of $8.75. Since the distribution paid to shareholders on September
30, 2015, with a record date of August 30, 2015, we have paid distributions monthly. Prior to the September 30, 2015, we paid distributions
on a semi-monthly basis. We changed to paying distributions monthly in order to reduce costs. 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.



Our distributions historically
have not been based on our investment performance. Prior to September 2013, our distributions were supported by our Manager in
the form of operating expense support payments to us, and a portion of our distributions constituted a return of capital. Since
September 2013, we have not had an expense support agreement with our Manager and as a result a greater portion of our distributions
have constituted a return of capital. A return of capital generally is a return of your investment rather than a return of
earnings or gains derived from our investment activities.



As of September 30, 2017
and December 31, 2016, the Fund has not accrued any stockholder distributions that were unpaid.



The following table reflects
the distributions per share paid or payable in cash or with the DRIP on the Fund’s common stock since January 2015 (dollars
in thousands except per share amounts), as well as the source of the distributions:



Source of Distribution by Cash vs. DRIP:



|                                       |  |           |          |  | Net        |   |       | Realized    |  |   |           |  |  |       |       |  |         |   |        |      | 
|-------------------------------------- |  | --------- | -------- |  | ---------- | - | ----- | ----------- |  | - | --------- |  |  | ----- | ----- |  | ------- | - | ------ | ---- | 
|                                       |  |           |          |  | Investment |   |       | Gain From   |  |   | Return of |  |  |       |       |  | Paid in |   |        |      | 
|Period                                 |  | Per Share |          |  | Income     |   |       | Investments |  |   | Capital   |  |  | Total |       |  | Cash    |   |        | DRIP | 
|January 1, 2015 - March 31, 2015       |  | $         | 0.179154 |  |            | $ | 153   |             |  | $ | 52        |  |  | $     | 824   |  |         | $ | 1,029  |      | 
|April 1, 2015 - June 30, 2015          |  |           | 0.179154 |  |            |   | 705   |             |  |   | 163       |  |  |       | 243   |  |         |   | 1,111  |      | 
|July 1, 2015 - September 30, 2015      |  |           | 0.209015 |  |            |   | 240   |             |  |   | 142       |  |  |       | 904   |  |         |   | 1,286  |      | 
|October 1, 2015 - December 31, 2015*   |  |           | 0.170315 |  |            |   | —     |             |  |   | 68        |  |  |       | 996   |  |         |   | 1,064  |      | 
|January 1, 2016 – March 31, 2016 **    |  |           | 0.169969 |  |            |   | 8     |             |  |   | —         |  |  |       | 1,045 |  |         |   | 1,053  |      | 
|April 1, 2016 - June 30, 2016***       |  |           | 0.107188 |  |            |   | —     |             |  |   | —         |  |  |       | 669   |  |         |   | 669    |      | 
|July 1, 2016 - September 30, 2016****  |  |           | 0.214372 |  |            |   | 305   |             |  |   | —         |  |  |       | 1,042 |  |         |   | 1,347  |      | 
|October 1, 2016 - December 31, 2016    |  |           | 0.107186 |  |            |   | 160   |             |  |   | 78        |  |  |       | 439   |  |         |   | 677    |      | 
|January 1, 2017 – March 31, 2017       |  |           | 0.160779 |  |            |   | 226   |             |  |   | 41        |  |  |       | 754   |  |         |   | 1,021  |      | 
|April 1, 2017 - June 30, 2017          |  |           | 0.160779 |  |            |   | 358   |             |  |   | 57        |  |  |       | 611   |  |         |   | 1,026  |      | 
|July 1, 2017 – September 30, 2017***** |  |           | 0.160779 |  |            |   | 570   |             |  |   | —         |  |  |       | 462   |  |         |   | 1,032  |      | 
|TOTAL                                  |  | $         | 1.818690 |  |            | $ | 2,725 |             |  | $ | 601       |  |  | $     | 7,989 |  |         | $ | 11,315 |      | 



28







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



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



*** For the period
from April 1, 2016 to June 30, 2016, the Fund had a net investment loss of approximately $4 thousand and a realized loss from investments
of approximately $12.6 million. These amounts are reflected on the source of distributions table below in the distributions from
paid in capital amount.



**** For the period
from July 1, 2016 to September 30, 2016, the Fund had a realized loss from investments of approximately $0.04 million. That amount
is reflected on the source of distributions table below in the distributions from paid in capital amount.



***** For the period
from July 1, 2017 to September 30, 2017, the Fund had a realized loss from investments of approximately $0.5 million. That amount
is reflected on the source of distributions table below in the distributions from paid in capital amount.



The following table shows
the percentage of our distributions, which have been funded from net investment income, realized capital gains and paid in capital
since January 2015:



Percentage of Distributions by Source:



|                                    |  |           |          |  | Net        |  |    | Realized    |  |  | Return  |  
|----------------------------------- |  | --------- | -------- |  | ---------- |  | -- | ----------- |  |  | ------- | -
|                                    |  |           |          |  | Investment |  |    | Gain From   |  |  | of      |  
|Period                              |  | Per Share |          |  | Income     |  |    | Investments |  |  | Capital |  
|January 1, 2015 - March 31, 2015    |  |           | 0.179154 |  |            |  | 15 | %           |  |  | 5       | %
|April 1, 2015 - June 30, 2015       |  |           | 0.179154 |  |            |  | 63 | %           |  |  | 15      | %
|July 1, 2015 - September 30, 2015   |  |           | 0.209015 |  |            |  | 19 | %           |  |  | 11      | %
|October 1, 2015 - December 31, 2015 |  |           | 0.170315 |  |            |  | —  | %           |  |  | 6       | %
|January 1, 2016 – March 31, 2016    |  |           | 0.169969 |  |            |  | 1  | %           |  |  | —       | %
|April 1, 2016 - June 30, 2016       |  |           | 0.107188 |  |            |  | —  | %           |  |  | —       | %
|July 1, 2016 - September 30, 2016   |  |           | 0.214372 |  |            |  | 23 | %           |  |  | —       | %
|October 1, 2016 – December 31, 2016 |  |           | 0.107186 |  |            |  | 24 | %           |  |  | 11      | %
|January 1, 2017 – March 31, 2017    |  |           | 0.160779 |  |            |  | 22 | %           |  |  | 4       | %
|April 1, 2017 - June 30, 2017       |  |           | 0.160779 |  |            |  | 35 | %           |  |  | 6       | %
|July 1, 2017 – September 30, 2017   |  |           | 0.160779 |  |            |  | 55 | %           |  |  | —       | %



The following table reflects
the sources of the cash distributions on a tax basis that the Fund has paid on its common stock (dollars in thousands) during the
nine months ended September 30, 2017 and the fiscal years ended December 31, 2016 and 2015:



|Source of Distributions:                 |  | Nine months ended September 30, 2017 |       |  | Year ended December 31, 2016 |  |       | Year ended   December 31, 2015 | 
|---------------------------------------- |  | ------------------------------------ | ----- |  | ---------------------------- |  | ----- | ------------------------------ | 
|Distributions from net investment income |  | $                                    | 1,154 |  |                              |  | 37.5  | %                              | 
|Distributions from realized gains        |  |                                      | 98    |  |                              |  | 3.2   |                                | 
|Distributions from paid In capital       |  |                                      | 1,827 |  |                              |  | 59.3  |                                | 
|Total                                    |  | $                                    | 3,079 |  |                              |  | 100.0 | %                              | 



