UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549








Form 10-K










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



For
the fiscal year ended December 31, 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 or organization) |  | (I.R.S. Employer Identification Number)



4 Orinda Way, Suite 125-A

Orinda, CA 94563

(Address of principal executive offices)



(855) 889-1778

(Registrant’s telephone number,
including area code)



Not applicable

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








Securities registered pursuant
to Section 12(b) of the Act:

Common Stock, par value

None

Securities registered pursuant to Section 12(g)
of the Act:

Common Stock, par value

$0.001 per share



Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.  Yes ̈ Nox



Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934. Yes ̈ Nox



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 ̈
Nox





Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yesx No ̈



Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x



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.:



|Large accelerated filer ̈ | Accelerated filer ̈ | Non-accelerated filerx | Smaller reporting company ̈ | Emerging growth 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. ̈



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



There is no established
market for the Registrant's shares of common stock. As of June 30, 2017, the last business day of the registrant's most recently
completed second fiscal quarter, the aggregate market value of the registrant's equity held by non-affiliates of the registrant
was approximately $43,613,782 based on net asset value per share of the registrant's common stock on such date.



The number of shares
of the Registrant’s common stock, par value $0.001 per share, outstanding as of November 5, 2018 was 6,511,714.



Documents Incorporated
by Reference



None.


















Forward Looking Statements



The following information
contains statements that constitute forward-looking statements. These statements generally are characterized by the use of terms
such as “may,” “should,” “plan,” “anticipate,” “estimate,” “intend,”
“predict,” “believe,” and “expect” or the negative of these terms or other comparable terminology.
Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our
actual results could differ materially from those set forth in the forward-looking statements.



Forward-looking statements
contained in this Annual Report are subject to a number of risks and uncertainties, some of which are beyond our control, including
statements as to:



| | • | our ability to invest in discounted corporate debt and equity-linked debt securities of our target companies;                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | our ability to successfully employ our Co-Optivist TM 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;
| | • | changes in general economic or business conditions or economic or demographic trends in the United States; and                                            
| | • | the risks, uncertainties and other factors we identify in “Risk Factors” and elsewhere in this annual report.                                             



Our actual results,
performance, prospects or opportunities could differ materially from those expressed in or implied by our forward-looking statements.
A description of some of the risks that could cause our actual results to differ appears under the section “Risk Factors”
and elsewhere in this prospectus. Additional risks of which we are not currently aware or which we currently deem immaterial could
also cause our actual results to differ.



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 prospectus. We undertake no obligation to publicly update or revise any forward-looking statements
after the date of this prospectus, whether as a result of new information, future events or otherwise, except as required by law.



Forward-looking statements
are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as
of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. These forward-looking
statements contained in this prospectus do not meet the safe harbor for forward-looking statements pursuant to Section 27A of the
Securities Act. Actual results could differ materially from those anticipated in forward-looking statements and future results
could differ materially from historical performance.



2









VII PEAKS CO-OPTIVIST INCOME BDC II,
INC.

FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 2017



TABLE OF CONTENTS



|                                                                                                                     | Page
|-------------------------------------------------------------------------------------------------------------------- | ----
|PART I                                                                                                               |     
|                                                                                                                     |     
|Item 1. Business                                                                                                     | 4   
|Item 1A. Risk Factors                                                                                                | 18  
|Item 1B. Unresolved Staff Comments                                                                                   | 36  
|Item 2. Properties                                                                                                   | 36  
|Item 3. Legal Proceedings                                                                                            | 36  
|Item 4. Mine Safety Disclosures                                                                                      | 36  
|PART II                                                                                                              |     
|                                                                                                                     |     
|Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 37  
|Item 6. Selected Financial Data                                                                                      | 39  
|Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations                        | 41  
|Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                                  | 53  
|Item 8. Financial Statements and Supplementary Data                                                                  | 54  
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         | 55  
|Item 9A. Controls and Procedures                                                                                     | 55  
|Item 9B. Other Information                                                                                           | 55  
|PART III                                                                                                             |     
|                                                                                                                     |     
|Item 10. Directors, Executive Officers and Corporate Governance                                                      | 56  
|Item 11. Executive Compensation                                                                                      | 60  
|Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters              | 62  
|Item 13. Certain Relationships and Related Transactions, and Director Independence                                   | 63  
|Item 14. Principal Accountant Fees and Services                                                                      | 64  
|PART IV                                                                                                              |     
|                                                                                                                     |     
|Item 15. Exhibits and Financial Statement Schedules                                                                  | 65  
|Item 16. Form 10-K Summary                                                                                           | 66  
|Signatures                                                                                                           | 67  



3







PART I



Except as otherwise specified in this annual report on Form
10-K (“Annual Report”), the terms:



| | • | “we”, “us”, “our” and the “Fund” refer to VII Peaks Co-Optivist TM Income BDC II, Inc., a Maryland Corporation.
| | - | ---------------------------------------------------------------------------------------------------------------



ITEM 1. BUSINESS



General



We are a specialty
finance company incorporated in Maryland on August 3, 2011. We are 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 (the “1940 Act”).



We are managed by VII
Peaks Capital, LLC, or (the “Manager”), which is registered as an investment adviser with the Securities and Exchange
Commission, or (the “SEC”). We have elected to be treated for federal income tax purposes as a regulated investment
company, or (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”).



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 achieved the minimum offering requirement on July 10, 2012 and commenced operations on such date. As of December 31, 2017, we
issued 6.8 million shares of common stock for gross proceeds of $63.8 million, including $5.9 million under our distribution reinvestment
plan (“DRIP”).



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”, 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) 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. We also make opportunistic debt and preferred equity
investments in private companies.



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. There
can be no assurance that any of these objectives be achieved.



Capital appreciation
on securities is generally not realized evenly over the holding period. In some instances market prices for securities may continue
to reflect a discount until a relatively short time period prior to a redemption event. The potential capital gain typically occurs
during the end of the holding period of a bond in our portfolio when securities are either called by the company or exchanged to
new securities during refinance. We have tendered certain debt securities well above the market-traded deep discount.



Our 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 company’s 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 24 months, during which time we
anticipate working actively with the target companies’ management to effect and/or participate in a restructuring or exchange
of the invested securities for new securities.



We make investments
in target companies that meet our investment criteria. The size of an individual investment will vary based on numerous factors,
including the amount of funds raised in 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.



4







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.



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



Conversion to Closed End Interval Fund



At our adjourned annual
meeting of stockholders held on December 28, 2016, our stockholders (i) approved the withdrawal of our election to be treated as
a business development company; (ii) approved our reorganization as a Delaware Statutory Trust; (iii) approved the amended and
restated investment management agreement with our Manager, and (iv) approved of a fundamental policy whereby we would become an
“interval fund”, under which we would make annual repurchase offers of our shares on or about November 1st
of each calendar year (collectively, the “Reorganization”). We will complete the Reorganization promptly after approval
of an N-2 Registration Statement filed by VII Peaks Co-Optivist Income Fund, a Delaware Statutory Trust, which was formed on January
25, 2017.



Changes to Investment
Advisory Agreement



Set forth below is
a chart that summarizes the differences between our Manager’s current investment advisory agreement and the amended and restated
investment management agreement approved by our shareholders:



|                                       | Current Investment Advisory Agreement                                                                                                                                                                     |  | Proposed Amended and RestatedInvestment Advisory Agreement                                                                                                                                                     
|-------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Fees-Management                        | 2.00% if our net assets are below $100 million; 1.75% if our net assets are between $100 million and $250 million; and 1.50% if our net assets are above $250 million. Fee is payable monthly in arrears. |  | 2.00% if our gross assets are below $100 million; 1.75% if our gross assets are between $100 million and $250 million; and 1.50% if our gross assets are above $250 million. Fee is payable monthly in arrears.
|Incentive Fee on Net Investment Income | 20% of our net investment income above a hurdle rate of 8% per annum, paid quarterly.                                                                                                                     |  | No change.                                                                                                                                                                                                     
|Incentive Fee on Capital Gains         | 20% of our realized capital gains, less realized and unrealized capital losses.                                                                                                                           |  | Eliminated.                                                                                                                                                                                                    
|Future Offering Expenses               | Incurred by our manager and reimbursed at the rate of 1.5% of gross offering proceeds.                                                                                                                    |  | Incurred and paid by us.                                                                                                                                                                                       
|Past Offering Expenses paid by Manager | Only reimbursable to the extent of 1.5% of our gross offering proceeds.                                                                                                                                   |  | No change.                                                                                                                                                                                                     



Conversion to
Interval Fund



In the event the Reorganization
is consummated, our shareholders approved the adoption of a fundamental policy under which we would operate as an “interval
fund” that makes periodic repurchase offers for our common stock. Set forth below is the fundamental policy approved by our
shareholders:



(a) We will make
offers to repurchase our shares at annual intervals pursuant to Rule 23c-3, as amended from time to time. Our Board of Directors
may place such conditions and limitations on repurchases as may be permitted.



(b) November 1st
of each year, or the next business day if November 1st is not a business day, will be the deadline (the “Repurchase
Request Deadline”) by which we must receive repurchase requests submitted by our shareholders in response to the most recent
repurchase offer.



5







(c) The date on
which the repurchase price for shares is to be determined shall occur within fourteen (14) days after the Repurchase Request Deadline.



(d) Repurchase
requests may be suspended or postponed under certain circumstances, as provided for in Rule 23c-3.



Fundamental Investment
Policies and Restrictions



Following our withdrawal
of our election to be treated as a business development company, we will no longer be required to invest at least 70% of our assets
in eligible portfolio securities. Instead, we are required to adopt fundamental policies and restrictions that govern how we may
invest our assets. The stated fundamental policies may only be changed by the affirmative vote of a majority of our outstanding
voting securities. As defined by the Investment Company Act of 1940 (the “1940 Act”), the vote of a “majority
of the outstanding voting securities of the company” means the vote, at an annual or special meeting of the company’s
shareholders duly called, (a) of 66- 2 ⁄ 3% or more of the voting securities present at such meeting, if the holders
of more than 50% of the outstanding voting securities of the company are present or represented by proxy; or (b) of more than
50% of the outstanding voting securities of the company, whichever is less.



Set forth below are
the fundamental policies and restrictions that we expect to adopt upon consummation of the Reorganization:



| | (1) | we may borrow money, except to the extent permitted by the 1940 Act, or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | we may not act as an underwriter of securities of other issuers, except to the extent we may be deemed to be an underwriter when disposing of our own securities.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | we may not make loans if, as a result, more than 33-1/3% of our total assets would be lent to other persons, including other investment companies to the extent permitted by the 1940 Act or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC. This limitation does not apply to (1) the lending of portfolio securities, (2) the purchase of debt securities, other debt instruments, loan participations and/or engaging in direct corporate loans in accordance with our investment goals and policies, and (3) repurchase agreements to the extent the entry into a repurchase agreement is deemed to be a loan.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | we may not purchase or sell real estate unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent us from (i) purchasing or selling securities or instruments secured by real estate or interests therein, securities or instruments representing interests in real estate or securities or instruments of issuers that invest, deal or otherwise engage in transactions in real estate or interests therein, and (ii) making, purchasing or selling real estate mortgage loans.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | we may not purchase or sell physical commodities, unless acquired as a result of ownership of securities or other instruments, provided that this restriction does not prevent us from investing in commodities contracts for the purpose of hedging its investment portfolio, including currency futures, stock index futures, interest rate futures and options thereon.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | we may not issue senior securities, except to the extent permitted by the 1940 Act or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | we may not invest more than 25% of our net assets in securities of issuers in any one industry (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities of other investment companies).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | we will not be limited in the percentage of our assets that may be invested in the securities of any one issuer.
| | --- | ----------------------------------------------------------------------------------------------------------------



With respect to these
investment restrictions (except our policy on borrowings set forth above), if a percentage restriction is adhered to at the time
of our investment or transaction, a later change in percentage resulting from a change in the values of our investments or the
value of our total assets, unless otherwise stated, will not constitute a violation of such restriction or policy.



The 1940 Act currently
limits borrowing to no more than 33-1/3% of the value of our total net assets. In addition, the 1940 Act currently limits the issuance
of a class of senior securities that is indebtedness to no more than 33-1/3% of the value of our total assets or, if the class
of senior security is stock, to no more than 50% of the value of our total assets.



Our Manager



Our investment activities
are managed by our Manager who is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, or
(the “Advisers Act”). 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 is led by Gurpreet (Gurprit) S. Chandhoke, who also serves as our Chief Executive Officer of the
Fund and Stephen Shea, a managing member of VII Peaks Capital, LLC. They are supported by the Manager’s team of employees,
including investment professionals who have extensive experience in underwriting and issuing debt products that include high-yield,
bank debt and convertible debt and have acted as financial advisers to private equity funds, venture capital firms and corporations
in mergers and acquisitions, recapitalization and corporate finance transactions, and have served as principal investors in private
equity and leveraged buyout transactions.



6







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 to discuss new and existing opportunities and developments on current investments. Our investment
committee currently consists of Mr. Chandhoke, our Chief Executive Officer, and Mr. Milton Balbuena, Co-Chief Investment Officer.



Our Affiliates



Our Manager is owned
and managed by Gurpreet (Gurprit) S. Chandhoke, our Chief Executive Officer, and Stephen F. Shea. Founded in April 2009 with principal
offices in Orinda, California, our Manager also manages VII Peaks Co-Optivist B Fund I, LLC, VII Peaks Co-Optivist R Fund I, LLC
and VII Peaks Co-Optivist B Fund II, LLC, and the VII Peaks Direct Lending Fund, which are private funds that were formed to conduct
private placements of securities and which have substantially similar investment objectives as the Fund. As of December 31, 2017,
VII Peaks Co-Optivist B Fund I, LLC, VII Peaks Co-Optivist R Fund I, LLC and VII Peaks Co-Optivist B Fund II, LLC had aggregate
net assets of $3.3 million.



The investment objective,
strategy and fee structure of the private funds are substantially similar to those of VII Peaks Co-Optivist Income BDC II, Inc.
However, the performance of the private funds is not necessarily indicative of our future performance.



Market Opportunity



In the upcoming years,
we believe many companies will face maturities and redemptions on significant amounts of outstanding debt and will have to find
ways to refinance those obligations. See below a chart compiled from S&P for Investment-grade and Speculative-grade USD Bonds
maturing from 2017 to 2027. The charts below show over $4.6 trillion of U.S. based investment-grade bonds to mature between 2017
to 2027 and $445 billion in speculative grade bonds to mature between 2018 and 2022.



U:\TopVin\2018\10 Oct\15 Oct\Shift III\VII Peaks Co-Optivist Income BDC II, Inc. 10-K (tv504875)\Draft\03-Production







7







While companies have
recently taken advantage of the low-interest rate environment to amend and extend their debt maturities, we believe this is only
a temporary push-out of the debt maturity wall without a meaningful reduction in overall outstanding debt. For the foreseeable
future, we expect continued low demand for collateralized debt and soft economic growth to keep credit markets tight. The amount
of speculative-grade debt (“BB+” and lower) coming due will continue to be a large share of overall maturing debt.
Corporate borrowers whose debt carries lower ratings have had difficulty obtaining refinancing and face what we call a “refinancing
wall”. As a result, many companies with speculative-grade debt have chosen to amend-and-extend their maturities rather than
fully refinancing their debt.



Our strategy is to
invest in debt securities that are issued by companies with solid fundamentals and business prospects but who are facing a liquidity
shortfall as they approach the “refinancing wall”. We believe that the expertise and experience of the officers of
our Manager provide us with the ability to identify debt securities that we believe are currently mispriced in the secondary loan
market and thus provide an opportunity for returns as their values recover and appreciate.