29













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



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



When the Fund is able to
raise new capital, it incurs offering expenses of 1.5% of the gross offering proceeds. However, the Fund has not been able to raise
additional capital since April 2015. The chart below shows the percentages of distributions from net investment income excluding
offering costs: (dollars in thousands)



|                               |  | Offering Expenses |    |  | Distribution from Net Investment Income excluding offering costs |   |       | % Distribution from Net Investment  Income excluding  offering costs |  |  | % Distributions from Realized  Gains excluding  offering costs |   |  | % Distributions from Paid In  Capital  excluding  offering costs |  
|------------------------------ |  | ----------------- | -- |  | ---------------------------------------------------------------- | - | ----- | -------------------------------------------------------------------- |  |  | -------------------------------------------------------------- | - |  | ---------------------------------------------------------------- | -
|2017 (January 1- September 30) |  | $                 | —  |  |                                                                  | $ | 1,154 |                                                                      |  |  | 38                                                             | % |  |                                                                  | 3
|2016                           |  | $                 | —  |  |                                                                  | $ | 473   |                                                                      |  |  | 13                                                             | % |  |                                                                  | 2
|2015                           |  | $                 | 96 |  |                                                                  | $ | 926   |                                                                      |  |  | 21                                                             | % |  |                                                                  | 9



Note 10.  Commitments and Contingencies



Unfunded commitments as
of September 30, 2017 and December 31, 2016 were as follows: (dollars in thousands)



|                          |  |                                |  | September 30, |       |  | December 31, |  
|------------------------- |  | ------------------------------ |  | ------------- | ----- |  | ------------ | -
|Name of Portfolio Company |  | Investment Type                |  | 2017          |       |  | 2016         |  
|Vieste Group, LLC         |  | Senior Secured First Lien Debt |  | $             | 2,280 |  |              | $
|                          |  |                                |  | $             | 2,280 |  |              | $







The Fund entered into a Senior Secured First Lien Loan Agreement
with Vieste Group, LLC on April 7, 2017, for a total loan amount of $4,250 thousand. As of September 30, 2017, the Fund has loaned
Vieste Group, LLC $1,970 thousand; the time and amounts of the additional $2,280 thousand in funding will be at the mutual agreement
between the Fund and Vieste Group, LLC.





From time to time, the
Fund is involved in legal proceedings in the normal course of its business. Although the outcome of such litigation cannot be predicted
with any certainty, management is of the opinion, based on the advice of the legal counsel, that final disposition of any litigation
should not have a material adverse effect on the financial position of the Fund.



30







Note 11.  Financial Highlights



The following is a schedule
of financial highlights for the nine months ended September 30, 2017 and 2016:



|                                                                     |  | For the Nine months ended September 30, 2017 |           |   | For the Nine months ended September 30, 2016 |  
|-------------------------------------------------------------------- |  | -------------------------------------------- | --------- | - | -------------------------------------------- | -
|                                                                     |  |                                              |           |   |                                              |  
|Per share data:                                                      |  |                                              |           |   |                                              |  
|Net asset value, beginning of period                                 |  | $                                            | 5.31      |   |                                              | $
|                                                                     |  |                                              |           |   |                                              |  
|Results of operations (1)                                            |  |                                              |           |   |                                              |  
|Net investment income                                                |  |                                              | 0.18      |   |                                              |  
|Net realized loss on investments                                     |  |                                              | (0.06     | ) |                                              |  
|Net unrealized appreciation on investments                           |  |                                              | 1.82      |   |                                              |  
|Net increase in net assets resulting from operations                 |  |                                              | 1.94      |   |                                              |  
|                                                                     |  |                                              |           |   |                                              |  
|Stockholder distributions (2)                                        |  |                                              |           |   |                                              |  
|Distributions from net investment income                             |  |                                              | (0.18     | ) |                                              |  
|Distributions from realized gains                                    |  |                                              | (0.01     | ) |                                              |  
|Distributions from capital                                           |  |                                              | (0.29     | ) |                                              |  
|                                                                     |  |                                              |           |   |                                              |  
|Net decrease in net assets resulting from stockholder distributions  |  |                                              | (0.48     | ) |                                              |  
|                                                                     |  |                                              |           |   |                                              |  
|Capital share transactions                                           |  |                                              |           |   |                                              |  
|Impact from reinvestment of stockholder distributions (3)            |  |                                              | 0.05      |   |                                              |  
|                                                                     |  |                                              |           |   |                                              |  
|Net increase in net assets resulting from capital share transactions |  |                                              | 0.05      |   |                                              |  
|Other (4)                                                            |  |                                              | (0.01     | ) |                                              |  
|Net asset value, end of period                                       |  | $                                            | 6.81      |   |                                              | $
|                                                                     |  |                                              |           |   |                                              |  
|Shares outstanding at end of period                                  |  | $                                            | 6,443,209 |   |                                              | $
|Total return (6)                                                     |  |                                              | 35.89     | % |                                              |  
|                                                                     |  |                                              |           |   |                                              |  
|Ratio/Supplemental data:                                             |  |                                              |           |   |                                              |  
|Net assets, end of period (in thousands)                             |  | $                                            | 43,883    |   |                                              | $
|Average net assets (in thousands)                                    |  | $                                            | 39,618    |   |                                              | $
|Ratio of net investment income to average net assets (5) (8)         |  |                                              | 3.89      | % |                                              |  
|Ratio of operating expenses to average net assets (5) (8)            |  |                                              | 6.52      | % |                                              |  
|Portfolio turnover ratio (7)                                         |  |                                              | 15.83     | % |                                              |  



|(1) | The per share amounts were derived by using the weighted average shares outstanding during the period. There was no expense waiver and reimbursement for the nine months ended September 30, 2017 and September 30, 2016.                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The per share data for distributions reflects the actual amount of distributions declared per share during the period.                                                                                                                                                                           
|(3) | The impact from reinvestment of stockholder distributions on a per share basis reflects the incremental net asset value changes as a result of the reinvestment of stockholder distributions.                                                                                                    
|(4) | Includes the impact of different share amounts used in calculating per share data as a result of calculating certain per share data based on weighted average shares outstanding during the period and certain per share data based on shares outstanding as of a period end or transaction date.
|(5) | The ratios are after giving effect to amounts reimbursed by the Manager under an expense reimbursement agreement. See “Note 4 – Related Party Transactions.” For the nine months ended September 30, 2017 and 2016, there was no expense waiver and reimbursement.                               



31







|(6) | Total return is calculated assuming a purchase of shares at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the DRIP. For the nine months ended September 30, 2017 and 2016, there was no expense reimbursement.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(7) | 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.                                                                                                                                                                                                                                              
|(8) | Ratios are annualized and calculated based on average net assets using current and prior three quarters’ net assets.                                                                                                                                                                                                                                                                                          



Note 12.  Subsequent Events



On October 4, 2017,
the Fund made an additional investment of $380,000 in a senior secured first lien loan to Vieste Group, LLC (See Note 10 for
further details). In conjunction with this investment, the Fund received a warrant to purchase 27,686 Class A Units.





On October 16, 2017, the Fund signed a short-term Senior Secured
Loan Agreement with Nima, LLC for an additional investment of $250,000. The Fund sent Nima, LLC $75,000 on October 17, 2017 and
will fund the balance of the loan should Nima, LLC need the additional investment. The full amount loaned is due in full by December
16, 2017, excluding loan origination fees and interest.





On October 23, 2017, the
Board of Directors of the Fund declared one monthly distribution, and consented to keep the annual distribution rate at 7.35% of
the current $8.75 gross offering price. The distribution was to stockholders of record on October 23, 2017 and payable on October
30, 2017.

32







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



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



Forward-Looking Statements



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



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



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



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



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



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



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



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



Overview



We invest in discounted
corporate debt, senior secured term loan 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. In addition, we also provide direct
loans with equity warrant coverage to portfolio companies to help facilitate corporate expansion.



33







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.



Investments - Money Market



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



Investment Classification



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



Valuation of Portfolio Investments



We have adopted Financial
Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”), Topic 820, Fair Value
Measurements and Disclosures (“ASC Topic 820”), which defines fair value, establishes a framework for measuring
fair value in accordance with U.S. GAAP 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.



34







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. US Bank is the Fund custodian. Through US Bank, the Fund
uses FT Interactive, a third-party valuation firm, to price the notes. The prices are reviewed by the CEO.



Level 3: Unobservable inputs for the asset or
liability.



The investment portfolio
is recorded on a trade date basis. We determine the net asset value of our investment portfolio each quarter. Securities that are
publicly-traded are valued at the reported closing price on the valuation date. Six of the forty-six investments were valued
using the closing market price at period end September 30, 2017.



The following table presents
investments that are not publically-traded or have no closing market price, as of September 30, 2017:



|Portfolio Company                                       |  | Asset Type                      |  | Investment  Coupon Rate |       |   | Maturity Date
|------------------------------------------------------- |  | ------------------------------- |  | ----------------------- | ----- | - | -------------
|Ansgar Media, LLC - Class B Units                       |  | Equity – Preferred Stock        |  |                         | -     |   |              
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Aspire Holdings (1)                                     |  | Equity – Common Stock           |  |                         | -     |   |              
|Aspect Software, Inc. (2)                               |  | Equity – Common Stock           |  |                         | -     |   |              
|Claire's Stores, Inc. Term Loan (3)                     |  | Senior Secured First Lien Debt  |  |                         | 9.00  | % |              
|CLSIP LLC Term Loan (3)                                 |  | Senior Secured First Lien Debt  |  |                         | 9.00  | % |              
|Claire’s (Gibraltar) Holdings Limited Term Loan (3)     |  | Senior Unsecured Debt           |  |                         | 9.00  | % |              
|Colt Defense, LLC (4)                                   |  | Senior Unsecured Debt           |  |                         | 8.00  | % |              
|Digital Golf Technologies, LLC                          |  | Senior Secured First Lien Debt  |  |                         | 13.00 | % |              
|Digital Golf Technologies, LLC                          |  | Warrant                         |  |                         | -     |   |              
|Education Management LLC                                |  | Equity – Common Stock           |  |                         | -     |   |              
|Education Management LLC                                |  | Warrant                         |  |                         | -     |   |              
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|GeoCommerce, Inc.                                       |  | Warrant                         |  |                         | -     |   |              
|Logan's Roadhouse, Inc. (5)                             |  | Equity – Common Stock           |  |                         | -     |   |              
|Logan's Roadhouse, Inc. PIK Exit Facility Term Loan (5) |  | Senior Secured Second Lien Debt |  |                         | 9.50  | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Warrant                         |  |                         | -     |   |              
|Nuverra Environmental Solutions, Inc. (6)               |  | Equity – Common Stock           |  |                         | -     |   |              
|UCI International, Inc. (7)                             |  | Equity – Common Stock           |  |                         | -     |   |              
|Vieste Group, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 13.00 | % |              
|Vieste Group, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 13.00 | % |              
|Vieste Group, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 13.00 | % |              
|Vieste Group, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 13.00 | % |              
|Vieste Group, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 13.00 | % |              
|Vieste Group, LLC                                       |  | Warrant                         |  |                         | -     |   |              



35









|(1) | Converted from exchange of 12.00% Endeavour International Corp, senior secured first lien debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The original 10.63% senior secured second lien notes due on May 15, 2017 defaulted. As part of Aspect’s bankruptcy and planned reorganization process, the Fund participated in a rights offering to purchase a new 3.00% PIK senior unsecured convertible note maturing on May 23, 2023 in an effort to facilitate recovery of its previous investment in the senior secured lien notes in Aspect. On November 25, 2016, 3.00% PIK senior unsecured convertible notes were exchanged out for mandatory conversion to shares of common stock of Aspect Software Parent, Inc. at a rate of 1/30 i.e. one common share per $30.00 in principal amount of notes outstanding.
|(3) | On September 20, 2016, all of 10.50% senior subordinated notes and 8.88% senior secured second lien notes were exchanged for 9.00% of Claire’s Stores, Inc. Term Loan, CLSIP Term Loans and of Claire’s Gibralter Term Loans.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(4) | On January 19, 2016, there was a mandatory exchange offer to exchange all of the 8.75% senior unsecured notes to 8.00% PIK third lien notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(5) | The company filed for bankruptcy in Delaware on August 8, 2016. The Fund participated in DIP financing as part of the company’s restructuring process during bankruptcy and has received a PIK second lien exit facility T/L in exchange. On April 28, 2017, the remaining unexchanged bonds were converted to equity.                                                                                                                                                                                                                                                                                                                                                   
|(6) | On March 11, 2016, the company announced that it had entered into a privately negotiated Restructuring Support Agreement with holders of more than 80% of the company’s 2018 unsecured Senior Notes to initiate a proposed debt restructuring plan. On August 8, 2017, as part of the mandatory reorganization, $1.44 million face value of 10% senior secured second lien bonds, due April 15, 2021 and 71,069 warrants of Nuverra Environmental Solutions, Inc. were exchanged for 31,989 shares of Nuverra Environmental Solutions Inc.                                                                                                                               
|(7) | On June 2, 2016, UCI International, LLC and certain of its affiliates filed voluntary petitions for relief under Chapter 11 Bankruptcy in the District of Delaware. As per the Plan of Reorganization and based on Rank contribution being reached, the Fund received 30,714 shares of the company on March 29, 2017.                                                                                                                                                                                                                                                                                                                                                    



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 undertake a multi-step valuation process each quarter, as described
below:



36







| | • | each portfolio company or investment is initially valued by members of our
investment committee, with such valuation taking into account information received from our independent valuation firm, if applicable;                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                  
| | • | preliminary valuations are then documented and reviewed with the members of our Board of Directors, or a committee thereof; and                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                  
| | • | the Board of Directors, or committee thereof, reviews the
    valuations and determines the fair value of each investment in our portfolio in good faith based on various statistical and
    other factors, including the input and recommendation of members of our investment committee and any third-party valuation
    firm, if applicable.



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



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



Revenue Recognition



Securities transactions
are accounted for on the trade date. We generate investment income in the form of interest, dividend and fees earned on senior
secured loans, senior secured notes, subordinated debt, senior unsecured debt, senior unsecured convertible 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 coupon rate of our investments. Coupon interest income is adjusted for the amortization of premiums
and accretion of discounts. We record interest income on an accrual basis to the extent that we expect to collect such amounts.
The Fund stops accruing when the invested company defaults in payment and has passed the 30-day grace period, files for bankruptcy
or goes through reorganization converting bonds to equity. We expect the dollar amount of interest and any dividend income that
we earn to increase as the size of our investment portfolio increases.



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



37







In connection with our
debt investments, we may receive warrants or similar equity-related securities ("Warrants"). We determine the cost basis
of Warrants based upon their fair values on the date of receipt relative to the total fair value of the debt and Warrants received.
Any resulting difference between the face amount of the debt and its recorded cost resulting from the assignment of value to the
Warrants is treated as original issue discount (“OID”), and accreted into interest income over the life of the debt
investment using a method that approximates the effective interest method. Similarly, loan origination fees are capitalized and
amortized as other income over the life of the loan.



For loans and debt securities
with contractual 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. Dividend income, if any, is recognized on an accrual basis to the extent that we expect to
collect such amount. We record prepayment premiums on loans and debt securities as interest income when we receive such amounts.
In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees
for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees generated in connection
with investments will be recognized when earned.



Loans and debt securities,
including those that are individually identified as being impaired under ASC Topic 310 — Receivables (“ASC
Topic 310”), are generally placed on non-accrual 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 non-accrual status is reversed against
interest income. Interest income is recognized on non-accrual loans or debt securities only to the extent received in cash. However,
where there is doubt regarding the ultimate collectability of principal, cash receipts, whether designated as principal or interest,
are thereafter applied to reduce the carrying value of the loan or debt security. Loans or securities are restored to accrual status
only when interest and principal payments are brought current and future payments are reasonably assured.



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



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



Payment-in-Kind Interest



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



Organizational and Offering Costs



The Fund is a closed-end
fund with a continuous offering period. Under the investment advisory agreement between the Fund and the Manager, our Manager fronts
the initial cost of the organizational and offering expenses, but the Fund is obligated to reimburse the Manager for such costs
to the extent of 1.5% of the gross offering proceeds in our continuous offering. The Fund also agreed to reimburse the Manager
for organization and offering expenses incurred by a prior manager in consideration for the Manager’s agreement to pay $1.3
million owed to the Fund by the prior manager under an expense reimbursement agreement, which amount the Manager has paid in full.
The Fund expenses organizational and offering costs as they become payable under the investment advisory agreement.