Potential Competitive Strengths



We believe that we
have the following potential competitive strengths as compared to investment funds that also invest in discounted corporate debt,
senior secured term loan and equity-linked debt securities:



| | • | We Are Not a Traditional Distressed Fund. Traditional distressed debt investors typically seek to own the debt and engage in a bankruptcy process with the issuing company and eventually become equity holders. Through equity ownership, traditional distressed debt investors then intend to restructure operations of the Fund. In contrast, we do not invest in debt securities with the intent of undergoing a bankruptcy process. We look to partner with management to pro-actively avoid a default and bankruptcy situation. We are focused on restructuring company balance sheets, not company operations.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Investment Hold Period. We will not actively trade in and out of positions. Rather, we hold our investments for an average of 24 months. During this hold period we anticipate working co-operatively with target company management and other debt holders on a debt restructuring or exchange.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Comprehensive Private Equity Due Diligence Approach. We employ a comprehensive private equity approach to our investment due diligence process. This approach involves performing comprehensive business and industry due diligence and in-depth, bottoms-up valuation analyses for each investment, comparable to what a private equity firm with a long-term ownership position would conduct prior to investing in a target company. We believe this disciplined approach serves as an effective risk management tool for our investment process.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Relevant Capital Markets and Investment Experience. Our investment team consists of individuals who collectively have expertise and experience in principal investing, debt securities and general capital markets. The members of our investment team combined have been involved in the issuance of over $20 billion of debt securities, advised on a number of merger and acquisition transactions and invested in a number of private equity and leveraged buyout transactions.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Investment Criteria and Strategy



Secondary
Market Debt Securities



With respect to corporate
debt, senior secured term loan and equity-linked debt securities that we acquire on the secondary market, we invest in discounted
corporate debt and equity-linked debt securities of companies that have a perceived risk of near term liquidity issues but have
solid business fundamentals and prospects, including historical revenue growth, positive cash flow, significant and sustainable
market presence, and sufficient asset coverage. We take a principal position in discounted debt securities with the primary goal
of restructuring the terms of the debt to allow the target company to increase its liquidity and strengthen its balance sheet.
Our typical target company has a debt redemption event (typically either a put or maturity event) on average within 24 months of
our investment and has experienced a significant decline in its equity value reflective of a highly leveraged 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.



The following is our
primary investment criteria for our target company:



| | • | minimum enterprise value of $200 million;
| | - | -----------------------------------------



| | • | solid business fundamentals, such as historic revenue growth, profitability and cash flow generation, and favorable prospects for continued improvement in financial performance;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | sufficient asset coverage of at least one and a half times the amount of our potential investment for outstanding liabilities;
| | - | ------------------------------------------------------------------------------------------------------------------------------



8







| | • | debt or equity-linked debt trading at a discount to par or at a premium yield in secondary loan markets due to a perceived risk of near term liquidity issues;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | balance sheet with debt to total capitalization of at least 50% or high debt to equity ratios; and
| | - | --------------------------------------------------------------------------------------------------



| | • | near term redemption (maturity or put) event on its debt creating an upcoming liquidity shortfall.
| | - | --------------------------------------------------------------------------------------------------



The securities that
we target include high-yield debt, bank debt, convertible debt, and collateralized loan obligations (“CLO”), which
are high-yield loans securitized into pools containing varying degrees of credit rating. Our portfolio is predominantly composed
of fixed-rate high-yield and equity-linked corporate debt securities. However, we may also purchase senior secured corporate debt
securities which may have variable interest rates. We currently anticipate that the portion of our portfolio composed of variable
rate corporate debt securities, if any, will not exceed 20%, but we may increase that to 33% of our aggregate portfolio at the
time of any purchase depending on market opportunities. In addition to the investments noted above, we may invest up to 30% of
our portfolio in opportunistic investments, including, but not limited to, high-yield bonds, private equity investments, distressed
debt investments and securities of public companies that are not thinly traded. We expect that these public companies generally
will have debt securities that are non-investment grade. We also may invest in debt securities of middle-market companies located
outside of the United States. All investments by us will be subject to oversight by our Board of Directors, a majority of whom
will be independent directors with no material interests in such transactions.



In each of our debt
investments, we seek to become an influential investor, typically either through the size of our position or cooperation with other
debt holders to pursue the shared goal of a beneficial debt restructuring. We actively work with other debt holders and the target
company management to potentially restructure and exchange the existing debt for new securities with amended terms. We believe
that a debt restructuring can be a positive outcome for not just the issuer but also its other stakeholders.



| | • | For such issuers and their equity holders, a debt restructuring is typically viewed favorably by the equity markets and may result in price appreciation in the target company equity securities.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | For investors in the existing debt, a restructuring is often effected through an exchange of securities at a premium to current trading levels to compel security holders to participate. The commencement of a restructuring and its perceived improvement to the Fund’s balance sheet represents an opportunity for investors to participate in capital appreciation that may result from a recovery in the value of the debt securities.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | For the issuer, a debt restructuring can potentially improve liquidity and strengthen its balance sheet by allowing the issuer to retire debt at a discount or obtain more favorable repayment terms.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We employ our Co-Optivist
TM approach in executing our investment strategy, which entails taking an influential position and proactively engaging
the target company management on average 24 months prior to a redemption event (typically a put or maturity event). This approach
differs from traditional activist debt holders who typically wait until a company is near or at bankruptcy before beginning formal
discussions regarding debt restructuring options. In addition, our strategy does not involve taking an operational role in the
target company or changing management or members of the target companies’ Board of Directors or actively negotiating the
terms of the restructuring. Rather, we look to establish a positive working relationship in assisting our target company to achieve
shared goals.



9







Below is a summary
of our investment and approval process:







Originated Investment Positions



We also expect to generate
current income through debt and equity investments that we originate, in addition to investments that we acquire on the secondary
market. A secondary objective is to generate long-term capital appreciation through such investments. We anticipate that during
our offering period we will invest largely in over-the-counter debt securities and customized debt and equity investments in lower
middle market companies. We have adopted the following business strategy to achieve our investment objective:



Focus on middle market
companies with stable cash flow.   We believe that there are relatively few finance companies focused on transactions
involving middle market companies, and this is one factor that allows us to negotiate favorable investment terms. Such favorable
terms include higher debt yields and lower leverage levels, more significant covenant protection and greater equity participation
than typical of transactions involving larger companies. We will generally invest in established companies with positive cash flow.
We believe that established companies possess better risk-adjusted return profiles than newer companies that are building management
or in early stages of building a revenue base. These middle market companies represent a significant portion of the U.S. economy
and often require substantial capital investment to grow their businesses.



Employ disciplined underwriting
policies and rigorous portfolio management.   We employ an extensive underwriting process that includes a review
of the prospects, competitive position, financial performance and industry dynamics of each potential portfolio company. In addition,
we perform substantial due diligence on potential investments and seek to invest with management teams and/or private equity sponsors
who have proven capabilities in building value. Through our Manager, we offer managerial assistance to our portfolio companies,
giving them access to our investment experience, direct industry expertise and contacts, and allowing us to continually monitor
their progress. As part of the monitoring process, our Manager analyzes monthly and quarterly financial statements versus the previous
periods and year, review financial projections, meet with management, attend board meetings and review all compliance certificates
and covenants.



Focus on long-term credit
performance and principal protection.   We will structure our customized loan investments on a conservative basis
with high cash yields, first and/or second lien security interests where possible, cash origination fees, and lower relative leverage
levels. Portfolio companies may pay fund manager due diligence fees to cover legal, due diligence, and loan structuring costs.
We will seek strong deal protections for our customized debt investments, including default penalties, information rights, board
observation rights, and affirmative, negative and financial covenants, such as lien protection and prohibitions against change
of control. We believe these protections will reduce our risk of capital loss.



Diversification.
  We seek to diversify our portfolio broadly among companies in a multitude of different industries and end markets,
thereby reducing the concentration of credit risk in any one company or sector of the economy. We cannot guarantee that we will
be successful in this effort.



In addition to the
investments noted above, we may invest up to 30% of our portfolio in opportunistic investments, including, but not limited to,
securities of public companies that are not thinly traded and debt securities of companies located outside of the United States.



10







Investment Exit Strategy



We employ a strict
sell discipline to our investments. As mentioned in our investment selection process, we look for investment opportunities that
provide us with the potential to generate income to support sustainable distributions, even if no restructuring of the debt occurs.
If a debt restructuring has not occurred upon an investment reaching this return threshold, we will continue our efforts to drive
towards a restructuring. If a successful restructuring of the target company debt occurs, we sell a portion of our holdings upon
the next pre-determined sell threshold (which we estimate will be approximately twice the average current yield of high yield bonds),
usually within one to two quarters after the restructuring event. At that time, depending on the market response to the proposed
restructuring, we may choose to exit the entire investment or maintain a small portion to further augment returns.



We anticipate that
it will take approximately two weeks to accumulate our position in a target company. Following that, we expect that it will take
a minimum of an additional two to four weeks to approach management of the target company with a debt restructuring proposal. Assuming
the target company wishes to pursue our debt restructuring proposal, we expect that the restructuring itself will take approximately
three to six months to implement. At any time during this process, if we feel the target company is unwilling to pursue our debt
restructuring proposal, we will seek to dispose of our position in the target company in an orderly manner. We avoid holding the
discounted debt if a redemption event is approaching within six months and there is no existing evidence that this debt will be
restructured.



The diagram below is
illustrative of how we may use our position as an influential debt holder of a target company to restructure its indebtedness.











Portfolio Monitoring



Valuation process.
Each quarter, we value investments in our portfolio, and disclose such values in reports filed with the SEC. Investments for which
market quotations are readily available are recorded at such market quotations. With respect to investments for which market quotations
are not readily available, our Board of Directors, or a committee thereof, determines the fair value of such investments in good
faith, utilizing the input of our valuation committee, our Manager and any other professionals or materials that our Board of Directors,
or a committee thereof, deems worthy and relevant, including independent third-party valuation firms, if applicable.



Managerial assistance.
As a business development company, we must offer, and provide upon request, managerial assistance to certain of our portfolio companies.
This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board
and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial
guidance. Depending on the nature of the assistance required, our Manager will provide such managerial assistance on our behalf
to portfolio companies that request this assistance. To the extent fees are paid for these services, we, rather than our Manager,
will retain any fees paid for such assistance.



Determination of Net Asset Value



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. Securities that are not publicly-traded are valued at fair value as determined in good faith by our Management
and submitted to our Board of Directors, or a committee thereof for review. In connection with that determination, our Manager
will prepare portfolio company valuations using relevant inputs, including, but not limited to, indicative dealer quotes, values
of like securities, the most recent portfolio company financial statements and forecasts, and valuations prepared by a third-party
valuation service annually for certain Level 3 investments.



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



| | · | each portfolio company or investment is 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 including the input and recommendation of members of the investment committee and any third-party valuation firm, if applicable.



11







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



We have adopted Financial
Accounting Standards Board, or FASB, Accounting Standards Codification, or (“ASC”), Topic 820, Fair Value Measurements
and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted
accounting principles and expands disclosures about fair value measurements.



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



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



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



Level 3: Unobservable inputs
for the asset or liability.



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.



Determinations in Connection With Offerings



We last sold our share
in our continuous offering at a price of $8.75 per share: however, we have not sold shares in our continuous offering since April
30, 2015. To the extent that our net asset value increases, we will sell at a price necessary to ensure that shares are not sold
at a price per share, after deduction of selling commissions and dealer manager fees, that is below the net asset value per share.
The closings are typically on a monthly basis. To the extent that the net asset value per share increases subsequent to the last
closing, the price per share may increase. Therefore, persons who subscribe for shares of our common stock in our continuous offering
must submit subscriptions for a certain dollar amount, rather than a number of shares of common stock and, as a result, may receive
fractional shares of our common stock. In connection with each closing on the sale of shares of our common stock offered pursuant
to our prospectus on a continuous basis, the Board of Directors or a committee thereof is required within 48 hours of the time
that each closing and sale is made to make the determination that we are not selling shares of our common stock at a price which,
after deducting selling commissions and dealer manager fees, is below our then current net asset value per share. The Board of
Directors or a committee thereof will consider the following factors, among others, in making such determination:



| | • | the net asset value of our common stock disclosed in the most recent periodic report we filed with the SEC;
| | - | -----------------------------------------------------------------------------------------------------------



| | • | our management’s assessment of whether any material change in the net asset value has occurred (including through the realization of net gains or losses on the sale of our portfolio investments) from the period beginning on the date of the most recently disclosed net asset value to the period ending two days prior to the date of the closing on and sale of our common stock; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | the magnitude of the difference between the net asset value disclosed in the most recent periodic report we filed with the SEC and our management’s assessment of any material change in the net asset value since the date of the most recently disclosed net asset value, and the offering price of the shares of our common stock at the date of closing.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Importantly, this determination
does not require that we calculate net asset value in connection with each closing and sale of shares of our common stock, but
instead it involves the determination by the Board of Directors or a committee thereof that we are not selling shares of our common
stock at a price which, after deducting selling commissions and dealer manager fees, is below the then current net asset value
at the time at which the closing and sale is made.



12







Effective for the February
28, 2013 close and onwards, the Pricing Committee of our Board of Directors increased the share price for new investments from
$10.00 to $10.15 per share due to an increase in our NAV generated from successful refinancings of portfolio companies. On August
8, 2014, the Pricing Committee of our Board of Directors decreased the share price for new investments from $10.15 to $10.00 per
share, and on November 18, 2014 the Pricing Committee of our Board of Directors decreased the share price for new investments from
$10.00 to $9.75 per share. On November 24, 2015, the Board of Directors of the Fund and the Pricing Committee of the Board made
a decision to approve a price reduction from $9.75 to $9.25 per share effective for the Funds next closing date and next declared
distribution date. On May 23, 2016, the Board of Directors of the Fund and the Pricing Committee of the Board made a final decision
to approve a price reduction from $9.25 to $8.75 per share. The decreases in August and November 2014 and November 2015 were made
as a result of reductions in the net asset value per share of the Fund’s common stock, which resulted from three factors:
overall declines in the market prices of high yield debt instruments; declines in the market value of specific positions that have
defaulted or which the market perceives will need to restructure or the ones that have already been restructured into 144A private
placement equity positions for which real pricing is not available; and as a result of distributions made to date in excess of
net investment income. The Fund has also not been able to raise any additional capital since May 2015 because the N-2 has not been
made effective by the SEC. The Pricing Committee of our Board of Directors is required to reassess our offering price when there
is a decrease in NAV per share of more than 5% below our current net offering price, and is required to reduce the offering price
where the decrease in the NAV per share is the result of a non-temporary movement in the credit markets or in the value of our
assets. Our board reviewed market data regarding movements in the credit markets, and the specific circumstances surrounding each
of the positions in our portfolio which had experienced the greatest decline in value, including recent earnings announcements,
collateral, priority in the capital structure, and current indications as to the terms of any restructuring.



Moreover, to the extent
that there is even a remote possibility that we may (i) issue shares of our common stock at a price which, after deducting selling
commissions and dealer manager fees, is below the then current net asset value of our common stock at the time at which the closing
and sale is made or (ii) trigger the undertaking (which we provided to the SEC in the registration statement to which our prospectus
is a part) to suspend the offering of shares of our common stock pursuant to our prospectus if the net asset value fluctuates by
certain amounts in certain circumstances until our prospectus is amended, the Board of Directors or a committee thereof will elect,
in the case of clause (i) above, either to postpone the closing until such time that there is no longer the possibility of the
occurrence of such event or to undertake to determine net asset value within two days prior to any such sale to ensure that such
sale will not be at a price which, after deducting selling commissions and dealer manager fees, is below our then current net asset
value, and, in the case of clause (ii) above, to comply with such undertaking or to undertake to determine net asset value to ensure
that such undertaking has not been triggered.



These processes and
procedures are part of our compliance policies and procedures. Records will be made contemporaneously with all determinations described
in this section and these records will be maintained with other records we are required to maintain under the 1940 Act. Promptly
following any adjustment to the offering price per share of our common stock, we will update our prospectus by filing a prospectus
supplement with the SEC. We will also make updated information available via our website.



Taxation and Election of a Regulated
Investment Company (“RIC”)



We have elected to
be treated as a RIC under Subchapter M of the Code effective for our taxable year ended December 31, 2017, and to annually qualify
as a RIC thereafter. 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 (as described below). 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.



In order to qualify
as a RIC for U.S. federal income tax purposes, we must, among other things:



| | • | elect to be treated as a RIC;
| | - | -----------------------------



| | • | meet the Annual Distribution Requirement;
| | - | -----------------------------------------



| | • | qualify to be treated as a business development company or be registered as a management investment company under the 1940 Act at all times during each taxable year;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock or other securities or currencies or other income derived with respect to our business of investing in such stock, securities or currencies and net income derived from an interest in a “qualified publicly traded partnership” (as defined in the Code), or the 90% Income Test; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | diversify our holdings so that at the end of each quarter of the taxable year (i) at least 50% of the value of our assets consists of cash, cash equivalents, U.S. Government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer (which for these purposes includes the equity securities of a “qualified publicly traded partnership”); and (ii) no more than 25% of the value of our assets is invested in the securities, other than U.S. Government securities or securities of other RICs, (i) of one issuer (ii) of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or (iii) of one or more “qualified publicly traded partnerships,” or the Diversification Tests.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13







Provided that we qualify
as a RIC and satisfy the Annual Distribution Requirement, we will not be subject to U.S. federal income tax on the portion of our
investment company taxable income and net capital gain (which we define as net long-term capital gain in excess of net short-term
capital loss) that we timely distribute to stockholders. We will be subject to U.S. federal income tax at the regular corporate
rates on any income or capital gain not distributed (or deemed distributed) to our stockholders.



We will be subject
to a 4% nondeductible U.S. Federal excise tax on certain undistributed income of RICs unless we distribute in a timely manner an
amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income
for the one-year period ended October 31st in that calendar year and (3) any income recognized, but not distributed,
in preceding years and on which we paid no U.S. federal income tax. We generally will endeavor in each taxable year to avoid any
U.S. Federal excise tax on our earnings.



Management Services and Responsibilities



Under the terms of
the investment advisory agreement, our Manager:



| | • | determines the composition and allocation of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | determines what securities we will purchase, retain or sell;
| | - | ------------------------------------------------------------



| | • | identifies, evaluates, negotiates and structures the investments we make; and
| | - | -----------------------------------------------------------------------------



| | • | executes, monitors and services the investments we make.
| | - | --------------------------------------------------------



Under the investment
advisory agreement, our Manager has a fiduciary responsibility for the safeguarding and use of our assets. Our Manager is also
subject to liability under both the 1940 Act and the Advisers Act for a breach of these fiduciary duties.



Our Manager’s
services under the investment advisory agreement may not be exclusive, and it is free to furnish similar services to other entities
so long as its services to us are not impaired. In addition, our Manager performs certain administrative services under the administration
agreement. See “Administration Agreement”.



Administration Agreement



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



14







License Agreements



We have entered into
a license agreement with VII Peaks under which VII Peaks has agreed to grant us a non-exclusive, royalty-free license to use the
names “VII Peaks” and “Co-Optivist.” Under these agreements, we will have a right to use the “VII
Peaks,” and “Co-Optivist” names for so long as our Manager or one of its affiliates remains our investment adviser.
Other than with respect to these limited licenses, we will have no legal right to the “VII Peaks,” and “Co-Optivist”
names. These license agreements will remain in effect for so long as the investment advisory agreement with our Manager is in effect.



Certain Relationship and Related Party Transactions



Conflicts of interest
between the operation of the Fund and other activities of the Manager and its affiliates and principals are expected to occur from
time to time. The Manager, in its sole judgment and discretion, will try to mitigate such potential adversity by the exercise of
its business judgment in an attempt to fulfill its obligations. However, the Manager has not developed, and does not expect to
develop, any formal process for resolving conflicts of interest. Such conflicts may include:



Competing Programs



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 the Fund. 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 the Fund, 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.



Further, the officers
of VII Peaks 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.



As a business development
company, we will be subject to certain regulatory restrictions in making our investments. For example, we generally will not be
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 will be 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.



Compensation Arrangements



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



Regulation



The election as a business
development company under the 1940 Act contains prohibitions and restrictions relating to transactions between business development
companies and their affiliates (including any investment advisers or sub-advisers), principal underwriters and affiliates of those
affiliates or underwriters and requires that a majority of the directors be persons other than “interested persons”,
as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so
as to cease to be, or to withdraw our election as, a business development company unless approved by “a majority of our outstanding
voting securities” as defined in the 1940 Act.



We may invest up to
100% of our assets in securities acquired directly from issuers in privately negotiated transactions. We do not intend to acquire
securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, except for registered
money market funds, we generally cannot acquire more than 3% of the voting stock of any investment company, invest more than 5%
of the value of our total assets in the securities of one investment company or invest more than 10% of the value of our total
assets in the securities of more than one investment company. With regard to that portion of our portfolio invested in securities
issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses.
None of our investment policies are fundamental and any may be changed without stockholder approval.



As a business development
company, we may be periodically examined by the SEC for compliance with the 1940 Act. Our Adviser is a registered investment adviser
and is also subject to examination by the SEC.



15







We are required to
provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore,
as a business development company, we are prohibited from protecting any director or officer against any liability to us or our
stockholders arising from willful misconduct, bad faith, gross negligence or reckless disregard of the duties involved in the conduct
of such person’s office.



Qualifying Assets



Under the 1940 Act,
a business development company may not acquire any asset other than assets of the type listed in section 55(a) of the 1940 Act,
which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70%
of the company’s total assets. The principal categories of qualifying assets relevant to our business are the following:



Securities purchased
in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited
exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated
person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible
portfolio company is defined in the 1940 Act as any issuer which:



| | • | is organized under the laws of, and has its principal place of business in, the United States;
| | - | ----------------------------------------------------------------------------------------------



| | • | is not an investment company (other than a small business investment company wholly owned by the Fund) or a company that would be an investment company but for certain exclusions under the 1940 Act; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | satisfies either of the following:
| | - | ----------------------------------



| | • | has a market capitalization of less than $250 million or does not have any class of securities listed on a national securities exchange; or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| | • | is controlled by a business development company or a group of companies including a business development company, the business development company actually exercises a controlling influence over the management or policies of the eligible portfolio company, and, as a result thereof, the business development company has an affiliated person who is a director of the eligible portfolio company.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Securities of any eligible portfolio company which we control.
| | - | --------------------------------------------------------------



| | • | Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Securities received in exchange for or distributed on or with respect to securities described above, or pursuant to the exercise of warrants or rights relating to such securities.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



Managerial Assistance to Portfolio Companies



A business development
company must have been organized and have its principal place of business in the United States and must be operated for the purpose
of making investments in the types of securities described in “Regulation – Qualifying Assets” above. However,
in order to count portfolio securities as qualifying assets for the purpose of the 70% test, the business development company must
either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and
solvent companies described above) significant managerial assistance. Where the business development company purchases such securities
in conjunction with one or more other persons acting together, the business development company will satisfy this test if one of
the other persons in the group makes available such managerial assistance. Making available managerial assistance means, among
other things, any arrangement whereby the business development company, through its directors, officers or employees, offers to
provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business
objectives and policies of a portfolio company.



16







Temporary Investments



Pending investment
in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S.
Government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer
to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we invest in money market
funds which invest in highly rated commercial paper, U.S. Government agency notes, U.S. Treasury bills or in repurchase agreements
relating to such securities that are fully collateralized by cash or securities issued by the U.S. Government or its agencies.
A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement
by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount
that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested
in such repurchase agreements. However, certain diversification tests in order to qualify as a RIC for federal income tax purposes
will typically require us to limit the amount we invest with any one counterparty. Our Manager will monitor the creditworthiness
of the counterparties with which we enter into repurchase agreement transactions.



Senior Securities



We are permitted, under
specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset
coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any preferred
stock or publicly traded debt securities are outstanding, we may be prohibited from making distributions to our stockholders or
the repurchasing of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution
or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without
regard to asset coverage.



Code of Ethics



We and our Manager
have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments
and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal
investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance
with the code’s requirements. You may read and copy the code of ethics at the SEC’s Public Reference Room in Washington,
D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. In addition,
the code of ethics is attached as an exhibit to the registration statement of which the prospectus is a part, and is available
on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. You may also obtain copies of the code
of ethics, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov,
or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.



Compliance Policies and Procedures



We have adopted and
implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws. We are required
to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation. Our
Chief Compliance Officer is responsible for administering these policies and procedures.



Proxy Voting Policies and Procedures



We have delegated our
proxy voting responsibility to our Manager. The Proxy Voting Policies and Procedures of our Manager are set forth below. The guidelines
are reviewed periodically by our Manager and our independent directors, and, accordingly, are subject to change.



Introduction



Our Manager is registered
with the SEC as an investment adviser registered under the Advisers Act. As an investment advisor registered under the Advisers
Act, our Manager has fiduciary duties to us. As part of this duty, our Manager recognizes that it must vote client securities in
a timely manner free of conflicts of interest and in our best interests and the best interests of our stockholders. Our Manager’s
Proxy Voting Policies and Procedures have been formulated to ensure decision-making consistent with these fiduciary duties.



These policies and
procedures for voting proxies for our investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6
under, the Advisers Act.



Proxy Policies



The Fund primarily
invests in debt securities, therefore on a rare occasion would the Manager vote a proxy. If a proxy is received, our Manager evaluates
routine proxy matters, such as proxy proposals, amendments or resolutions on a case-by-case basis. Routine matters are typically
proposed by management and our Manager will normally support such matters so long as they do not measurably change the structure,
management control, or operation of the corporation and are consistent with industry standards as well as the corporate laws of
the state of incorporation.



17







Our Manager also evaluates
non-routine matters on a case-by-case basis. Non-routine proposals concerning social issues are typically proposed by stockholders
who believe that the corporation’s internally adopted policies are ill-advised or misguided. If our Manager has determined
that management is generally socially responsible, our Manager will generally vote against these types of non-routine proposals.
Non-routine proposals concerning financial or corporate issues are usually offered by management and seek to change a corporation’s
legal, business or financial structure. Our Manager will generally vote in favor of such proposals provided the position of current
stockholders is preserved or enhanced. Non-routine proposals concerning stockholder rights are made regularly by both management
and stockholders. They can be generalized as involving issues that transfer or realign board or stockholder voting power. Our Manager
typically would oppose any proposal aimed solely at thwarting potential takeovers by requiring, for example, super-majority approval.
At the same time, our Manager believes stability and continuity promote profitability. Our Manager’s guidelines in this area
seek a middle road and individual proposals will be carefully assessed in the context of their particular circumstances. If a vote
may involve a material conflict of interest, prior to approving such vote, our Manager must consult with its Chief Compliance Officer
to determine whether the potential conflict is material and if so, the appropriate method to resolve such conflict. If the conflict
is determined not to be material, our Manager’s employees shall vote the proxy in accordance with our Manager’s proxy
voting policy.



Proxy Voting Records



You may obtain information
about how we voted proxies by making a written request for proxy voting information to:



Chief Compliance
Officer

VII Peaks
Co-Optivist Income BDC II, Inc.

Pine Grove
Financial Center

4 Orinda
Way, Bldg. A, Suite 125A

Orinda, CA
94563



Available Information



We have filed a registration
statement with the SEC on Form N-2, including amendments, relating to the shares we are offering. We have filed a prospectus with
the SEC. The prospectus does not contain all of the information set forth in the registration statement, including any exhibits
and schedules it may contain. For further information concerning us or the shares we are offering, please refer to the registration
statement and prospectus. Statements contained in the prospectus and this 10-K as to the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is made to the copy of any contract or other document filed
as an exhibit to the registration statement or prospectus. Each statement is qualified in all respects by this reference. Any stockholder
and its designated representative are permitted access to our records to which it is entitled under applicable law by all reasonable
times, and may inspect and copy any of them for a reasonable charge. Please see our charter and bylaws for additional information
regarding stockholders’ rights to access our records.



We are required to
file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the
informational requirements of the Securities Exchange Act of 1934. You may inspect and copy these reports, proxy statements and
other information, as well as the registration statement and prospectus with all related exhibits and schedules at the Public Reference
Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. Copies of these reports, proxy and information statements and other information may
be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov ,
or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102. In addition, the SEC maintains an Internet
website that contains reports, proxy and information statements and other information filed electronically by us with the SEC at
http://www.sec.gov.



ITEM 1A. RISK FACTORS



An investment in shares
of our common stock involves a high degree of risk. You should carefully read and consider all of the risks described below, together
with all of the other information contained or referred to in this prospectus, before making a decision to invest in our shares.
If any of the following events occur, our financial condition, business and results of operation, may be materially adversely affected.
In that event, you could lose all or part of your investment. This prospectus also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as
a result of specific factors, including but not limited to the risks described below.



Risks Related to Our Business and Structure



We are a relatively new company and
have a limited operating history, and are subject to the business risks and uncertainties associated with any new business, including
the risk that we will not achieve our business objectives.



We were formed in
2011 and commenced operations in July 2012 when we raised an aggregate of $1.0 million from investors unaffiliated with us or our
Manager. We are subject to all of the business risks and uncertainties associated with any new business, including the risk that
we will not achieve our investment objectives and that the value of our common shares could decline substantially.



18







We face competition for investment
opportunities.



We compete for investments
with other business development companies and investment funds (including private equity funds and mezzanine funds), as well as
traditional financial services companies such as commercial banks and other sources of funding. Moreover, alternative investment
vehicles, such as hedge funds, also make investments in middle market private U.S. companies. As a result, competition for investment
opportunities in private U.S. companies may intensify. Many of our competitors are substantially larger and have considerably greater
financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of capital and access
to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different
risk assessments than we have. These characteristics could allow our competitors to consider a wider variety of investments, establish
more relationships and offer better pricing and more flexible structuring than we are able to do. We may lose investment opportunities
if we do not match our competitors’ pricing, terms and structure. If we are forced to match our competitors’ pricing,
terms and structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital
loss. A significant part of our competitive advantage stems from the fact that the market for investments in private U.S. companies
is under served by traditional commercial banks and other financial sources. A significant increase in the number and/or the size
of our competitors in this target market could force us to accept less attractive investment terms. Furthermore, many of our competitors
may have greater experience operating under, or are not subject to, the regulatory restrictions under the 1940 Act that are imposed
on us as a business development company.



We face competition for assets to manage.



We face competition
from a range of competitors, including mutual funds, private equity, hedge funds, and leveraged buyout funds, for assets to manage.
Many of these entities may have greater financial resources than we do or access to financing on more favorable terms than we will.
Our operating expenses are relatively fixed, and therefore we will have a higher expense ratio, which will decrease returns to
shareholders, to extent we are unable to increase the amount of assets that we manage.



Price declines in the medium- and large-sized corporate
leveraged loan market may adversely affect the fair value of our portfolio, reducing our net asset value through increased net
unrealized depreciation.



Prior to the onset
of the financial crisis that began in 2007, securitized investment vehicles, hedge funds and other highly leveraged non-bank financial
institutions comprised the majority of the market for purchasing and holding senior and subordinated debt. As the trading price
of the loans underlying these portfolios began to deteriorate beginning in the first quarter of 2007, we believe that many institutions
were forced to raise cash by selling their interests in performing assets in order to satisfy margin requirements or the equivalent
of margin requirements imposed by their lenders and/or, in the case of hedge funds and other investment vehicles, to satisfy widespread
redemption requests. This resulted in a forced deleveraging cycle of price declines, compulsory sales, and further price declines,
with falling underlying credit values, and other constraints resulting from the credit crisis generating further selling pressure.



Conditions in the
medium and large-sized U.S. corporate debt market may experience similar disruption or deterioration in the future, which may cause
pricing levels to similarly decline or be volatile. As a result, our net asset value could decline through an increase in unrealized
depreciation and incurrence of realized losses in connection with the sale of our investments, which could have a material adverse
impact on our business, financial condition and results of operations.



Our Board of Directors has full authority
and discretion over the timing and amount of distributions we make, and it may decide to reduce or eliminate distributions at any
time, which may have an adverse effect on your investment.



We expect to continue
to authorize and declare distributions with record and payment dates distributions on a monthly basis to our shareholders. Our
distributions, if any, will be determined by our Board of Directors. There can be no assurances that we will be able to make distributions
or, to the extent we make distributions, the level of distributions declared and paid to our shareholders or our ability to pay
distributions. The target companies in which we invest will generally have near-term liquidity issues that make investments in
them highly speculative. If one or more of our investments in our target companies is not successful, it may adversely impact our
ability to make distributions to shareholders.



Our distributions may exceed our
earnings. Therefore, portions of the distributions that we make may represent a return of capital to you for tax purposes that
will lower your tax basis in your common stock and reduce the amount of funds we have for investment in targeted assets.