38







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 ASC Topic 740, Accounting for Income Taxes, (“ASC Topic 740”) for all tax years and in all
major tax jurisdictions, and determined that there is no material impact on the financial statements.



Portfolio and Investment Activity



During the three months
ended September 30, 2017, we made $1.2 million of investments in new and existing portfolio companies and had $2.6 million in aggregate
amount of exits, maturities and repayments, resulting in net repayments of $1.4 million for the period. During the three months
ended September 30, 2016, we made $2.3 million of investments in new and existing portfolio companies and had $6.2 million in aggregate
amount of exits and repayments, resulting in net repayments of $3.9 million for the period.



During the nine months
ended September 30, 2017, we made $6.7 million of investments in new and existing portfolio companies and had $16.2 million in
aggregate amount of exits, maturities and repayments, resulting in net repayments of $9.5 million for the period. During the nine
months ended September 30, 2016, we made $25.7 million of investments in new and existing portfolio companies and had $25.3 million
in aggregate amount of exits and repayments, resulting in net investments of $0.4 million for the period



As of September 30,
2017, we have invested an aggregate of approximately $33.3 million in forty-seven investment positions in twenty-one
portfolio companies. On September 30, 2017, the fair value of our investment positions was $44.3 million (including money
market investments and the accrued interest of $0.4 million). As of such date, our estimated gross annual portfolio yield was
11.9% and gross annual portfolio yield to maturity was 12.0% (excluding equity investments and non-accrual investments) based
on the purchase price of our investments. At September 30, 2017, the weighted average coupon yield of all the securities in
the portfolio was 5.60%. The average duration of our debt portfolio was approximately 1.2 years. During the nine months ended
September 30, 2017, eight T-bills matured, we exited six portfolio companies in full and one company in partial, for
aggregate sales proceeds of $16.2 million.



The following table presents
two debt investments that had not paid coupon interest as due beyond the thirty-day grace period, as of September 30, 2017. Interest
incurred on these investments was recorded through the date that the last coupon payment was received:



|Portfolio  Company       |  | Asset  Type                     |  | Investment  Coupon Rate |       |   | Maturity  Date
|------------------------ |  | ------------------------------- |  | ----------------------- | ----- | - | --------------
|Gymboree Corp. (1)       |  | Senior Unsecured Debt           |  |                         | 9.13  | % |               
|Saratoga Resources, Inc. |  | Senior Secured Second Lien Debt |  |                         | 12.50 | % |               



|(1) | On August 10, 2017, the Gymboree Corporation announced solicitation of consents from holders of its 9.125% senior unsecured notes due 2018 pertaining to the first amended joint chapter 11 plan of reorganization. The Fund has decided to accept the plan and submit its consent.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



39







The following table presents
fourteen equity investments that are non-income producing, as of September 30, 2017:



|PortfolioCompany                          |  | AssetType                |  |  | Investment
        Coupon
        Rate |  |  |  | MaturityDate | 
|----------------------------------------- |  | ------------------------ |  |  | -------------------------------------- |  |  |  | ------------ | 
|Affinion Group, Inc. (2)                  |  | Equity – Common Stock    |  |  | -                                      |  |  |  | -            | 
|Ansgar Media, LLC - Class B Units         |  | Equity – Preferred Stock |  |  | -                                      |  |  |  | -            | 
|Aspect Software, Inc. (3)                 |  | Equity – Common Stock    |  |  | -                                      |  |  |  | -            | 
|Aspire Holdings (1)                       |  | Equity – Common Stock    |  |  | -                                      |  |  |  | -            | 
|Digital Golf Technologies, LLC            |  | Warrant                  |  |  | -                                      |  |  |  | -            | 
|Education Management, LLC (4)             |  | Warrant                  |  |  | -                                      |  |  |  | -            | 
|Education Management, LLC                 |  | Equity – Common Stock    |  |  | -                                      |  |  |  | -            | 
|GeoCommerce, Inc.                         |  | Warrant                  |  |  | -                                      |  |  |  | -            | 
|Logan's Roadhouse, Inc. (7)               |  | Equity – Common Stock    |  |  | -                                      |  |  |  | -            | 
|NII Holdings, Inc. (5)                    |  | Equity – Common Stock    |  |  | -                                      |  |  |  | -            | 
|Nima, LLC                                 |  | Warrant                  |  |  | -                                      |  |  |  | -            | 
|Nuverra Environmental Solutions, Inc. (6) |  | Equity – Common Stock    |  |  | -                                      |  |  |  | -            | 
|UCI International, Inc.                   |  | Equity – Common Stock    |  |  | -                                      |  |  |  | -            | 
|Vieste Group, LLC                         |  | Warrant                  |  |  | -                                      |  |  |  | -            | 



|(1) | Converted from exchange of 12.00% Endeavour International Corp First Lien Bonds.                                                                                                                                                                                                                                      
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Converted from exchange of 3.00% PIK senior unsecured convertible notes.                                                                                                                                                                                                                                              
|(3) | Converted from exchange of 3.00% PIK senior unsecured convertible notes.                                                                                                                                                                                                                                              
|(4) | Received in exchange of 15.00% Cash/PIK bonds.                                                                                                                                                                                                                                                                        
|(5) | Received in exchange of 10.00% senior unsecured debt.                                                                                                                                                                                                                                                                 
|(6) | Received in exchange of 10% senior secured second lien bonds, due April 15, 2021 and warrants of Nuverra Environmental Solutions, Inc. as part of the mandatory reorganization.                                                                                                                                       
|(7) | The company filed for bankruptcy in Delaware on August 8, 2016. The Fund participated in DIP financing as part of the company’s restructuring process during bankruptcy and has received a PIK Second Lien Exit Facility T/L in exchange. On April 28, 2017, the remaining unexchanged bonds were converted to equity.



The following table shows
the weighted average yield of our portfolio composition based on fair value at September 30, 2017:



|                                |  | At September 30, 2017         |      
|------------------------------- |  | ----------------------------- | -----
|                                |  | Percentage of Total Portfolio |      
|Investments – Money Market      |  |                               | 1.8  
|Senior Secured First Lien Debt  |  |                               | 45.7 
|Senior Secured Second Lien Debt |  |                               | 0.4  
|Senior Unsecured Debt           |  |                               | 0.8  
|Equity Securities               |  |                               | 51.3 
|Total                           |  |                               | 100.0



* 11.9% yield is on non-defaulted,
non-equity positions and excludes money market investments. The weighted average coupon yield of all the securities in the portfolio was 5.60%.



As of September 30, 2017,
our non-defaulted, non-equity portfolio had a yield to maturity of 12.0%, and an average duration of 1.22 years.



40







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



|                                |  | At December 31, 2016          |      
|------------------------------- |  | ----------------------------- | -----
|                                |  | Percentage of Total Portfolio |      
|Investments – Money Market      |  |                               | 0.4  
|U.S. Government Securities      |  |                               | 17.7 
|Senior Secured First Lien Debt  |  |                               | 42.1 
|Senior Secured Second Lien Debt |  |                               | 1.3  
|Senior Unsecured Debt           |  |                               | 12.0 
|Senior Subordinated Debt        |  |                               | 2.6  
|Equity Securities               |  |                               | 23.9 
|Total                           |  |                               | 100.0



* 8.6% yield is on non-defaulted, non-equity
positions and excludes money market investments.



As of December 31, 2016, our non-defaulted,
non-equity portfolio had a yield to maturity of 8.6%, and an average duration of 1.60 years.