Since the Fall of 2013,
our cash distributions to shareholders have been funded partly from capital contributed by shareholders. Prior to the Fall of 2013,
a substantial portion of our distributions were funded by expense reimbursements from our then manager, which are subject to recoupment.
In August 2013, we replaced our then manager with our current Manager, and our current Manager has not entered into an expense
support agreement with us. As a consequence, we do not expect to generate net investment income sufficient to support our projected
dividends unless our current Manager enters into an expense support agreement with us, our mix of interest and dividend paying
assets increase, or until our expense ratio decreases, which we do not expect will happen until we have significantly more assets
than we do at present.



19







Our ability to pay
distributions might be adversely affected by, among other things, the impact of one or more of the risk factors described in this
prospectus. All distributions are and will be paid at the discretion of our Board of Directors and will depend on our earnings,
our financial condition, maintenance of our RIC status, compliance with applicable business development company regulations and
such other factors as our Board of Directors may deem relevant from time to time. We cannot assure you that we will continue to
pay distributions to our shareholders in the future. A return of capital is a return of your investment, rather than a return of
earnings or gains derived from our investment activities. A shareholder will not be subject to immediate taxation on the amount
of any distribution treated as a return of capital to the extent of the shareholder’s basis in its shares; however, the shareholder’s
basis in its shares will be reduced (but not below zero) by the amount of the return of capital, which will result in the shareholder
recognizing additional gain (or a lower loss) when the shares are sold. To the extent that the amount of the return of capital
exceeds the shareholder’s basis in its shares, such excess amount will be treated as gain from the sale of the shareholder’s
shares. Distributions from the proceeds of our public offering or from borrowings also could reduce the amount of capital we ultimately
invest in our portfolio companies.



Purchases of debt securities of financially
stressed companies create an enhanced risk of substantial loss or loss of entire investment.



We may purchase debt
securities of companies that are experiencing significant financial or business stress, including companies involved in bankruptcy
or other reorganization and liquidation proceedings. Such purchases involve a substantial degree of risk and may not show any return
for a considerable period of time. In fact, many of these instruments ordinarily remain unpaid unless and until the company reorganizes
and/or emerges from bankruptcy proceedings, and as a result may have to be held for an extended period of time. The level of analytical
sophistication, both financial and legal, necessary for successful investment in companies experiencing significant business and
financial stress is unusually high. There is no assurance that we will correctly evaluate the nature and magnitude of the various
factors that could affect the prospects for a successful reorganization or similar action. In any reorganization or liquidation
proceeding relating to a company in which we invest, we may lose our entire investment or may be required to accept cash or securities
with a value less than our original investment. Under such circumstances, the returns generated from our investments may not compensate
shareholders adequately for the risks assumed.



Economic activity in the United States was impacted by
the global financial crisis of 2008 and has yet to fully recover.



Beginning in the third
quarter of 2007, global credit and other financial markets suffered substantial stress, volatility, illiquidity and disruption.
These forces reached extraordinary levels in late 2008, resulting in the bankruptcy of, the acquisition of, or government intervention
in the affairs of several major domestic and international financial institutions. In particular, the financial services sector
was negatively impacted by significant write-offs as the value of the assets held by financial firms declined, impairing their
capital positions and abilities to lend and invest. We believe that such value declines were exacerbated by widespread forced liquidations
as leveraged holders of financial assets, faced with declining prices, were compelled to sell to meet margin requirements and maintain
compliance with applicable capital standards. Such forced liquidations also impaired or eliminated many investors and investment
vehicles, leading to a decline in the supply of capital for investment and depressed pricing levels for many assets. These events
significantly diminished overall confidence in the debt and equity markets, engendered unprecedented declines in the values of
certain assets, and caused extreme economic uncertainty.



Economic
activity continued to be somewhat subdued because of declining annual job growth. As a result, corporate interest rate risk premiums,
otherwise known as credit spreads, declined significantly throughout most of 2009 and 2010. However, credit spreads remain slightly
above historical averages, particularly in the loan market. The improving economic and market conditions that have driven these
declines in credit spreads may reverse themselves if uncertainty returns to the markets. Such a reversal could negatively impact
credit spreads as well as our ability to obtain financing, particularly from the debt markets. As a result, corporate interest
rate risk premiums, otherwise known as credit spreads, declined significantly throughout most of 2009 and 2010. However, credit
spreads remain slightly above historical averages, particularly in the loan market. The improving economic and market conditions
that have driven these declines in credit spreads may reverse themselves if uncertainty returns to the markets. Such a reversal
could negatively impact credit spreads as well as our ability to obtain financing, particularly from the debt markets.



The tightening
of the US monetary policy through the increase in Fed interest rate continued in 2017 with three rate increases. The increase in
the Fed rate can have a negative effect on our investments by making it harder and more expensive to refinance capital structures
or even obtain financing.



The tightening of
US monetary policy through increases in the Fed interest rate happened for the first time in nine years in December of 2015.
Per the Fed’s statement, it plans to raise interest rates at a slow (.25%) but steady pace so long as gauges of U.S.
inflation and economic growth improve. The Fed made projections to raise the rate four times in 2016 but only increased the
rate once in December 2016. After expecting three to four rate increases in 2017, the Fed raised rates three times in 2017 to
settle between a range of 1.25% to 1.50%. Through September 2018 the Fed has raised rates an additional three times to 2.25%.
The Fed commented that it will assess economic conditions relative to its objectives of maximum employment and 2% inflation
when determining future adjustments to the target range of the federal funds rate. There can be no guarantee the Fed will
raise rates at the pace they proposed, nor can there be any assurance that the Fed will make sound decisions as to when to
raise rates. The increase in the Fed rate can have a negative effect on our investments by making it harder and more
expensive to refinance capital structures or even obtain financing. Default rates in the US high-yield market currently stand
around 1.6% for the trailing twelve months according to Fitch Ratings. The ratings company forecasts the U.S. high-yield
default rate will finish 2018 at 2%, the lowest rate since 2013 and below the non-recessionary 2.3% average. The average
yield on a U.S. junk bond is now around 5.8%, according to Bank of America Merrill Lynch indexes, below the mean of the last
10 years.



20









Positive global growth paired with hawkish banks and low
volatility overall could have a material adverse effect on the companies we invest in.



Overall, for the year
of 2017 volatility was the lowest it has been in decades, potentially leading to dangerous complacency amid a growing market. The
Fed raised central bank rates three times in 2017, three times through September 2018 and signaled for more to come in 2018. This coincided
with growth momentum in the U.S., in which GDP growth reached 3.3% annualized return in the third quarter while the stock market
experienced strong performance and the oil industry ended on an uptrend as well. U.S. unemployment also dipped 0.6% below its lowest
level since December 2000, 4.1%. Employers also added an average of 174,000 jobs per month for 2017. In the debt markets, the U.S.
is set to sell the most debt in eight years by 2018, which is estimated at $1.3 trillion, more than double the 2017 issuance. Germany’s
government stated the intended to sell more 30-year Bunds during 2018 while interest rates are low, causing the German yield curves
to steepen. An ECB Governing Council member stated Europe may start using interest rates to regulate the economy rather than asset
purchases. However, the fiscal stimulus created by the tax plan overhaul could accelerate overall growth and spur inflation. Within
the High Yield markets, they generated between a 6% and 7% return for the year of 2017, depending on which index you benchmark.
However, potential weakness resides in lowering LIBOR floors, the Fed’s 2% inflation goal and a faster pace of Fed rate hikes.
Leveraged loan markets underperformed compared to High Yield for the year, mostly caused by large refinancing and repricings coupled
with slow Fed rate hikes. The rising rate credit environment and strong global economic growth is potentially creating a dangerously
complacent market. This could have a material adverse effect on the financial markets and economic conditions in the United States
and the rest of the world. It could also limit our ability and the ability of our portfolio companies to obtain financing; it can
also have an adverse material effect on the valuation of our portfolio companies. Overall, 2017 was a fairly positive year in the
equity and bond markets, paving the way for a positive 2018.



A substantial portion of our investment
portfolio may be recorded at fair value as determined in good faith by our Board of Directors, or a committee thereof, and, as
a result, there will be uncertainty as to the value of our portfolio investments.



Under the 1940 Act,
we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value
as determined by our Board of Directors, and a committee thereof. We expect that a substantial portion of our investments will
not trade on a national securities exchange or actively trade on a secondary market, but instead will trade on a privately negotiated
over-the-counter secondary market for institutional investors. As a result, we will value these securities quarterly at fair value
as determined in good faith by our Board of Directors, and a committee thereof.



To the extent that
an investment is not traded, we determine the fair value of the investment by analyzing various fundamental factors, including
the nature and realizable value of any collateral, the portfolio company’s earnings and its ability to make payments on its
indebtedness, the markets in which the portfolio company does business, comparison to comparable publicly-traded companies, discounted
cash flow and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies,
are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value
may differ materially from the values that would have been used if a ready market for these infrequently traded securities existed.



Where a security is
traded on a market, including the over-the-counter secondary market for institutional investors described above, we normally value
the security using only market data, even if the market data consists solely of bid and ask quotes rather than actual trades, and
we disregard fundamental factors that may suggest a different value. The over the counter market for high yield securities has
recently suffered distress due to investor redemptions from high yield debt funds as well as the forced liquidation of a major
high yield debt fund, which has caused the fair value of many of our investments to deviate materially from the values that we
estimate internally based on fundamental factors. Due to these uncertainties, our fair value determinations may cause our net asset
value on a given date to materially understate or overstate the value that we may ultimately realize upon the sale of one or more
of our investments.



Any unrealized losses we experience on our portfolio may
be an indication of future realized losses, and any unrealized gains may not be realized, which could reduce our income available
for distribution.



As a business
development company, we are required to carry our investments at market value or, if no market value is ascertainable, at the fair
value as determined in good faith by our Board of Directors. Decreases in the market values or fair values of our investments are
recorded as unrealized depreciation. Any unrealized losses in our portfolio could be an indication of a portfolio company’s
inability to meet its repayment obligations to us with respect to the affected investments. This could result in realized losses
in the future and ultimately in reductions of our income available for distribution in future periods. In addition, decreases in
the market value or fair value of our investments will reduce our net asset value.



Any unrealized
gains may be reduced if any of our portfolio companies are unable to repay obligations to us within a timely period or if any
portfolio companies experience potential slowdowns in their business.



Our ability to achieve our investment
objective depends on our Manager’s ability to manage and support our investment process. If our Manager were to lose any
members of its senior management team, our ability to achieve our investment objective could be significantly harmed.



We are externally managed
and depend upon the investment expertise, diligence, skill and network of business contacts of our Manager. We also depend, to
a significant extent, on our Manager’s access to the investment professionals and the information and deal flow generated
by these investment professionals in the course of their investment and portfolio management activities. Our Manager will evaluate,
negotiate, structure, close, monitor and service our investments. Our success depends to a significant extent on the continued
service and coordination of our Manager, including its key professionals. The departure of a significant number of our Manager’s
key professionals could have a materially adverse effect on our ability to achieve our investment objective. In addition, we can
offer no assurance that our Manager will remain our investment adviser and sub-adviser or that we will continue to have access
to their investment professionals or their information and deal flow.



21







Changes in laws or regulations governing
our operations may adversely affect our business or cause us to alter our business strategy.



We and our portfolio
companies are subject to regulation at the local, state and federal level. New legislation may be enacted or new interpretations,
rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which
could harm us and our shareholders, potentially with retroactive effect.



Additionally,
any changes to the laws and regulations governing our operations relating to permitted investments may cause us to alter our investment
strategy to avail ourselves of new or different opportunities. Such changes could result in material differences to our strategies
and plans as set forth in our prospectus and may result in our investment focus shifting from the areas of expertise of our Manager
to other types of investments in which our Manager may have less expertise or little or no experience. Thus, any such changes,
if they occur, could have a material adverse effect on our results of operations and the value of your investment.



As a public company, we are subject
to regulations not applicable to private companies, such as provisions of the Sarbanes-Oxley Act. Efforts to comply with such regulations
will involve significant expenditures, and non-compliance with such regulations may adversely affect us.



We are subject to regulations
not applicable to private companies, including certain provisions of the Sarbanes-Oxley Act and the related rules and regulations
promulgated by the SEC. Our management is required to report on our internal control over financial reporting pursuant to Section
404 of the Sarbanes-Oxley Act and rules and regulations of the SEC thereunder. We are required to review on an annual basis our
internal control over financial reporting, and on a quarterly and annual basis, to evaluate and disclose changes in our internal
control over financial reporting.



Management concluded
it had material weaknesses resulting from the following:



The Fund has not been
able to file its December 31, 2017 10-K report or its subsequent 2018 10-Q reports in a timely manner. The Fund had to wait for
the financial statements from its privately held portfolio companies. Those companies are not required to file audited financial
statements and therefore do not have the same reporting deadlines as the Fund. Once financial statements are received by the Fund,
they are forwarded to a third-party to prepare independent valuations of the warrants issued by those companies. To avoid these
delays in the future, management has concluded that it will use the financials from those privately held portfolio companies for
the period ending September 30 to provide to its third-party valuation firm to prepare the December 31 valuations, if their December
31 financials are not available by January 30 of the following year. Management team has brought in additional outside resources to help with completing financial statements in a timely manner.



Subsequent to December
31, 2016, our Board of Directors elected to restate our financial statements for the three and six months ended June 30, 2016,
and 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 will result in an increase in net investment
income, and a decrease in unrealized appreciation in the same amount, in each period, and will have 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. We believe the material deficiency has
been remediated by the additional controls and procedures that have been implemented.



We may in the future
identify additional internal control deficiencies that could rise to the level of a material weakness or uncover errors in our
financial reporting, and such material weaknesses could have a material adverse effect on the accuracy, timeliness and reliability
of our financial reporting, which may have an adverse effect on our financial condition and results of operation as well as the
price of our common stock.



We have a high concentration of our
portfolio in direct loans



We have 42% of our
assets invested in direct loans to privately held companies. Default of any of these direct loans could have an adverse effect
on our portfolio. This would also have an adverse effect on cash flow and our ability to make distributions.



We may experience fluctuations in our quarterly results.



We could experience
fluctuations in our quarterly operating results due to a number of factors, including our ability or inability to make investments
in companies that meet our investment criteria, the interest rate payable on the debt securities we acquire, the level of our expenses,
variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition
in our markets and general economic conditions. As a result of these factors, results for any previous period should not be relied
upon as being indicative of performance in future periods.



22







We may acquire various structured
financial instruments for purposes of “hedging” or reducing our risks, which may be costly and ineffective and could
reduce our cash available for distribution to our stockholders.



We may seek to hedge
against interest rate and currency exchange rate fluctuations and credit risk by using structured financial instruments such as
futures, options, swaps and forward contracts, subject to the requirements of the 1940 Act. Use of structured financial instruments
for hedging purposes may present significant risks, including the risk of loss of the amounts invested. Defaults by the other party
to a hedging transaction can result in losses in the hedging transaction. Hedging activities also involve the risk of an imperfect
correlation between the hedging instrument and the asset being hedged, which could result in losses both on the hedging transaction
and on the instrument being hedged. Use of hedging activities may not prevent significant losses and could increase our losses.
Further, hedging transactions may reduce cash available to pay distributions to our stockholders.



If we internalize our management
functions, your interest in us could be diluted, and we could incur other significant costs associated with being self-managed.



Our Board of Directors
may decide in the future to internalize our management functions. If we do so, we may elect to negotiate to acquire our Manager’s
assets and personnel. At this time, we cannot anticipate the form or amount of consideration or other terms relating to any such
acquisition. Such consideration could take many forms, including cash payments, promissory notes and shares of our common stock.
The payment of such consideration could result in dilution of your interests as a stockholder and could reduce the earnings per
share attributable to your investment.



In addition, while
we would no longer bear the costs of the various fees and expenses we expect to pay to our Manager under the investment advisory
agreement, we would incur the compensation and benefits costs of our officers and other employees and consultants that are being
paid by our Manager or its affiliates. In addition, we may issue equity awards to officers, employees and consultants. These awards
would decrease net income and may further dilute your investment. We cannot reasonably estimate the amount of fees we would save
or the costs we would incur if we became self-managed. If the expenses we assume as a result of an internalization are higher than
the expenses we avoid paying to our Manager, our earnings per share would be lower as a result of the internalization than it otherwise
would have been, potentially decreasing the amount of funds available to distribute to our stockholders and the value of our shares.
As we are currently organized, we do not have any employees. If we elect to internalize our operations, we would employ personnel
and would be subject to potential liabilities commonly faced by employers, such as workers disability and compensation claims and
other employee-related liabilities and grievances.



If we internalize our
management functions, we could have difficulty integrating these functions as a standalone entity. Currently, individuals employed
by our Manager and its affiliates perform asset management and general and administrative functions, including accounting and financial
reporting, for multiple entities. These personnel have a great deal of know-how and experience. We may fail to properly identify
the appropriate mix of personnel and capital needs to operate as a stand-alone entity. An inability to manage an internalization
transaction effectively could thus result in our incurring excess costs and/or suffering deficiencies in our disclosure controls
and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs, and
our management’s attention could be diverted from effectively managing our investments.



In recent years, management
internalization transactions have been the subject of shareholder litigation. Shareholder litigation can be costly and time-consuming,
and there can be no assurance that any litigation expenses we might incur if we were to internalize our management functions would
not be significant or that the outcome of litigation would be favorable to us. Any amounts we are required to expend defending
any such litigation will reduce our net investment income.



Risks Related to our Manager



Our Manager has limited prior experience
managing a Business Development Company or a RIC.



Our Manager was formed
in 2009, has only managed a business development company since 2012, and has limited prior experience managing a business development
company or a RIC. Similarly, members of our Manager’s management team, including our Chief Executive Officer and our Chief
Financial Officer, have no prior experience managing a business development company or RIC. Therefore, our Manager and its management
team may not be able to successfully operate our business or achieve our investment objectives. As a result, an investment in our
shares may entail more risk than the shares of a comparable company with a substantial operating history.



The 1940 Act and the
Code impose numerous constraints on the operations of business development companies and RICs that do not apply to the other types
of investment vehicles. For example, under the 1940 Act, business development companies are required to invest at least 70% of
their total assets primarily in securities of qualifying U.S. private or thinly traded companies. Moreover, qualification for RIC
tax treatment under subchapter M of the Code requires satisfaction of source-of-income, diversification and other requirements.
The failure to comply with these provisions in a timely manner could prevent us from qualifying as a business development company
or a RIC or could force us to pay unexpected taxes and penalties, which could be material. Our Manager has no experience managing
a business development company or RIC. Its lack of experience in managing a portfolio of assets under such constraints may hinder
its ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objectives.



23







Members of our Manager’s management team may engage
in other activities that compete with us.



The officers of our
Manager anticipate devoting a significant portion of their time performing services for other entities. As a result, there may
be conflicts between us and our Manager, including members of its management team regarding the allocation of resources to the
management of our day-to-day activities.



Further, our Manager’s
officers are involved in other ventures, some of which may compete with us for investment opportunities 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.



We may be obligated to pay our Manager
incentive compensation even if we incur a net loss due to a decline in the value of our portfolio.



Our investment advisory
agreement entitles our Manager to receive an incentive fee based on our net investment income regardless of any capital losses.
In such case, we may be required to pay our Manager an incentive fee for a fiscal quarter even if there is a decline in the value
of our portfolio or if we incur a net loss for that quarter.



Any incentive fee payable
by us that relates to our net investment income may be computed and paid on income that may include interest that has been accrued,
but not yet received, including original issue discount, which may arise if we receive warrants in connection with the origination
of a loan or possibly in other circumstances, or contractual payment-in-kind, or (“PIK”), interest, which represents
contractual interest added to the loan balance and due at the end of the loan term. To the extent we do not distribute accrued
PIK interest, the deferral of PIK interest has the simultaneous effects of increasing the assets under management and increasing
the base management fee at a compounding rate, while generating investment income and increasing the incentive fee at a compounding
rate. In addition, the deferral of PIK interest would also increase the loan-to-value ratio at a compounding rate if the issuer’s
assets do not increase in value, and investments with a deferred interest feature, such as PIK interest, may represent a higher
credit risk than loans on which interest must be paid in full in cash on a regular basis. For federal income tax purposes,
we are required to recognize taxable income in some circumstances in which we do not receive a corresponding payment in cash (such
as deferred interest that is accrued as original issue discount or PIK interest) and to make distributions with respect to such
income to maintain our status as a RIC. Under such circumstances, we may have difficulty meeting the annual distribution requirement
necessary to obtain and maintain RIC tax treatment under the Code. This difficulty in making the required distribution may be amplified
to the extent that we are required to pay an incentive fee with respect to such accrued income. As a result, we may have to sell
some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital,
or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify
for RIC tax treatment and thus become subject to corporate-level income tax.



Our incentive fee may induce our
Manager to make speculative investments.



The incentive fee payable
by us to our Manager may create an incentive for it to make investments on our behalf that are risky or more speculative than would
be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to our Manager is determined
may encourage it to use leverage to increase the return on our investments.



Shares of our common stock may be
purchased by the Manager or its affiliates.



Our Manager and its
affiliates may purchase shares of our common stock for any reason deemed appropriate; provided, however, that the Manager and its
affiliates will not purchase or hold more than 5% of our outstanding shares of common stock. The Manager and its affiliates will
not acquire any shares of our common stock with the intention to resell or re-distribute such shares. The purchase of shares by
the Manager or its affiliates could create certain risks, including, but not limited to, the following:



| | • | the Manager or its affiliates may have an interest in disposing of our assets at an earlier date so as to recover their investment in our shares; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



| | • | substantial purchases of shares by the Manager or its affiliates may limit the Manager’s ability to fulfill any financial obligations that it may have to or on our behalf.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our Manager relies on key personnel,
the loss of any of whom could impair its ability to successfully manage us.



Our future success
depends, to a significant extent, on the continued services of the employees of our Manager or its affiliates. The loss of services
of one or more members of our Manager’s management team, including members of our investment committee, could adversely affect
our financial condition, business and results of operations.



24







The compensation we pay to our Manager
was determined without independent assessment on our behalf, and these terms may be less advantageous to us than if they had been
the subject of arm’s-length negotiations.



The compensation we
pay to our Manager was not entered into on an arm’s-length basis with an unaffiliated third party. 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 an unaffiliated third party. However, we believe that the terms of the base management fee that we pay our Manager
is generally more favorable to us than what most or all other externally-managed business development company’s pay their
manager, and the terms of the incentive fee on income and capital gains are roughly the same as what other externally-managed business
development company’s pay their manager.



Security breaches and other disruptions
could compromise our and our Manager’s information and expose us and our Manager to liability, which would cause our business
and reputation to suffer.



In the ordinary course
of our business, we and our Manager store sensitive data, including our proprietary business information and that of our portfolio
companies, and personally identifiable information of our directors, officers and other employees, in our and our Manager’s
data centers and networks. The secure processing, maintenance and transmission of this information is important to our and our
Manager’s operations and business strategy. Despite our security measures, our and our Manager’s information technology
and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions.
Any such breach could compromise our and our Manager’s networks and the information stored there could be accessed, publicly
disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings,
liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations, and damage
our and our Manager’s reputations, and cause a loss of confidence in us and our Manager’s products and services, which
could adversely affect our business.



Risks Related to Business Development Companies



The requirement that we invest a
sufficient portion of our assets in qualifying assets could preclude us from investing in accordance with our current business
strategy; conversely, the failure to invest a sufficient portion of our assets in qualifying assets could result in our failure
to maintain our status as a business development company.



As a business development
company, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect
to such acquisition, at least 70% of our total assets are qualifying assets. Therefore, we may be precluded from investing in what
we believe are attractive investments if such investments are not qualifying assets. Conversely, if we fail to invest a sufficient
portion of our assets in qualifying assets, we could lose our status as a business development company, which would have a material
adverse effect on our business, financial condition and result of operations. Similarly, these rules could prevent us from making
additional investments in existing portfolio companies, which could result in the dilution of our position, or could require us
to dispose of investments at an inopportune time to comply with the 1940 Act. If we were forced to sell non-qualifying investments
in the portfolio for compliance purposes, the proceeds from such sale could be significantly less than the current value of such
investments.



Failure to maintain our status as
a business development company would reduce our operating flexibility.



If we do not remain
a business development company, we might be regulated as a registered closed-end investment company under the 1940 Act, which would
subject us to substantially more regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility.



Regulations governing our operation
as a business development company and RIC will affect our ability to raise, and the way in which we raise, additional capital or
borrow for investment purposes, which may have a negative effect on our growth.



As a result of the
annual distribution requirement to qualify as a RIC, we may need to periodically access the capital markets to raise cash to fund
new investments. We may issue “senior securities,” including borrowing money from banks or other financial institutions
only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such incurrence or issuance.
Our ability to issue different types of securities is also limited. Compliance with these requirements may unfavorably limit our
investment opportunities and reduce our ability in comparison to other companies to profit from favorable spreads between the rates
at which we can borrow and the rates at which we can lend. As a business development company, therefore, we continuously issue
equity at a rate more frequent than our privately owned competitors, which may lead to greater shareholder dilution.



Although we do not
currently use any leverage, we reserve the right to utilize leverage to generate capital to make additional investments. If the
value of our assets declines, we may be unable to satisfy the asset coverage test under the 1940 Act, which could prohibit us from
paying distributions and could prevent us from qualifying as a RIC. If we cannot satisfy the asset coverage test, we may be required
to sell a portion of our investments and, depending on the nature of our debt financing, repay a portion of our indebtedness at
a time when such sales and repayments may be disadvantageous.



25







Under the 1940 Act,
we generally are prohibited from issuing or selling our shares at a price below net asset value per share, which may be a disadvantage
as compared with other public companies. We may, however, sell our shares, or warrants, options or rights to acquire our shares,
at a price below the current net asset value of the shares if our Board of Directors and independent directors determine that such
sale is in our best interests and the best interests of our shareholders, and our shareholders as well as those shareholders that
are not affiliated with us approve such sale. In any such case, the price at which our securities are to be issued and sold may
not be less than a price that, in the determination of our Board of Directors, closely approximates the fair value of such securities.



Various conflicts of interest exist
between us and the roles, activities and duties of the Manager and its affiliates.



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 the Fund. 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.



Our ability to enter into transactions
with our affiliates will be restricted.



We are prohibited under
the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of a majority
of the independent members of our Board of Directors and, in some cases, the SEC. Any person that owns, directly or indirectly,
5% or more of our outstanding voting securities is considered our affiliate for purposes of the 1940 Act and we are generally prohibited
from buying or selling any securities from or to such affiliate, absent the prior approval of our Board of Directors. The 1940
Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in
the same portfolio company (whether at the same or different times), without prior approval of our Board of Directors and, in some
cases, the SEC. If a person acquires more than 25% of our voting securities, we will be prohibited from buying or selling any security
from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such persons,
absent the prior approval of the SEC or adherence to certain interpretive advice from the SEC. Similar restrictions limit our ability
to transact business with our officers or directors or their affiliates. As a result of these restrictions, we may be prohibited
from buying or selling any security from or to any portfolio company of a private equity fund managed by our Manager or its affiliates
without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available
to us.





We are uncertain of our sources for
funding our future capital needs; if we cannot obtain debt or equity financing on acceptable terms, our sell our portfolio investments
or collect our loan payments timely, our ability to acquire investments and to expand our operations will be adversely affected.



Our audited financial
statements for the year ended December 31, 2017 have been prepared assuming we will continue to operate as a going concern. Due
to the high annual fixed costs of running the Fund as a Business Development Company, any working capital reserves we maintain
may not be sufficient for investment purposes, and we may require debt or equity financing to operate. Any loan defaults from portfolio
companies, or our inability to sell such loans, will negatively impact our results of operations, reduce our overall liquidity
and cash flows needed to continue as a going concern. Any defaults would also increase the difficulty in securing alternative sources
of funding, and there can be no assurances that we will be able to obtain such funding on favorable terms or sell our portfolio
investments or collect our loan payments timely. If we are unable to obtain sufficient financing, or sell our investments in a
timely manner, we may be required to reduce, defer, or discontinue certain or all of our operations or we would be less able to
create and maintain a broad portfolio of investments and achieve our investment objective, which may negatively impact our results
of operations and reduce our ability to make distributions to our shareholders or we may not be able to continue as a going concern.



We are a non-diversified investment
company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that
may be invested in securities of a single issuer.



We are classified as
a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with
respect to the proportion of our assets that we may invest in securities of a single issuer. To the extent that we assume large
positions in the securities of a small number of issuers, or within a particular industry, our net asset value may fluctuate to
a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s
assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment
company. However, we will be subject to the diversification requirements applicable to RICs under Subchapter M of the Code.



Risks Related to our Target Investments



Our investments in prospective portfolio
companies may be risky, and we could lose all or part of our investment.



We intend to invest
primarily in senior secured loans, second lien secured loans and subordinated debt of private U.S. companies. We may also invest
in equity securities or securities of foreign companies.



26







Senior secured loans and second
lien secured loans. There is a risk that any collateral pledged by portfolio companies in which we have taken a security interest
may decrease in value over time or lose its entire value, may be difficult to sell in a timely manner, may be difficult to appraise
and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability
of the portfolio company to raise additional capital. To the extent our debt investment is collateralized by the securities of
a portfolio company’s subsidiaries, such securities may lose some or all of their value in the event of the bankruptcy or
insolvency of the portfolio company. Also, in some circumstances, our security interest may be contractually or structurally subordinated
to claims of other creditors. In addition, deterioration in a portfolio company’s financial condition and prospects, including
its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Loans
that are under-collateralized involve a greater risk of loss. Consequently, the fact that a loan is secured does not guarantee
that we will receive principal and interest payments according to the loan’s terms, or at all, or that we will be able to
collect on the loan should we be forced to enforce our remedies.



Subordinated debt. Our
subordinated debt investments will generally rank junior in priority of payment to senior loans and will generally be unsecured.
This may result in a heightened level of risk and volatility or a loss of principal, which could lead to the loss of the entire
investment. These investments may involve additional risks that could adversely affect our investment returns. To the extent interest
payments associated with such debt are deferred, such debt may be subject to greater fluctuations in valuations, and such debt
could subject us and our stockholders to non-cash income. Since we will not receive any principal repayments prior to the maturity
of some of our subordinated debt investments, such investments will be of greater risk than amortizing loans.



Equity investments. We
expect to make select equity investments. In addition, when we invest in senior secured and second lien secured loans or subordinated
debt, we may acquire warrants to purchase equity securities. The equity interests we receive may not appreciate in value and, in
fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do
realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.



Non-U.S. securities. We
may invest in non-U.S. securities, which may include securities denominated in U.S. dollars or in non-U.S. currencies, to the extent
permitted by the 1940 Act. Because evidences of ownership of such securities usually are held outside the United States, we would
be subject to additional risks if we invested in non-U.S. securities, which include possible adverse political and economic developments,
seizure or nationalization of foreign deposits and adoption of governmental restrictions which might adversely affect or restrict
the payment of principal and interest on the non-U.S. securities to investors located outside the country of the issuer, whether
from currency blockage or otherwise. Since non-U.S. securities may be purchased with and payable in foreign currencies, the value
of these assets as measured in U.S. dollars may be affected unfavorably by changes in currency rates and exchange control regulations.



In addition, we invest
in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were
rated. Below investment grade securities, which are often referred to as “junk,” have predominantly speculative characteristics
with respect to the issuer’s capacity to pay interest and repay principal. They may also be difficult to value and illiquid.



Our portfolio companies may incur
debt that ranks equally with, or senior to, our investments in such companies.



Our portfolio companies
may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their
terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which
we are entitled to receive payments with respect to the debt instruments in which we invest. Also, in the event of insolvency,
liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our
investment in that portfolio company would typically be entitled to receive payment in full before we receive any proceeds. After
repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to
us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any
distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or
bankruptcy of the relevant portfolio company.



There may be circumstances where
our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.



If one of our portfolio
companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided managerial
assistance to that portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion
of our claim to that of other creditors. In situations where a bankruptcy carries a high degree of political significance, our
legal rights may be subordinated to other creditors. We may also be subject to lender liability claims for actions taken by us
with respect to a borrower’s business or in instances where we exercise control over the borrower or render significant managerial
assistance.