The following table shows the portfolio composition
by industry grouping at fair value at September 30, 2017 (dollars in thousands):



|                                          |  | At September 30, 2017      |       
|----------------------------------------- |  | -------------------------- | ------
|                                          |  | Investments at  Fair Value |       
|Consumer Electronics                      |  | $                          | 13,195
|Media: Broadcasting & Subscription        |  |                            | 12,682
|Technology                                |  |                            | 11,718
|Renewable Energy                          |  |                            | 2,167 
|Services: Consumer                        |  |                            | 1,100 
|Investments - Money Market                |  |                            | 781   
|Retail                                    |  |                            | 739   
|Telecommunications                        |  |                            | 569   
|Automobile                                |  |                            | 364   
|Beverage, Food & Tobacco                  |  |                            | 260   
|Aerospace and Defense                     |  |                            | 153   
|Media: Advertising, Printing & Publishing |  |                            | 127   
|Energy: Oil & Gas                         |  |                            | 28    
|Environmental Industries                  |  |                            | —     
|Total                                     |  | $                          | 43,883



41







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



|                                          |  | At December 31, 2016       |       
|----------------------------------------- |  | -------------------------- | ------
|                                          |  | Investments at  Fair Value |       
|Media: Broadcasting & Subscription        |  | $                          | 10,418
|Technology                                |  |                            | 7,684 
|U.S. Government                           |  |                            | 7,173 
|Consumer Electronics                      |  |                            | 6,500 
|Aerospace and Defense                     |  |                            | 2,124 
|Energy: Oil & Gas                         |  |                            | 1,460 
|Services: Consumer                        |  |                            | 1,428 
|Retail                                    |  |                            | 1,084 
|Healthcare & Pharmaceuticals              |  |                            | 1,050 
|Telecommunications                        |  |                            | 607   
|Environmental Industries                  |  |                            | 279   
|Beverage, Food & Tobacco                  |  |                            | 249   
|Automobile                                |  |                            | 238   
|Investments – Money Market                |  |                            | 157   
|Media: Advertising, Printing & Publishing |  |                            | 51    
|Total                                     |  | $                          | 40,502



Our fair value of total
investments was $43.9 million as of September 30, 2017 as compared to $40.5 million as of December 31, 2016. The increase in the
fair value of our investments was attributable to two factors: a) warrants received in connection with additional loan investments in Vieste Group, LLC, and b) increase in the valuation estimate of Nima LLC warrants based on a company
equity valuation of $33.6 million.



Discussion and Analysis of Results of Operations



Results of Operations



The results of operations
are based on investment income 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, investment income is recognized on an accrual basis. Income is earned
as coupon interest adjusted for the amortization of premiums and accretion of discounts on the high-yield corporate debt investments.
Expenses include professional services, management fees, administrative services, organizational and offering costs and other general
and administrative. Realized gains (losses) are from investments sold, written off, or called at an advantageous price. The unrealized
appreciation (depreciation) is the change in the market price on investments in the portfolio at period end, subject to significant
fluctuation.



Operating results for the
three and nine months ended September 30, 2017 and 2016 were as follows (in thousands):



|                                                                        |  | For the Three  Months Ended September 30, 2017 |       |   | For the Three  Months Ended September 30, 2016 |  
|----------------------------------------------------------------------- |  | ---------------------------------------------- | ----- | - | ---------------------------------------------- | -
|Total investment income                                                 |  | $                                              | 1,105 |   |                                                | $
|Total operating expenses                                                |  |                                                | 535   |   |                                                |  
|Net investment income                                                   |  |                                                | 570   |   |                                                |  
|Net realized loss on non-controlled/non-affiliate investments           |  |                                                | (498  | ) |                                                |  
|Net unrealized appreciation on non-controlled/non-affiliate investments |  |                                                | 943   |   |                                                |  
|Net unrealized appreciation on affiliate investments                    |  |                                                | —     |   |                                                |  
|                                                                        |  |                                                |       |   |                                                |  
|Net increase in net assets resulting from operations                    |  | $                                              | 1,015 |   |                                                | $



|                                                                        |  | For the Nine  Months Ended September 30, 2017 |        |   | For the Nine  Months Ended September 30, 2016 |  
|----------------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | --------------------------------------------- | -
|Total investment income                                                 |  | $                                             | 3,086  |   |                                               | $
|Total operating expenses                                                |  |                                               | 1,932  |   |                                               |  
|Net investment income                                                   |  |                                               | 1,154  |   |                                               |  
|Net realized loss on non-controlled/non-affiliate investments           |  |                                               | (400   | ) |                                               |  
|Net unrealized appreciation on non-controlled/non-affiliate investments |  |                                               | 8,335  |   |                                               |  
|Net unrealized appreciation on affiliate investments                    |  |                                               | 3,314  |   |                                               |  
|                                                                        |  |                                               |        |   |                                               |  
|Net increase in net assets resulting from operations                    |  | $                                             | 12,403 |   |                                               | $



42







Investment Income



We generated
investment income of $1.1 million and $3.1 million for the three and nine months ended September 30, 2017, respectively, as
compared to $1.0 million and $2.3 million for the three and nine months ended September 30, 2016, respectively. Interest
income was $1.0 million and $2.9 million for the three and nine months ended September 30, 2017, respectively, as compared to
$0.9 million and $2.3 million for the three and nine months ended September 30, 2016, respectively. The increase in interest
income in 2017 as compared to 2016 was attributable to higher yield earned on investments in senior secured notes of Ansgar
Media, LLC, GeoCommerce, Inc., Nima, LLC, Vieste Group, LLC and Digital Golf Technologies, LLC, partially offset by an
increase in debt investments placed on non-accrual status and restructuring of certain debt investments into equity
investments. Fee income was $0.08 million and $0.19 million for the three and nine months ended September 30, 2017,
respectively, as compared to $0.03 million and $0.06 million for the three and nine months ended September 30, 2016,
respectively. Fee income received is non-recurring in nature. The increase in fee income in 2017 as compared to 2016 was
attributable to higher amount of investments in direct lending deals that earn 3% origination fee, which is being amortized
over the term of the loan.



Interest from debt investments is in the
form of interest and fees earned on senior secured loans, senior secured notes, subordinated debt, senior unsecured debt and collateralized
securities in our debt portfolio. Our debt portfolio constituted approximately 46.9% of the investment portfolio at September 30,
2017 (excluding money market investments). The level of interest income we receive is directly related to the balance of collectible
income producing investments multiplied by the coupon rate of our investments, offset by debt investments held in non-accrual status.
We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio
increases. The average balance of the debt portfolio during the nine months ended September 30, 2017 was lower than the nine months
ended September 30, 2016, which was attributable to – 1) increase in debt investments placed on non-accrual status and restructuring
of certain debt investments into equity investments; and 2) in the money warrants and/or other equity securities received while
making direct lending investments in companies like Ansgar Media LLC, Geocommerce, Inc., Nima LLC, Digital Golf Technologies, LLC
and Vieste Group, LLC. At September 30, 2017, the weighted average coupon yield of our debt investments was 11.9% as compared to
9.3% at September 30, 2016. This coupon yield is for the non-defaulted and non-equity positions. At September 30, 2017, the weighted
average coupon yield of all the securities in the portfolio was 5.6%, as compared to 6.5% at September 30, 2016. Based on current
and prior three quarters’ net assets, average net assets as of September 30, 2017 were $39.6 million, as compared to $30.5
million as of September 30, 2016.



Since becoming
operational in the third quarter of 2012, we generate income 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 income in the form of commitment, origination or structuring fees. Any such fees will be
generated in connection with our investments and recognized as earned.