27







Second priority liens on collateral
securing debt investments that we own may be subject to control by senior creditors with first priority liens. If there is a default,
the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.



Certain debt investments
that we own may be secured on a second priority basis by the same collateral securing first priority debt of such companies. The
first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt
and may secure certain other future debt that may be permitted to be incurred by such company under the agreements governing the
loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation
of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In
addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability
of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral
would be sufficient to satisfy the debt obligations secured by the second priority liens after payment in full of all obligations
secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the
debt obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral,
will only have an unsecured claim against such company’s remaining assets, if any.



The rights we may have
with respect to the collateral securing the debt investments we own with senior debt outstanding may also be limited pursuant to
the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor
agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following
actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the
first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control
the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers
of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights
are adversely affected.



To the extent original issue discount
constitutes a portion of our income, we will be exposed to risks associated with the deferred receipt of cash representing such
income.



Our investments may
include original issue discount instruments. To the extent original issue discount constitutes a portion of our income, we will
be exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to
receipt of cash, including the following:



| | • | Original issue discount instruments may have unreliable valuations because the accruals require judgments about collectability.
| | - | -------------------------------------------------------------------------------------------------------------------------------



| | • | Original issue discount instruments may create heightened credit risks because the inducement to trade higher rates for the deferral of cash payments typically represents, to some extent, speculation on the part of the borrower.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | For accounting purposes, cash distributions to stockholders representing original issue discount income do not come from paid-in capital, although they may be paid from the offering proceeds. Thus, although a distribution of original issue discount income comes from the cash invested by the stockholders, the 1940 Act does not require that stockholders be given notice of this fact.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | In the case of PIK, “toggle” debt, the PIK election has the simultaneous effects of increasing the assets under management, thus increasing the base management fee, and increasing the investment income, thus increasing the incentive fee.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Original issue discount creates risk of non-refundable cash payments to the Advisor based on non-cash accruals that may never be realized.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



We do not expect to control our portfolio
companies.



We do not expect to
control our portfolio companies. As a result, we are subject to the risk that a portfolio company in which we invest may make business
decisions with which we disagree and the management of such company, as representatives of the holders of their common equity,
may take risks or otherwise act in ways that do not serve our interests as debt investors. Due to the limited liquidity for our
debt investments in our portfolio companies, we may not be able to dispose of our interests in our portfolio companies as readily
as we would like or at an appropriate valuation. As a result, a portfolio company may make decisions that could decrease the value
of our portfolio holdings.



We will be exposed to risks associated
with changes in interest rates.



We are subject to financial
market risks, including changes in interest rates. We expect our portfolio to be predominantly composed of fixed-rate high-yield
and equity-linked corporate debt securities, but 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. As of December 31, 2017, we did not hold any variable rate securities in our portfolio. Accordingly, general
interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities and, therefore
may have a material adverse effect on our investment objectives and our rate of return on invested capital.



28







To the extent we borrow funds the potential for gain or
loss on amounts invested in us is magnified and may increase the risk of investing in us.



Borrowings, also known
as leverage, magnify the potential for gain or loss on invested equity capital. To the extent we use leverage to partially finance
our investments, you will experience increased risks associated with investing in our securities. We may borrow from banks and
other lenders and may issue debt securities or enter into other types of borrowing arrangements in the future. Our loan agreements
may contain financial and operating covenants that could restrict our business activities. Breach of any of those covenants could
cause a default under those instruments. Such a default, if not cured or waived, could have a material adverse effect on us. If
the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase
more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause
net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income
in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without
the leverage, while any decrease in our income would cause our net investment income to decline more sharply than it would have
had we not borrowed. Such a decline could negatively affect our ability to make distributions to our stockholders. Leverage is
generally considered a speculative investment technique. While we have used leverage in the past, at December 31, 2017, we did
not have any outstanding leverage, nor did we have a leverage facility available to us.



We invest a portion of our assets
in privately held companies which presents certain challenges, including the lack of available information about these companies.



We invest a large portion of our assets
in privately held companies. Investments in private companies pose certain incremental risks as compared to investments in public
companies including that they:



| | • | have reduced access to the capital markets, resulting in diminished capital resources and ability to withstand financial distress;
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| | • | may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | may have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and changing market conditions, as well as general economic downturns;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, our executive officers, directors and members of our Manager’s management team may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, investments
in private companies tend to be less liquid. The securities of private companies are not publicly traded or actively traded on
the secondary market and are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors.
These privately negotiated over-the-counter secondary markets may be inactive during an economic downturn or a credit crisis. In
addition, the securities in these companies will be subject to legal and other restrictions on resale or will otherwise be less
liquid than publicly traded securities. Also, under the 1940 Act, if there is no readily available market for these investments,
we are required to carry these investments at fair value as determined by our Board of Directors, or a committee thereof. As a
result, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value
at which we had previously recorded these investments. We may also face other restrictions on our ability to liquidate an investment
in a portfolio company to the extent that we, our Manager or any of their respective affiliates have material nonpublic information
regarding such portfolio company or where the sale would be an impermissible joint transaction. The reduced liquidity of our investments
may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.



Finally, little public
information generally exists about private companies and these companies may not have third-party debt ratings or audited financial
statements. Privately-held companies are not required to file periodic reports with the SEC regarding their financial performance
or material business developments nor or they subject to the same SEC regulatory oversight as publicly held companies. In addition,
such companies may not be audited or have similar governance as publicly held companies. We must therefore rely on the ability
of our Manager to obtain adequate information through due diligence to evaluate the creditworthiness and potential returns from
investing in these companies. Additionally, these companies and their financial information will not generally be subject to the
Sarbanes-Oxley Act and other rules that govern public companies. If we are unable to uncover all material information about these
companies, we may not make a fully informed investment decision, and we may lose money on our investments.



Economic recessions or downturns
could impair our portfolio companies and harm our operating results.



Many of our portfolio
companies may be susceptible to economic slowdowns or recessions and may be unable to repay our debt investments during these periods.
Therefore, our non-performing assets are likely to increase, and the value of our portfolio is likely to decrease, during these
periods. Adverse economic conditions may also decrease the value of any collateral securing our first lien or second lien secured
loans. A prolonged recession may further decrease the value of such collateral and result in losses of value in our portfolio and
a decrease in our revenues, net income and net asset value. Unfavorable economic conditions also could increase our funding costs,
limit our access to the capital markets or result in a decision by lenders not to extend credit to us on terms we deem acceptable.
These events could prevent us from increasing investments and harm our operating results.



29







A covenant breach by our portfolio
companies may harm our operating results.



A portfolio company’s
failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination
of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a
portfolio company’s ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses
to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial
covenants, with a defaulting portfolio company.



A lack of liquidity in certain of
our investments may adversely affect our business.



We invest in certain
companies whose securities are not publicly-traded or actively traded on the secondary market and are, instead, traded on a privately
negotiated over-the-counter secondary market for institutional investors and whose securities are subject to legal and other restrictions
on resale or are otherwise less liquid than publicly-traded securities. We also invest in certain companies who issue us warrants
for the shares of their equity which are not traded on the secondary market. The illiquidity of these investments may make it difficult
for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly,
we may realize significantly less than the value at which we had previously recorded these investments. The reduced liquidity of
our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.



Certain macro-economic events may
adversely affect the value of our bond positions and thus may impair our investment performance.



The following risks
may adversely affect the value of our bond positions and thus may impair our investment performance:



| | • | Recession. If the U.S. economy slides back into a recession it may cause a correction in bond prices driving them lower and increasing the cost of borrowing for companies.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Correction in U.S. Treasuries or Broader Bond Markets. U.S. Treasuries and corporate bonds have seen a continued dramatic increase in prices over the past several quarters, driving down yields. A correction or trade out of these fixed income securities could correct bond prices across the board, from Treasuries to corporate debt.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Increase in Corporate Default Rates. Corporate debt default rates and bankruptcy rates have remained relatively flat and remain at extremely low levels (less than 2%). Any significant increase in default rates would depress bond prices as corporate borrowing costs increase.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Inflation. Core inflation in the United States remains under 1%. However, a significant increase in inflation would reduce the real return of debt securities, causing prices to drop.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Monetary Tightening and Rising Interest Rates. The U.S. Federal Reserve has halted the quantitative easing program, after injection of $4.5 trillion over the period from 2008-2015. The program was introduced to steer the world’s largest economy through the financial crisis. It aided in keeping interest rates near an all-time low in the U.S. The long term unintended consequences remain concerning, including excessive risk-taking. As the Fed begins to decrease its debt holdings, it may have adverse effects on the credit markets.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Devaluation of the U.S. Dollar. We invest in the debt securities of issuers domiciled in the United States. As such, the debt securities that we purchase will pay coupons denominated in U.S. dollars. A significant devaluation of the U.S. dollar could lead to lower bond prices as real returns are diminished due to a devalued currency.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Revenue from our investments may not be guaranteed.



We generate investment
income in the form of interest and fees earned on senior secured loans, senior secured notes, subordinated debt, senior unsecured
debt and collateralized securities in our portfolio. The level of income we receive is directly related to the balance of collectible
income producing investments multiplied by the weighted average yield of our investments. There is no guarantee that the companies
we invest in will pay the coupon interest when due.



30







We may be subject to litigation claims
from Relativity.





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”). At the time, we owned 855,079 shares of Series E Preferred Stock of
Relativity. In October 2015, Relativity filed an adversary proceeding against our Manager in the Bankruptcy Court alleging that
our Manager breached a commitment to provide $30 million of financing as part of a proposed reorganization of Relativity. We were
not named as a defendant in the adversary proceeding. However, on October 20, 2015, Relativity sought and obtained from the Bankruptcy
Court an ex parte temporary restraining order, or 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 our US Bank and Wells Fargo accounts. Neither we nor our Manager were
provided with prior notice of the hearing on the TRO or were present at the hearing. The two accounts affected by the TRO contained
substantially all of our assets at the time. The TRO was dissolved pursuant to a Stipulation and Agreed Order entered by the Bankruptcy
Court on October 28, 2015, pursuant to which the parties agreed to engage in negotiations to resolve their dispute. (The negotiations
did not result in a settlement). Following the dissolution of the TRO, our Manager filed a Motion for Summary Judgment in the adversary
proceeding. The motion was fully briefed but never heard by the Court.



In April 2016, Relativity’s
Plan of Reorganization was confirmed by the Court. The Plan provides, among other things, that most claims of the debtor are assigned
to the Liquidating Trust that was established by the confirmed Plan. In 2016, our Manager reached a settlement with Relativity
which settlement was conditioned upon approval by the Bankruptcy Court.  Prior to the time that the reorganized debtor’s
motion for approval of the settlement was set for hearing, such motion was withdrawn by the reorganized debtor on January 25, 2017.
At approximately the same time at the insistence of the Court, the pending Motion for Summary Judgment in the adversary proceeding
was withdrawn without prejudice to the subsequent refilling of such summary judgment motion.



Given the uncertainty
surrounding Relativity, it is not clear if the lawsuit that may involve us and against our Manager will be pursued or dropped.
In the event the creditors trust or the reorganized debtor elects to pursue the case, our Manager intends to vigorously defend
the case. 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.



On February 8, 2017,
the principal secured lender to Relativity and Relativity’s co-manager filed a joint motion to convert Relativity’s
bankruptcy case to Chapter 7 liquidation proceeding, asserting an inability by Relativity to raise capital for its operations and
significant defaults on its debts.  Such motion was withdrawn with prejudice on May 17, 2017. At the hearing, the then-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.



On May 3, 2018, the
reorganized debtor itself filed a voluntary petition for relief under Chapter 11 of title 11 of the United Stated Bankruptcy Code
and has filed a motion to approve the sale of the bulk of its remaining assets. The Bankruptcy Judge ultimately approved such sale.
It is our understanding that such sale has now occurred. The US Trustee moved to dismiss and convert the 2015
bankruptcy proceeding by reason of the Reorganized Debtor’s failure to fulfill its obligations under the confirmed plan.
After hearing and discussion, the Court concluded that at the present time neither dismissal nor conversion is in the best interest
of any party and the Court denied the Motion without prejudice to bringing it again at a future date.



Given the uncertainty
surrounding Relativity, it is not clear if the lawsuit against our Manager will be pursued or dropped. In the event the creditor
or litigation 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.





Risks Related to Our Continuous Offering and Our Shares



If we are unable to raise substantial
funds in our continuous “best efforts” offering, we will be limited in the number and type of investments we may make,
our expense ratio will be higher, and the value of your investment in us may be reduced in the event our assets under-perform.



Our continuous offering
was being made on a best efforts basis by Arete Wealth Management, LLC ("Arete"), our managing broker/dealer and distributor
of the Fund's shares, but that agreement was mutually terminated in October of 2017 since we have not been able to complete the
comment review process with respect to the annual amendment to our Form N-2 registration statement for fiscal 2015, and therefore
have not been able to issue any shares in our continuous offering since April 30, 2015. Our inability to obtain approval of our
Form N-2 amendment in 2015 was partially due to issues that arose from a material weakness in our internal controls that we discovered
in 2015, which has since been remedied, as well as uncertainties regarding the valuation of a material investment we made in Relativity
Media, LLC in 2015. In the middle of 2016, the Board of Directors voted to withdraw our election to be treated as a business development
company and convert the Fund into a closed end fund that elects to be an “interval fund” (the “Reorganization”).
The Reorganization was approved by our shareholders at an adjourned shareholder meeting held on December 28, 2016. As a result
of the Reorganization, we did not resubmit our Form N-2 to the SEC for approval in 2016. We expect to resume offering shares after
the Form N-2 for the reorganized fund is approved by the SEC, and the Reorganization is completed.



To the extent that
less than the maximum number of shares is sold, the opportunity for diversification of our investments may be decreased and the
returns achieved on those investments may be reduced as a result of allocating all of our expenses among a smaller capital base.



31







Investors will not know the purchase
price per share at the time they submit their subscription agreements and could pay a premium for their common stock if our Board
of Directors does not decrease the offering price in the event of a decline in our net asset value, or (“NAV”) per
share.



Prior to consummation
of the Reorganization, our policy has been that the purchase price at which you purchase common stock will be determined at each
monthly closing date to ensure that the sales price, after deducting selling commissions and dealer manager fees, is equal to or
greater than the net asset value of our common stock. In the event of a decrease to our net asset value per share, you could pay
a premium of more than 5.0% for your common stock if our Board of Directors does not decrease the offering price. A decline in
our net asset value per share to an amount more than 5.0% below our current offering price, net of selling commissions and dealer
manager fees, creates a rebuttable presumption that there has been a material change in the value of our assets such that a reduction
in the offering price per share is warranted. This presumption may only be rebutted if our Board of Directors, in consultation
with our management, reasonably and in good faith determines that the decline in net asset value per share is the result of a temporary
movement in the credit markets or the value of our assets, rather than a more fundamental shift in the valuation of our portfolio.
In the event that (i) net asset value per share decreases to more than 5.0% below our current net offering price and (ii) our Board
of Directors believes that such decrease in net asset value per share is the result of a non-temporary movement in the credit markets
or the value of our assets, our Board of Directors will undertake to establish a new net offering price that is not more than 5.0%
above our net asset value per share. If our Board of Directors determines that the decline in our net asset value per share is
the result of a temporary movement in the credit markets or the value of our assets, investors will purchase common stock at an
offering price per share, net of selling commissions and dealer manager fees, which represents a premium to the net asset value
per share of greater than 5.0%.



In the fiscal year
ended 2017, the net asset value of our common stock decreased to an amount more than 5% below our then current offering price.
The decline resulted from three factors: overall declines in the market prices of high yield debt instruments; declines in the
market value of specific positions that have defaulted or which the market perceives will need to restructure or the ones that
have already been restructured into 144A private placement equity positions for which real pricing is not available; and as a result
of distributions made to date in excess of net investment income. The Pricing Committee of our Board of Directors reviewed market
data regarding movements in the credit markets, and the specific circumstances surrounding each of the positions in our portfolio
which had experienced the greatest decline in value, including recent earnings announcements, collateral, priority in the capital
structure, and current indications as to the terms of any restructuring. Based on that analysis, the Board of Directors determined
that a reduction in our gross offering price to $9.25 per share in 2015 and then to $8.75 in 2016 accurately reflected the extent
to which the decline was the result of non-temporary factors in the markets and specific positions. However, the current offering
price of $8.75 is more than 5% greater than the net asset value per share of our common stock. Therefore, investors in our common
stock will experience immediate dilution of their investments.