43







Operating Expenses



The composition of our
operating expenses for the three and nine months ended September 30, 2017 and 2016 was as follows (in thousands):



|                                                                                   |  | For the Three Months Ended September 30, 2017 |     |  | For the Three Months Ended September 30, 2016 |  
|---------------------------------------------------------------------------------- |  | --------------------------------------------- | --- |  | --------------------------------------------- | -
|                                                                                   |  |                                               |     |  |                                               |  
|Professional fees                                                                  |  | $                                             | 46  |  |                                               | $
|Director fees                                                                      |  |                                               | 12  |  |                                               |  
|Insurance                                                                          |  |                                               | 33  |  |                                               |  
|Interest expense                                                                   |  |                                               | -   |  |                                               |  
|Management fees – related parties                                                  |  |                                               | 223 |  |                                               |  
|Administrative services – related parties                                          |  |                                               | 74  |  |                                               |  
|General and administrative (includes CFO salary and related party travel expenses) |  |                                               | 119 |  |                                               |  
|Transfer agent fees                                                                |  |                                               | 28  |  |                                               |  
|Total operating expenses                                                           |  | $                                             | 535 |  |                                               | $



|                                                                                   |  | For the Nine Months Ended September 30, 2017 |       |  | For the Nine Months Ended September 30, 2016 |  
|---------------------------------------------------------------------------------- |  | -------------------------------------------- | ----- |  | -------------------------------------------- | -
|                                                                                   |  |                                              |       |  |                                              |  
|Professional fees                                                                  |  | $                                            | 448   |  |                                              | $
|Director fees                                                                      |  |                                              | 31    |  |                                              |  
|Insurance                                                                          |  |                                              | 99    |  |                                              |  
|Interest expense                                                                   |  |                                              | 58    |  |                                              |  
|Management fees – related parties                                                  |  |                                              | 626   |  |                                              |  
|Administrative services – related parties                                          |  |                                              | 206   |  |                                              |  
|General and administrative (includes CFO salary and related party travel expenses) |  |                                              | 363   |  |                                              |  
|Transfer agent fees                                                                |  |                                              | 101   |  |                                              |  
|Total operating expenses                                                           |  | $                                            | 1,932 |  |                                              | $



For the three months ended
September 30, 2017 and 2016, our operating expenses were $0.5 million and $0.7 million, respectively. Included within general and
administrative expenses for the three months ended September 30, 2017 and 2016, were $0.04 million and $0.03 million, respectively,
for the cost of our chief financial officer’s salary reimbursed to the Manager. Also included within general and administrative
expenses for the three months ended September 30, 2017 and 2016, were zero and $0.01 million, respectively, for related
party travel expenses reimbursed to the Manager. For the nine months ended September 30, 2017 and 2016, our operating expenses
were $1.9 million and $2.0 million, respectively. Included within general and administrative expenses for the nine months ended
September 30, 2017 and 2016, were $0.1 million and $0.1 million, respectively, for the cost of our chief financial officer’s
salary reimbursed to the Manager. Also included within general and administrative expenses for the nine months ended September
30, 2017 and 2016, were $0.03 million and $0.03 million, respectively, for related party travel expenses reimbursed to the Manager.



Management fees for the
three and nine months ended September 30, 2017 and 2016, remained at a single rate 2% of the net asset value. The offering costs
were consistent at 1.5% of the gross closing proceeds for the three and nine months September 30, 2017 and 2016. However, since
the Fund has not been open to new investments, there has not been any offering costs expense since June 30, 2015.



44







The decrease in professional
fees is due to reduced legal fees in 2017 as compared to 2016 in conjunction with the settlement of UCI International and Relativity
Media legal matters, partially offset by increased legal costs related to conversion of the Fund to an Interval Fund.



Net Investment Income



Our net investment income
totaled $0.6 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively. Our net investment
income totaled $1.2 million and $0.3 million for the nine months ended September 30, 2017 and 2016, respectively. For the three
months ended September 30, 2017 and 2016, total investment income was $1.1 million and $1.0 million, respectively. For the same
periods, the total investment income included $0.08 million and $0.03 million of non-recurring fees, respectively. For the nine
months ended September 30, 2017 and 2016, total investment income was $3.1 million and $2.3 million, respectively. For the same
periods, the total investment income included $0.19 million and $0.06 million of non-recurring fees, respectively.



The increase in net investment
income for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 was primarily due to
the positive returns posted by almost all of the fixed income sectors in 2017, and additional direct lending investments in the
senior secured first lien notes that earn high yield and also a fee income in form of 3% origination fees. For the three months
ended September 30, 2017 and 2016, total operating expenses were $0.5 million and $0.7 million, respectively. For the nine months
ended September 30, 2017 and 2016, total operating expenses were $1.9 million and $2.0 million, respectively.



Net Realized Gains or Losses from Investments



For the three and nine
months ended September 30, 2017, we had $2.6 million and $16.2 million of sales, maturities, write-offs and principal repayments,
resulting in $0.5 million and $0.4 million of realized losses, respectively. For the three and nine months ended September 30,
2016, we had $6.2 million and $25.3 million of sales, maturities, write-offs and principal repayments, resulting in $0.04 million
and $13.3 million of realized losses, respectively.



Net Change in Unrealized Appreciation or Depreciation on Investments



For the three and nine
months ended September 30, 2017, we experienced $0.9 million and $11.6 million of unrealized appreciation, respectively, mainly
because of increased valuation estimates of equity securities of GeoCommerce, Inc., Nima, LLC and Ansgar, LLC, and also because
of receipt of in-the-money warrants from investments in Digital Golf Technologies, LLC and Vieste Group, LLC. For the three and
nine months ended September 30, 2016, we experienced $1.7 million and $19.7 million of unrealized appreciation, respectively.



The unrealized appreciation
during the nine months ended September 30, 2017 has been partially offset by a number of positions that either initiated a restructuring
of their indebtedness (either in Chapter 11 bankruptcy or prepackaged bankruptcy) or announced that they were considering a restructuring.
Such announcements generally reduce liquidity in the secondary market creating greater mispricing in underlying bonds. Until the
bankruptcy or other restructuring process is complete, it becomes difficult to ascertain whether some of these positions will result
in a loss of principal or full recovery of principal given their position in the capital structure of the issuer and the underlying
asset values. Generally, we expect much higher recoveries or full payment for senior secured first lien type bonds, as compared
to senior secured second lien or unsecured bonds for defaulted bonds.



Changes in Net Assets from Operations



For the three and nine
months ended September 30, 2017, we recorded a net increase in net assets resulting from operations of $1.0 million and $12.4 million,
respectively. For the three and nine months ended September 30, 2017, this increase is mainly due to net unrealized appreciation
of $0.9 million and $11.6 million, respectively, and net investment income of $0.6 million and $1.2 million, respectively, partially
offset by net realized losses from investments of $0.5 million and $0.4 million, respectively, on our portfolio investments. The
increase in 2017 is largely due to increase in the valuation of Class B units of Ansgar Media, LLC, warrants of Nima, LLC and GeoCommerce,
Inc., and in-the-money warrants received through new investments in senior secured first lien notes of Vieste Group, LLC. Overall,
the portfolio experienced a market value increase, with an increase in net unrealized appreciation on investments of $0.9 million
and $11.6 million, respectively, for the three and nine months ended September 30, 2017. Based on 6,420,505 and 6,385,756 weighted
average common shares outstanding for the three and nine months ended September 30, 2017, respectively, our per share net increase
in net assets resulting from operations was $0.16 and $1.94, respectively.



45







For
the three and nine months ended September 30, 2016, we recorded a net increase in net assets resulting from operations of $1.9
million and $6.6 million, respectively. For the three and nine months ended September 30, 2016, this increase was mainly due to
net unrealized appreciation of $1.7 million and $19.7 million, respectively, and net investment income of $0.3 million and $0.3
million, partially offset by net realized loss from investments of $0.04 million and $13.3
million, respectively, on our portfolio investments. This increase was largely due to a strong rally in high yield markets because
of increases in the market price of oil, easing concerns about global economic growth, a continued search for yield and continued
accommodation by central banks and the completion of restructuring plans by a few of our bond investment companies. Overall, the
portfolio experienced a market value increase, with an increase in net unrealized appreciation on investments of $19.7 million
for the nine months ended September 30, 2016. Based on 6,276,081 and 6,236,996 weighted average common shares outstanding for the
three and nine months ended September 30, 2016, our per share net increase in net assets resulting from operations was $0.31 and
$1.06, respectively.



Liquidity and Capital Resources



On August 4, 2015, we entered
an agreement with Wells Fargo Advisors, LLC for obtaining a revolving line of credit. The amount we can borrow is based upon the
value of cash deposited in an account at Wells Fargo Advisors, LLC and the treasury notes that Wells Fargo purchases, which serve
as collateral for the loan. As of September 30, 2017 and December 31, 2016, the outstanding balance under this credit line was
$0.0 million and $6.4 million, respectively.



At the end of March 2017,
the Fund began selling the treasury notes that Wells Fargo held as collateral for the line of credit. The line was paid off in
April 2017 and the remaining securities held at Wells Fargo were transferred to U.S. Bank National Association, the Fund’s administrator. In May
2017, the line of credit and corresponding collateral account were closed at Wells Fargo.



We generate cash primarily
from cash flows from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from
sales of our investments. On July 10, 2012, we satisfied our minimum offering requirement of raising gross offering proceeds in
excess of $1.0 million from persons who are not affiliated with us or our Manager, and commenced operations. As of September 30,
2017, we had issued 6.7 million shares of common stock, including 0.6 million shares under our distribution reinvestment plan (“DRIP”)
less 0.3 million shares redeemed under our tender offer. As of September 30, 2017, we had received gross proceeds from our continuous
offering of total $66.4 million, including $5.6 million under our DRIP less $2.9 million paid to redeem shares in our prior quarterly
tender offers.



When our registration statement
becomes effective, we will sell our shares on a continuous basis. On May 23, 2016, our Board of Directors and the Pricing Committee
of the Board made a final decision to approve a price reduction from $9.25 to $8.75 per share. On November 24, 2015, our Board
of Directors and the Pricing Committee of the Board had approved a price reduction from $9.75 to $9.25 per share effective for
our next closing date and next declared distribution date. To the extent that our net asset value per share increases, we will
sell at a price necessary to ensure that our shares are not sold at a price, after deduction of selling commissions and dealer
manager fees that is below our net asset value per share. However, since April 30, 2015, we have not been able to sell any shares
in our continuous offering because our registration statement has been under review by the SEC.



For the nine months ended
September 30, 2017, we experienced a net increase in money market investments of $0.6 million. For the nine months ended September
30, 2017, approximately $8.6 million was used for our financing activities, which primarily consisted of $8.6 million repayments
of the priority credit line and $2.2 million in distributions, partially offset by $2.2 million received through the priority credit
line. We generated approximately $8.6 million of cash provided by our operating activities mainly as the result of the receipt
of proceeds from the sale of, repayment of and principal payments on portfolio debt investments of $16.2 million, partially offset
by the purchase of new portfolio debt investments of $6.7 million.



46







Distributions



Subject to our Board of
Director’s discretion and applicable legal restrictions, we have historically declared and paid ordinary cash distributions
at a rate equal to 7.35% of our latest offering price per share. Since the distribution paid to shareholders on September 30, 2015,
with a record date of August 30, 2015, we have paid distributions monthly. Prior to the September 30, 2015, we paid distributions
on a semi-monthly basis. We changed to paying distributions monthly in order to reduce costs. 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.



Based upon our current
level of operations, we estimate that about 59.3% of our distributions will constitute a return of capital. Our distributions historically
have not been based on our investment performance. Prior to September 2013, our distributions were supported by our Manager in
the form of operating expense support payments to us, and a portion of our distributions constituted a return of capital. Since
September 2013, we have not had an expense support agreement with our Manager and as a result a greater portion of our distributions
have constituted a return of capital. A return of capital generally is a return of your investment rather than a return of
earnings or gains derived from our investment activities constitutes the return of capital previously paid to us for shares of
our common stock.



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 January 2015:



|                                       |  |           |          |  | Net        |  |    | Realized    |  |  | Return  |  
|-------------------------------------- |  | --------- | -------- |  | ---------- |  | -- | ----------- |  |  | ------- | -
|                                       |  |           |          |  | Investment |  |    | Gain From   |  |  | of      |  
|Period                                 |  | Per Share |          |  | Income     |  |    | Investments |  |  | Capital |  
|January 1, 2015 - March 31, 2015       |  |           | 0.179154 |  |            |  | 15 | %           |  |  | 5       | %
|April 1, 2015 - June 30, 2015          |  |           | 0.179154 |  |            |  | 63 | %           |  |  | 15      | %
|July 1, 2015 - September 30, 2015      |  |           | 0.209015 |  |            |  | 19 | %           |  |  | 11      | %
|October 1, 2015 - December 31, 2015 *  |  |           | 0.170315 |  |            |  | —  | %           |  |  | 6       | %
|January 1, 2016 – March 31, 2016 **    |  |           | 0.169969 |  |            |  | 1  | %           |  |  | —       | %
|April 1, 2016 – June 30, 2016***       |  |           | 0.107188 |  |            |  | —  | %           |  |  | —       | %
|July 1, 2016 – September 30, 2016****  |  |           | 0.214372 |  |            |  | 23 | %           |  |  | —       | %
|October 1, 2016 – December 31, 2016    |  |           | 0.107186 |  |            |  | 24 | %           |  |  | 11      | %
|January 1, 2017 – March 31, 2017       |  |           | 0.160779 |  |            |  | 22 | %           |  |  | 4       | %
|April 1, 2017 – June 30, 2017          |  |           | 0.160779 |  |            |  | 35 | %           |  |  | 6       | %
|July 1, 2017 – September 30, 2017***** |  |           | 0.160779 |  |            |  | 55 | %           |  |  | —       | %



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



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



*** For the period
from April 1, 2016 to June 30, 2016, the Fund had a net investment loss of approximately $4 thousand and a realized loss from investments
of approximately $12.6 million. These amounts are reflected on the source of distributions table below in the distributions from
paid in capital amount.



47







**** For the period
from July 1, 2016 to September 30, 2016, the Fund had a realized loss from investments of approximately $0.04 million. That amount
is reflected on the source of distributions table below in the distributions from paid in capital amount.



***** For the period
from July 1, 2017 to September 30, 2017, the Fund had a realized loss from investments of approximately $0.5 million. That amount
is reflected on the source of distributions table below in the distributions from paid in capital amount.



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



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



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



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



The following table reflects
the sources of the cash distributions on a tax basis that the Fund has paid on its common stock (dollars in thousands) during the
nine months ended September 30, 2017 and fiscal years ended December 31, 2016 and 2015:



|Source of Distributions:                 |  | Nine months ended September 30, 2017 |       |  | Year ended December 31, 2016 |  |       | Year ended   December 31, 2015 | 
|---------------------------------------- |  | ------------------------------------ | ----- |  | ---------------------------- |  | ----- | ------------------------------ | 
|Distributions from net investment income |  | $                                    | 1,154 |  |                              |  | 37.5  | %                              | 
|Distributions from realized gains        |  |                                      | 98    |  |                              |  | 3.2   |                                | 
|Distributions from paid In capital       |  |                                      | 1,827 |  |                              |  | 59.3  |                                | 
|Total                                    |  | $                                    | 3,079 |  |                              |  | 100.0 | %                              | 



48







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 is required on their part to do so.
If shareholders elect to participate in the DRIP program, they are not charged selling commissions, dealer manager fees or other
sales charges for the purchase of DRIP shares. The purchase price of the DRIP shares is 95% of the current offering price of the
shares at the time of the distribution. Shares issued pursuant to our DRIP will have the same voting rights as our shares of common
stock offered pursuant to our prospectus.



When the Fund is able to
raise new capital, it incurs offering expenses of 1.5% of the gross offering proceeds. However, the Fund has not been able to raise
additional capital since April 2015. The chart below shows the percentages of distributions from Net Investment Income excluding
offering costs:



|                                |  | Offering Expenses |    |  | Distribution from  Net Investment Income excluding offering costs |   |       | % Distribution from Net Investment  Income excluding  offering costs |  |  | % Distributions from Realized  Gains excluding  offering costs |   |  | % Distributions from Paid In  Capital  excluding  offering costs |  
|------------------------------- |  | ----------------- | -- |  | ----------------------------------------------------------------- | - | ----- | -------------------------------------------------------------------- |  |  | -------------------------------------------------------------- | - |  | ---------------------------------------------------------------- | -
|2017 (January 1 – September 30) |  | $                 | —  |  |                                                                   | $ | 1,154 |                                                                      |  |  | 38                                                             | % |  |                                                                  | 3
|2016                            |  | $                 | —  |  |                                                                   | $ | 473   |                                                                      |  |  | 13                                                             | % |  |                                                                  | 2
|2015                            |  | $                 | 96 |  |                                                                   | $ | 926   |                                                                      |  |  | 21                                                             | % |  |                                                                  | 9



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 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 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.