In the event the Reorganization
is completed, our policy will be that the purchase price of our common stock in monthly closings will be offered at the Fund’s
net asset value (“NAV”) per share, plus the sales load (as described below), as of the first business day of each month. The
NAV per share is computed by dividing the Fund’s NAV by the total number of shares outstanding at the time the determination
is made. A sales load, which includes selling commissions of 6% of the gross proceeds from sales made by selected dealers,
which includes 2% for dealer manager fees, will be paid or charged on sales of shares. The sales load will be deducted from the
proceeds paid to the Fund.



If we are unable to raise substantial
funds in our continuous “best efforts” offering, our distributions may continue to constitute a return of capital or
we may have to reduce our distribution rate.



Since we have commenced
operations, we have implemented a policy of declaring monthly distributions at an annual distribution rate of 7.35% per annum of
our offering price. Our distributions 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. We expect to continue paying distributions at the same distribution
rate, and that a substantial part of those distributions will constitute a return of capital for the foreseeable future. Furthermore,
our ability to generate net investment income sufficient to cover our monthly dividend has been hindered by the fact that we have
a number of portfolio investments that are on non-accrual status, and because we hold more equity investments that do not generate
regular interest or dividend income. Our distributions will continue to constitute a return of capital until our net investment
income is sufficient to support our distribution rate, which will probably not occur until our Manager enters into an expense support
agreement with us, our mix of interest and dividend paying assets increase, or our assets increase enough to lower our expense
ratio, which we do not expect to occur until we have significantly more net assets than we do at present.



If our Board of Directors
elects to maintain the same policy declaring monthly distributions at an annual distribution rate of 7.35% per annum of our offering
price, our distributions may decrease as our offering price decreases.



The shares sold in our continuous
offering will not be listed on an exchange or quoted through a quotation system for the foreseeable future, if ever. Therefore,
if an investor purchase shares in our continuous offering, they will have limited liquidity and may not receive a full return of
their invested capital if they sell their shares.



The shares offered
by us are illiquid assets for which there is not expected to be any secondary market nor is it expected that any will develop in
the foreseeable future. When we initially elected to be treated as a business development corporation, our Board of Directors resolved
that it would, within four years following the completion of our public offering or any subsequent follow-on offering, recommend
that we pursue a liquidity event for our shareholders. However, there was no assurance that we would be able to complete a liquidity
event within such time or at all. A liquidity event could include: (i) a listing of our shares on a national securities exchange;
(ii) a merger or another transaction approved by our Board of Directors in which our shareholders will receive cash or shares of
a listed company; or (iii) a sale of all or substantially all of our assets either on a complete portfolio basis or individually
followed by a liquidation.



32







Prior to the completion
of a liquidity event, our tender offer program provided a limited opportunity for investors to achieve liquidity, subject to certain
restrictions and limitations, at a price which may reflect a discount from the purchase price they paid for their shares being
repurchased. However, we suspended our tender offer program in the third quarter of 2015 and have not determined when we will resume
the tender offer program. Unless and until we resume the tender offer program, or effect another type of liquidity event, shareholders
will not have any realistic options to liquidate their shares.



In mid-2016, our Board
of Directors approved resolutions to withdraw our election to be treated as a business development company and convert the Fund
into a closed end fund that elects to be an “interval fund” (the “Reorganization”). The Reorganization
was approved by our shareholders at an adjourned shareholder meeting held on December 28, 2016. We expect to resume offering shares
after the Form N-2 for the reorganized fund is approved by the SEC, and the Reorganization is completed. The Reorganization includes
the adoption of a fundamental policy under which we would make annual tender offers of between 5% and 25% of our shares on an annual
basis at our net asset value at the time, which will provide shareholders with some liquidity for their shares. Therefore, if the
Reorganization is consummated, we no longer expect to complete an alternative liquidity event.



If the Reorganization
is not completed for any reason, we may still seek to undertake an alternative liquidity event. In making a determination of what
type of liquidity event is in the best interest of our shareholders, our Board of Directors, including our independent directors,
may consider a variety of criteria, including, but not limited to, market conditions, portfolio diversification, portfolio performance,
our financial condition, potential access to capital as a listed company, market conditions for the sale of our assets or listing
of our shares, internal management requirements to become a perpetual life company and the potential for shareholder liquidity.
We can offer no assurance that we will be able to effect a liquidity event. Further, even if we do complete a liquidity event,
you may not receive a return of all of your invested capital.



Beginning with the fourth calendar
quarter of 2013, we began offering a repurchase program for shareholders’ shares on a quarterly basis. However, we are not
required to make repurchases and there can be no assurance we will do so. However, we suspended our tender offer program in the
third quarter of 2015, and have not determined when we will resume the tender offer program. As a result, shareholders may
be unable to sell their shares and, to the extent they are able to sell their shares under the tender offer program, they may not
be able to recover the amount of their investment in our shares. Once conversion of the Fund is complete, an annual tender offer
will be available to shareholders.



Beginning with the
fourth calendar quarter of 2013, we began offering a repurchase program for shareholders to tender their shares on a quarterly
basis at a price equal to 90% of our current offering price as of the date of repurchase. To the extent that we make purchases,
the tender offer program will include numerous restrictions that limit their ability to sell their shares. We intend to limit the
number of shares repurchased pursuant to our proposed tender offer program as follows: (1) we currently intend to limit the number
of shares to be repurchased during any calendar year to 20% of the weighted average number of shares outstanding in the prior calendar
year, or 5% in each quarter; (2) unless shareholders tender all of their shares, shareholders must tender at least 25%
of the amount of shares they have purchased in the offering and must maintain a minimum balance of $5,000 subsequent to submitting
a portion of their shares for repurchase by us; and (3) to the extent that the number of shares put to us for repurchase exceeds
the number of shares that we are able to purchase, we will repurchase shares on a pro rata basis, not on a first-come, first-served
basis. Further, we will have no obligation to repurchase shares if the repurchase would violate the restrictions on distributions
under federal law or Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests
of solvency. These limits may prevent us from accommodating all repurchase requests made in any year. Our Board of Directors may
amend, suspend or terminate the tender offer program upon 30 days’ notice. We will notify shareholders of such developments
(1) in our quarterly reports or (2) by means of a separate mailing to shareholders, accompanied by disclosure in a current or periodic
report under the Exchange Act. In addition, although we have adopted a tender offer program, we have discretion to not repurchase
shareholders’ shares, to suspend the plan, and to cease repurchases. Further, the plan has many limitations and should not
be relied upon as a method to sell shares promptly and at a desired price. We suspended our tender offer program in the third quarter
of 2015. Once the conversion of the Fund is completed, we will resume a tender offer program on an annual basis. Unless and until
we resume the tender offer program, or effect another type of liquidity event, shareholders will not have any realistic options
to liquidate their shares.



The timing of our repurchase offers
pursuant to our tender offer program may be at a time that is disadvantageous to our shareholders.



When we make quarterly
repurchase offers pursuant to our tender offer program, we may offer to repurchase shares at a price that is lower than the price
that investors paid for shares in our offering. As a result, to the extent investors have the ability to sell their shares to us
as part of our tender offer program, the price at which an investor may sell shares, which will be equal to the net asset value
per share on the date of repurchase, may be lower than what an investor paid in connection with the purchase of shares in our offering.



In addition, in the
event an investor chooses to participate in our tender offer program, the investor will be required to provide us with notice of
intent to participate prior to knowing what the net asset value per share will be on the repurchase date. Although an investor
will have the ability to withdraw a repurchase request prior to the repurchase date, to the extent an investor seeks to sell shares
to us as part of our tender offer program, the investor will be required to do so without knowledge of what the repurchase price
of our shares will be on the repurchase date.



33







Your interest in us will be diluted
if we issue additional shares, which could reduce the overall value of an investment in us.



Shareholders do not
have preemptive rights to any shares we issue in the future. Our certificate of incorporation authorizes us to issue 200,000,000
shares of common stock. Pursuant to our certificate of incorporation, a majority of our entire Board of Directors may amend our
certificate of incorporation to increase the number of authorized shares without shareholder approval. After an investor purchases
shares, our board may elect to sell additional shares in the future, issue equity interests in private offerings, or issue share-based
awards to our independent directors or persons associated with the Advisor. To the extent we issue additional equity interests
after an investor purchases shares of our common stock, an investor’s percentage ownership interest in us will be diluted.
In addition, depending upon the terms and pricing of any additional offerings and the value of our investments, you may also experience
dilution in the book value and fair value of your shares of common stock.



Under the 1940 Act,
we generally are prohibited from issuing or selling our common stock at a price below net asset value per share, which may be a
disadvantage as compared with certain public companies. We may, however, sell our common stock, or warrants, options, or rights
to acquire our common stock, at a price below the current net asset value of our common stock if our Board of Directors and independent
directors determine that such sale is in our best interests and the best interests of our stockholders, and our stockholders, including
a majority of those stockholders that are not affiliated with us, approve such sale. In any such case, the price at which our securities
are to be issued and sold may not be less than a price that, in the determination of our Board of Directors, closely approximates
the fair value of such securities (less any distributing commission or discount). If we raise additional funds by issuing common
stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders
at that time will decrease and you will experience dilution.



Under the terms of our charter, our
Board of Directors is authorized to issue shares of preferred stock with rights and privileges superior to common stockholders
without common stockholder approval.



Under the terms of
our charter, our Board of Directors is authorized to issue shares of preferred stock in one or more classes or series without stockholder
approval. The board has discretion to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations
as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series of preferred
stock. Every issuance of preferred stock will be required to comply with the requirements of the 1940 Act. The 1940 Act requires,
among other things, that (1) immediately after issuance and before any distribution is made with respect to our common stock and
before any purchase of common stock is made, such preferred stock together with all other senior securities must not exceed an
amount equal to 50% of our total assets after deducting the amount of such distribution or purchase price, as the case may be,
and (2) the holders of shares of preferred stock, if any are issued, must be entitled as a class to elect two directors at all
times and to elect a majority of the directors if distributions on such preferred stock are in arrears by two years or more. Certain
matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock.



Certain provisions of the Maryland
Corporation Law could deter takeover attempts.



Our bylaws exempt us
from the Maryland Control Share Acquisition Act, which significantly restricts the voting rights of control shares of a Maryland
corporation acquired in a control share acquisition. If our Board of Directors were to amend our bylaws to repeal this exemption
from the Maryland Control Share Acquisition Act, that statute may make it more difficult for a third party to obtain control of
us and increase the difficulty of consummating such a transaction. There can be no assurance, however, that we will not amend our
bylaws at some time in the future. We will not, however, amend our bylaws to make us subject to the Maryland Control Share Acquisition
Act without our Board of Directors determining that doing so would not conflict with the 1940 Act and obtaining confirmation from
the SEC that it does not object to that determination.



Additionally, our Board
of Directors may, without stockholder action, authorize the issuance of shares of stock in one or more classes or series, including
preferred stock. Our Board of Directors may also, without stockholder action, amend our articles of incorporation to increase the
number of shares of stock of any class or series that we have authority to issue. These anti-takeover provisions may inhibit a
change of control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the
value of our common stock.



Investing in our common stock involves
a high degree of risk.



The investments we
make in accordance with our investment objective may result in a higher amount of risk and volatility or loss of principal than
alternative investment options. Our investments in portfolio companies may be highly speculative and aggressive and, therefore,
an investment in our common stock may not be suitable for someone with lower risk tolerance.



The net asset value of our common
stock may fluctuate significantly.



The net asset value
and liquidity, if any, of the market for shares of our common stock may be significantly affected by numerous factors, some of
which are beyond our control and may not be directly related to our operating performance. These factors include:



| | • | significant volatility in the market price and trading volume of securities of business development companies or other companies in our sector, which are not necessarily related to the operating performance of the companies;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | changes in regulatory policies or tax guidelines, particularly with respect to RICs or business development companies;                                                                                                          
| | • | loss of RIC or business development company status;                                                                                                                                                                             
| | • | changes in earnings or variations in operating results;                                                                                                                                                                         





34







| | • | changes in the value of our portfolio of investments;                                              
| | - | ---------------------------------------------------------------------------------------------------
| | • | changes in accounting guidelines governing valuation of our investments;                           
| | • | any shortfall in revenue or net income or any increase in losses from levels expected by investors;
| | • | departure of the Manager or certain of its respective key personnel;                               
| | • | operating performance of companies comparable to us;                                               
| | • | general economic trends and other external factors; and                                            
| | • | loss of a major funding source.                                                                    



Risks Related to Taxation



We will be subject to corporate-level
income tax if we are unable to qualify as a RIC under Subchapter M of the Code or to satisfy RIC distribution requirements.



To maintain RIC tax
treatment under the Code, we must meet the following minimum annual distribution, income source and asset diversification requirements.



The minimum annual
distribution requirement for a RIC will be satisfied if we distribute to our stockholders on an annual basis at least 90% of our
net ordinary taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any.
We would also be taxed on any retained income and/or gains, including any short-term capital gains or long-term capital gains.
We must also satisfy an additional annual distribution requirement during each calendar year in order to avoid a 4% excise tax
on the amount of the under-distribution. Because we may use debt financing, we are subject to an asset coverage ratio requirement
under the 1940 Act and may in the future become subject to certain financial covenants under loan and credit agreements that could,
under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirements. If we are
unable to obtain cash from other sources, we could fail to qualify for RIC tax treatment, or could be required to retain a portion
of our income or gains, and thus become subject to corporate-level income tax.



The income source requirement
will be satisfied if we obtain at least 90% of our income for each year from dividends, interest, gains from the sale of stock
or securities, or similar sources.



The asset diversification
requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year.
To satisfy this requirement, at least 50% of the value of our assets must consist of cash, cash equivalents, U.S. Government securities,
securities of other RICs, and other acceptable securities; and no more than 25% of the value of our assets can be invested in the
securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled,
as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or
of certain “qualified publicly traded partnerships.” Failure to meet these requirements may result in our having to
dispose of certain investments quickly in order to prevent the loss of RIC status. Because a portion of our investments are expected
to be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices
and could result in substantial losses.



If we fail to qualify
for or maintain RIC tax treatment for any reason and are subject to corporate income tax, the resulting corporate taxes could substantially
reduce our net assets, the amount of income available for distribution, and the amount of our distributions.



You may have current tax liability
on distributions you elect to reinvest in shares of our common stock but would not receive cash from such distributions to pay
such tax liability.



If you participate
in our distribution reinvestment plan, you will be deemed to have received, and for U.S. federal income tax purposes will be taxed
on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital.
As a result, unless you are a tax-exempt entity, you may have to use funds from other sources to pay your tax liability on the
value of our common stock received from the distribution.



We may have difficulty paying our required distributions
if we recognize income before or without receiving cash representing such income.



For federal income
tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment
in cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount
(such as debt instruments with PIK, interest or, in certain cases, increasing interest rates or debt instruments that were issued
with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the
obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to
include in income other amounts that we have not yet received in cash, such as deferred loan origination fees that are paid after
origination of the loan or are paid in non-cash compensation such as warrants or stock. Furthermore, we may invest in non-U.S.
corporations (or other non-U.S. entities treated as corporations for U.S. federal income tax purposes) that could be treated under
the Code and U.S. Treasury regulations as “passive foreign investment companies” and/or “controlled foreign corporations.”
The rules relating to investment in these types of non-U.S. entities are designed to ensure that U.S. taxpayers are either, in
effect, taxed currently (or on an accelerated basis with respect to corporate level events) or taxed at increased tax rates at
distribution or disposition. In certain circumstances this could require us to recognize income where we do not receive a corresponding
payment in cash.



35







We anticipate that
a portion of our income may constitute original issue discount or other income required to be included in taxable income prior
to receipt of cash. Further, we may elect to amortize market discounts and include such amounts in our taxable income in the current
year, instead of upon disposition, as an election not to do so would limit our ability to deduct interest expenses for tax purposes.