49







The compensation we pay
to our Manager was not entered 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 Note 4 for a discussion of the investment advisory agreement we have with the Manager.



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



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



Due from related
party of $198,000 consists of approximately $38,000 of true up for management fees from writing down certain portfolio
investments at the end of a quarter in prior quarters, $50,000 in Blue Sky state filing fees by the Fund instead of our
Manager, $25,000 in allocation of the Directors and Officers insurance policy costs to our Manager, and $85,000 in expenses
related to legal and other operational costs allocated to our Manager instead of the Fund.



Due diligence fees received
by the Fund from the borrowers related to the Fund’s direct lending transactions are remitted to our Manager, VII Peaks Capital,
LLC, as the collateral and administrative agent for the loans. Due diligence fees received are not revenues or expenses of the
Fund and therefore are not reflected in the financial statements. Fees for the three and nine months ended September 30, 2017 totaled
$0 and $222,500, respectively. Fees for the three and nine months ended September 30, 2016 totaled $50,000 and $212,500, respectively.



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.



50







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



Assuming that our current
financial condition were to remain constant and no actions were taken to alter our existing interest rate sensitivity, a 100 basis
point move in interest rates up or down from their September 30, 2017 levels would result in an increase or decrease in net asset
value of $0.5 million or 1.2%.



Item 4. Controls and Procedures



Our management is responsible
for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rules 13a-15(f)
and 15d-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive
Officer and Chief Financial Officer, or persons performing similar functions, and effected by the Fund’s Board of Directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. GAAP. Based on our management’s evaluation under the
framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), management concluded that our internal controls over financial reporting were not effective as of December
31, 2016.



Because of its inherent
limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to financial
statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.



Management had concluded it had a material
weaknesses resulting from the following:



Subsequent to December
31, 2016, our Board of Directors elected to restate our financial statements for the three and nine months ended September 30,
2016 in order to correct an error in the accounting for certain warrants received in connection with direct loans that we made.
Specifically, we did not assign a cost to the warrants based upon their fair value on the date of receipt relative to the total
fair value of the debt and warrants received. The difference between the face amount of the debt and its recorded cost resulting
from the assignment of value to the warrants is to be treated as original issue discount, and accreted into interest income over
the life of the loan. The change resulted in an increase in net investment income, and a decrease in unrealized appreciation in
the same amount, in each period, and had no impact on our net asset value per share, as previously reported. Management previously
concluded that its disclosure controls were effective for those periods. In response, in 2017 we implemented additional controls
whereby officers will seek outside guidance in regard to accounting for transactions that we have not historically engaged in and
which present novel issues.



In addition, we will also
obtain third party valuations of certain Level 3 assets in certain situations to corroborate managements’ internal valuations
or guide management in valuing such assets, as well as to assist us in enhancing our documentation related to valuing such investments.



We believe the material
weaknesses have been remediated by the additional controls and procedures that have been implemented.



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.



51







Change in Internal Control over Financial Reporting



Other than the additional
controls noted above, there have been no additional changes in internal control over financial reporting (as defined in Rule 13a-15(f)
and 15d-15(f) of the Exchange Act) during the nine months ended September 30, 2017 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.



52







Part II



OTHER INFORMATION



Item 1. Legal Proceedings



On July 30, 2015, Relativity
Media, LLC (“Relativity”) filed a voluntary Chapter 11 case in the United States Bankruptcy Court for the Southern
District of New York (the “Bankruptcy Court”). We own 855,079 shares of Series E Preferred Stock of Relativity. On
October 19, 2015, Relativity filed an adversary proceeding against our Manager in the Bankruptcy Court, styled Relativity Fashion,
LLC, et al. v. VII Peaks Capital, LLC, Adversary No. 15-1361 (the “Adversary Proceeding”), alleging that our Manager
breached a commitment to provide $30.0 million of financing as part of a proposed reorganization of Relativity. We were not named
as a defendant in the Adversary Proceeding. On October 20, 2015, Relativity sought and obtained from the Bankruptcy Court an ex
parte temporary restraining order (the “TRO”) that barred our Manager and “its agents, servants, officers, employees
and attorneys, and all persons in active concert or participation with them from transferring, assigning, encumbering, or taking
any other action with respect to any and all funds” in the US Bank and Wells Fargo accounts which belong to us. Neither us
nor our Manager were provided with prior notice of the hearing on the TRO or was present at the hearing. The two accounts affected
by the TRO contained substantially all of our assets. The TRO was dissolved pursuant to a Stipulation and Agreed Order entered
by the Bankruptcy Court on October 28, 2015 (the “Stipulation”), pursuant to which the parties agreed to engage in
negotiations to resolve their dispute. The negotiations did not result in a settlement.



Relativity then filed a
reorganization plan, which provided that the Series E preferred stock would receive no consideration under the plan. We filed an
objection to the plan. On February 2, 2016, at the hearing on confirmation Relativity’s plan, our Manager and Relativity
reached a memorandum of understanding regarding a settlement of Relativity’s claims against our Manager and us, as well as
our objection to the plan. On March 18, 2016, the Bankruptcy Court approved Relativity’s plan of reorganization, and the
plan became effective on April 14, 2016.



On October 18, 2016, Relativity
filed a motion with the Bankruptcy Court to approve a revised settlement with our Manager under Bankruptcy Rule 9019. Under the
settlement, Relativity would dismiss all claims against our Manager and the funds it manages in consideration for the entry by
Relativity into an Output Distribution Agreement with Divine Distribution, LLC, an affiliate of our Manager. Under the Output Distribution
Agreement, Relativity agreed to grant two US output distribution slots per year for five years for films to be distributed by Relativity
in exchange for a prescribed fee. The motion to approve the settlement agreement was withdrawn on January 23, 2017, by mutual agreement
between our Manager and Relativity. Relativity’s confirmed plan provides that Relativity’s claims will be assigned
to a trust established for its creditors under its plan of reorganization if they are not settled. However, on February 8, 2017,
the principal secured lender to Relativity and Relativity’s co-manager filed a joint motion to convert Relativity’s
case to Chapter 7 liquidation, citing an inability by Relativity to raise capital for its operations and significant defaults on
its debts. A hearing on the conversion motion was held on May 17, 2017. At the hearing, the pending motion to convert the bankruptcy
case to chapter 7 liquidation was dismissed with prejudice by the petitioning creditors. The court did not discuss the adversary
case related to the Fund's matter.



Given the uncertainty surrounding
Relativity, it is not clear if the lawsuit against our Manager will be pursued or dropped. In the event the creditors trust elects
to continue the case, our Manager intends to defend the case vigorously. Our Manager contends, among other things, that the parties
never reached a binding agreement on the terms of an investment and that Relativity has suffered no harm since it has obtained
alternative financing to replace the financing it contends that our Manager did not provide.



53







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, 2016.



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.



54







Item 6. Exhibits



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



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



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



55







SIGNATURES



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



|                        | VII Peaks Co-Optivist Income BDC II, Inc.
|----------------------- | -----------------------------------------
|                        |                                          
|Date: November 14, 2017 | By                                       
|                        |                                          
|                        |                                          
|                        |                                          
|                        |                                          



|                        | VII Peaks Co-Optivist Income BDC II, Inc.
|----------------------- | -----------------------------------------
|                        |                                          
|Date: November 14, 2017 | By                                       
|                        |                                          
|                        |                                          
|                        |                                          
|                        |                                          
|                        |                                          



56