Because any original
issue discount or other amounts accrued will be included in our investment company taxable income for the year of the accrual,
we may be required to make a distribution to our stockholders in order to satisfy the annual distribution requirement, even if
we will not have received any corresponding cash amount. As a result, we may have difficulty meeting the annual distribution requirement
necessary to obtain and maintain RIC tax treatment under the Code. We may have to sell some of our investments at times and/or
at prices we would not consider advantageous, raise additional debt or equity capital, make a partial share distribution, or forgo
new investment opportunities for this purpose. If we are not able to obtain cash from other sources, and choose not to make a qualifying
share distribution, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.



ITEM 1B. UNRESOLVED STAFF COMMENTS



Not applicable.



ITEM 2. PROPERTIES



We do not own any real
estate or other physical properties materially important to our operation. Our executive offices are located at Pine Grove Financial
Center, 4 Orinda Way, Bldg. A, Suite 125-A, Orinda, CA 94563. We believe that our current office facilities are adequate for our
business as we intend to conduct it.



ITEM 3. 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”). At the time, we owned 855,079 shares of Series E Preferred Stock of
Relativity. In October 2015, Relativity filed an adversary proceeding against our Manager in the Bankruptcy Court alleging that
our Manager breached a commitment to provide $30 million of financing as part of a proposed reorganization of Relativity. We were
not named as a defendant in the adversary proceeding. However, on October 20, 2015, Relativity sought and obtained from the Bankruptcy
Court an ex parte temporary restraining order, or 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 our US Bank and Wells Fargo accounts. Neither we nor our Manager were
provided with prior notice of the hearing on the TRO or were present at the hearing. The two accounts affected by the TRO contained
substantially all of our assets at the time. The TRO was dissolved pursuant to a Stipulation and Agreed Order entered by the Bankruptcy
Court on October 28, 2015, pursuant to which the parties agreed to engage in negotiations to resolve their dispute. (The negotiations
did not result in a settlement). Following the dissolution of the TRO, our Manager filed a Motion for Summary Judgment in the adversary
proceeding. The motion was fully briefed but never heard by the Court.



In April 2016, Relativity’s
Plan of Reorganization was confirmed by the Court. The Plan provides, among other things, that most claims of the debtor are assigned
to the Liquidating Trust that was established by the confirmed Plan. In 2016, our Manager reached a settlement with Relativity
which settlement was conditioned upon approval by the Bankruptcy Court.  Prior to the time that the reorganized debtor’s
motion for approval of the settlement was set for hearing, such motion was withdrawn by the reorganized debtor on January 25, 2017.
At approximately the same time at the insistence of the Court, the pending Motion for Summary Judgment in the adversary proceeding
was withdrawn without prejudice to the subsequent refilling of such summary judgment motion.



Given the uncertainty
surrounding Relativity, it is not clear if the lawsuit that may involve us and against our Manager will be pursued or dropped.
In the event the creditors trust or the reorganized debtor elects to pursue the case, our Manager intends to vigorously defend
the case. 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.



On February 8, 2017,
the principal secured lender to Relativity and Relativity’s co-manager filed a joint motion to convert Relativity’s
bankruptcy case to Chapter 7 liquidation proceeding, asserting an inability by Relativity to raise capital for its operations and
significant defaults on its debts.  Such motion was withdrawn with prejudice on May 17, 2017. At the hearing, the then-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.



On May 3, 2018, the
reorganized debtor itself filed a voluntary petition for relief under Chapter 11 of title 11 of the United Stated Bankruptcy Code
and has filed a motion to approve the sale of the bulk of its remaining assets. The Bankruptcy Judge ultimately approved such sale.
It is our understanding that such sale has now occurred. The US Trustee moved to dismiss and convert the 2015
bankruptcy proceeding by reason of the Reorganized Debtor’s failure to fulfill its obligations under the confirmed plan.
After hearing and discussion, the Court concluded that at the present time neither dismissal nor conversion is in the best interest
of any party and the Court denied the Motion without prejudice to bringing it again at a future date.



Given the uncertainty
surrounding Relativity, it is not clear if the lawsuit against our Manager will be pursued or dropped. In the event the creditor
or litigation 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.





ITEM 4. MINE SAFETY DISCLOSURES



Not applicable.



36







PART II



ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



Our authorized stock
consists of 250,000,000 shares of stock, par value $0.001 per share, of which 200,000,000 shares are classified as common stock
and 50,000,000 shares are classified as preferred stock. There is currently no market for our common stock, and we do not expect
that a market for our shares will develop in the future. No stock has been authorized for issuance under any equity compensation
plans. Under Maryland law, our stockholders generally will not be personally liable for our debts or obligations.



We last sold our shares
in our continuous offering at a price of $8.75 per share; however, we have not sold shares in our continuous offering since April
30, 2015. In connection with each closing on the sale of shares of our common stock pursuant to our prospectus, as amended or supplemented,
which relates to our public offering of common stock on a continuous basis, our Board of Directors or a committee thereof is required
to make the determination that we are not selling shares of our common stock at a price per share, after deduction of selling commissions
and dealer manager fees, that is below our then current net asset value per share within 48 hours of the time that we price our
shares. Closings are typically monthly. For the year ended December 31, 2015, we had one price reduction. On November 24, 2015,
the Board of Directors of the Fund and the Pricing Committee of the Board made a final decision to approve a price reduction from
$9.75 to $9.25 per share effective for the Funds next closing date and next declared distribution date. For the year ended December
31, 2016, we had one price reduction. On May 23, 2016, the Board of Directors of the Fund and the Pricing Committee of the Board
made a final decision to approve a price reduction from $9.25 to $8.75 per share. For the year ended December 31, 2017, we had
no price reduction.



A decline in our net
asset value per share to an amount more than 5.0% below our current offering price, net of selling commissions and dealer
manager fees, creates a rebuttable presumption that there has been a material change in the value of our assets such that a reduction
in the offering price per share is warranted. This presumption may only be rebutted if our Board of Directors, in consultation
with its management, reasonably and in good faith determines that the decline in net asset value per share is the result of a temporary
movement in the credit markets or the value of our assets, rather than a more fundamental shift in the valuation of our portfolio.
In the event that (i) net asset value per share decreases to more than 5.0% below our current net offering price and (ii) our Board
of Directors believes that such decrease in net asset value per share is the result of a non-temporary movement in the credit markets
or the value of our assets, the Board of Directors will undertake to establish a new net offering price that is not more than 5.0%
above our net asset value per share.



In the fiscal years
ended 2015 and 2016, the net asset value of our common stock decreased to an amount more than 5% below our then current offering
price. The declines resulted from three factors: overall declines in the market prices of high yield debt instruments; declines
in the market value of specific positions that have defaulted or which the market perceives will need to restructure or the ones
that have already been restructured into 144A private placement equity positions for which real pricing is not available; and as
a result of distributions made to date in excess of net investment income. The Pricing Committee of our Board of Directors reviewed
market data regarding movements in the credit markets, and the specific circumstances surrounding each of the positions in our
portfolio which had experienced the greatest decline in value, including recent earnings announcements, collateral, priority in
the capital structure, and current indications as to the terms of any restructuring. Based on that analysis, the Board of Directors
determined that a reduction in our gross offering price to $9.25 per share in 2015 and then to $8.75 in 2016 accurately reflected
the extent to which the decline was the result of non-temporary factors in the markets and specific positions. However, the current
offering price of $8.75 is more than 5% greater than the net asset value per share of our common stock. Therefore, investors in
our common stock will experience immediate dilution of their investments.



Set forth below is
a chart describing the classes of our securities outstanding as of December 31, 2017:



|Title of Class                           |  | AmountAuthorized |             |  | AmountOutstanding | 
|---------------------------------------- |  | ---------------- | ----------- |  | ----------------- | 
|Common Stock, par value $0.001 per share |  | $                | 200,000,000 |  |                   | 



During the three months
ended December 31, 2017, we issued 34,354.67 shares of common stock for consideration of $285,573 under our dividend reinvestment
program. As of December 31, 2017, we had 1,541 record holders of our common stock.



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. 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.



37







Based upon our current
level of operations, we estimate that approximately 55% 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 return
of capital since January 2015:



|Period                                    |  | Per Share |          |  | NetInvestmentIncome |  |    | RealizedGain FromInvestments |  |  | ReturnofCapital |  
|----------------------------------------- |  | --------- | -------- |  | ------------------- |  | -- | ---------------------------- |  |  | --------------- | -
|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 | %                            |  |  | —               | %
|October 1, 2017 – December 31, 2017****** |  |           | 0.160779 |  |                     |  | 50 | %                            |  |  | —               | %



* 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. The allocation of the distributions between net investment income and return of capital are different than
previously reported as a result of the correction of an accounting error. For further detail, please see Item 9A Controls and Procedures.



**** 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. The allocation of the
distributions between net investment income and return of capital are different than previously reported as a result of the correction
of an accounting error. For further detail, please see Item 9A Controls and Procedures.



***** 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.



****** For the period
from October 1, 2017 to December 31, 2017, the Fund had a realized loss from investments of approximately $3.5 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 as declared by our Board of Directors, 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 a 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
if, 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.



38







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 31st
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 fiscal years ended December 31, 2017, 2016 and 2015:



|Source of Distributions:                        |  | Year endedDecember 31, 2017 |       |  | Year endedDecember 31, 2016 |  |       | Year endedDecember 31, 2015 | 
|----------------------------------------------- |  | --------------------------- | ----- |  | --------------------------- |  | ----- | --------------------------- | 
|Distributions from net investment income        |  | $                           | 1,681 |  |                             |  | 40.8  | %                           | 
|Distributions from realized gain on investments |  |                             | 98    |  |                             |  | 2.4   | %                           | 
|Distributions from paid in capital              |  |                             | 2,339 |  |                             |  | 56.8  | %                           | 
|Total                                           |  | $                           | 4,118 |  |                             |  | 100.0 | %                           | 



Distribution Reinvestment Plan



We have adopted an
“opt-in” distribution reinvestment plan (“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.



ITEM 6. SELECTED FINANCIAL DATA



The following selected
financial data as of and for the years ended December 31, 2017 and 2016 was derived from our financial statements, which has been
audited by OUM & Co. LLP, our independent registered public accounting firm as stated in their report. The selected financial
data as of and for the years ended December 31, 2015, 2014, and 2013 was derived from our financial statements, which was audited
by BPM LLP. The data should be read in conjunction with our financial statements and related notes thereto and “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report (dollars in thousands
except share and per share data):



39







|                                                                |  | As of andfor theYear EndedDecember 31,2017 |        |   | As of andfor theYear EndedDecember 31,2016 |   |        | As of andfor theYear EndedDecember 31,2015 |  |   | As of andfor theYear EndedDecember 31,2014 |    |  | As of andfor theYear EndedDecember 31,2013 |       
|--------------------------------------------------------------- |  | ------------------------------------------ | ------ | - | ------------------------------------------ | - | ------ | ------------------------------------------ |  | - | ------------------------------------------ | -- |  | ------------------------------------------ | ------
|Statement of operations data:                                   |  |                                            |        |   |                                            |   |        |                                            |  |   |                                            |    |  |                                            |       
|Total investment income                                         |  | $                                          | 4,234  |   |                                            | $ | 3,120  |                                            |  | $ | 3,512                                      |    |  | $                                          | 3,260 
|Operating expenses                                              |  |                                            |        |   |                                            |   |        |                                            |  |   |                                            |    |  |                                            |       
|Total operating expenses                                        |  |                                            | 2,553  |   |                                            |   | 2,651  |                                            |  |   | 2,682                                      |    |  |                                            | 2,441 
|Less: Expense waivers and reimbursements                        |  |                                            | -      |   |                                            |   | -      |                                            |  |   | -                                          |    |  |                                            | -     
|Net expenses                                                    |  |                                            | 2,553  |   |                                            |   | 2,651  |                                            |  |   | 2,682                                      |    |  |                                            | 2,441 
|Net investment income                                           |  |                                            | 1,681  |   |                                            |   | 469    |                                            |  |   | 830                                        |    |  |                                            | 819   
|Realized and unrealized gain (loss), net                        |  |                                            | 15,225 |   |                                            |   | 7,145  |                                            |  |   | (14,189                                    | )  |  |                                            | (6,093
|Net increase (decrease) in net assets resulting from operations |  | $                                          | 16,906 |   |                                            | $ | 7,614  |                                            |  | $ | (13,359                                    | )  |  | $                                          | (5,274
|Per share data - basic and diluted:                             |  |                                            |        |   |                                            |   |        |                                            |  |   |                                            |    |  |                                            |       
|Net investment income                                           |  | $                                          | 0.26   |   |                                            | $ | 0.07   |                                            |  | $ | 0.14                                       |    |  | $                                          | 0.19  
|Net realized and unrealized gain (loss) on investments          |  | $                                          | 2.38   |   |                                            | $ | 1.15   |                                            |  | $ | (2.34                                      | )  |  | $                                          | (1.42 
|Net increase (decrease) in net assets resulting from operations |  | $                                          | 2.64   |   |                                            | $ | 1.22   |                                            |  | $ | (2.20                                      | )  |  | $                                          | (1.23 
|Distributions declared                                          |  | $                                          | (0.65  | ) |                                            | $ | (0.60  | )                                          |  | $ | (0.74                                      | )  |  | $                                          | (0.73 
|Balance sheet data:                                             |  |                                            |        |   |                                            |   |        |                                            |  |   |                                            |    |  |                                            |       
|Investments at fair value                                       |  | $                                          | 47,495 |   |                                            | $ | 40,345 |                                            |  | $ | 26,722                                     |    |  | $                                          | 37,428
|Investments in money market funds – at fair value               |  | $                                          | 18     |   |                                            | $ | 157    |                                            |  | $ | 6,210                                      |    |  | $                                          | 3,104 
|Total assets                                                    |  | $                                          | 48,430 |   |                                            | $ | 41,219 |                                            |  | $ | 33,689                                     |    |  | $                                          | 42,381
|Total liabilities                                               |  | $                                          | 797    |   |                                            | $ | 7,537  |                                            |  | $ | 5,199                                      |    |  | $                                          | 1,693 
|Total net assets                                                |  | $                                          | 47,633 |   |                                            | $ | 33,682 |                                            |  | $ | 28,490                                     |    |  | $                                          | 40,688
|                                                                |  |                                            |        |   |                                            |   |        |                                            |  |   |                                            |    |  |                                            |       
|Other data:                                                     |  |                                            |        |   |                                            |   |        |                                            |  |   |                                            |    |  |                                            |       
|Total return                                                    |  |                                            | 49.52  | % |                                            |   | 23.62  | %                                          |  |   | (32.37                                     | )% |  |                                            | (8.88 
|Number of portfolio company investments at period end           |  |                                            | 16     |   |                                            |   | 29     |                                            |  |   | 33                                         |    |  |                                            | 45    
|Total portfolio investments for the year                        |  | $                                          | 7,785  |   |                                            | $ | 36,545 |                                            |  | $ | 23,245                                     |    |  | $                                          | 31,308
|Investment sales and repayments for the year                    |  | $                                          | 17,343 |   |                                            | $ | 30,593 |                                            |  | $ | 19,688                                     |    |  | $                                          | 11,765



40







ITEM 7. 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.



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



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”), 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.



41







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



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



| | Level 2: | Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices. 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. Five of the forty-three investments were valued
using the closing market price at year end December 31, 2017.



The following table
presents investments that are not publicly traded or have no closing market price, as of December 31, 2017:



|PortfolioCompany                                        |  | AssetType                       |  |  | InvestmentCoupon Rate |       |   | MaturityDate
|------------------------------------------------------- |  | ------------------------------- |  |  | --------------------- | ----- | - | ------------
|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(8)                                |  | Senior Secured First Lien Debt  |  |  |                       | 12.00 | % |             
|Ansgar Media, LLC (8)                                   |  | Senior Secured First Lien Debt  |  |  |                       | 12.00 | % |             
|Aspect Software, Inc. (1)                               |  | Equity – Common Stock           |  |  |                       | —     |   |             
|Aspire Holdings (2)                                     |  | Equity – Common Stock           |  |  |                       | —     |   |             
|Colt Defense, LLC (3)                                   |  | 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. (4)                                   |  | Senior Secured First Lien Debt  |  |  |                       | 12.00 | % |             
|GeoCommerce, Inc. (4)                                   |  | Senior Secured First Lien Debt  |  |  |                       | 12.00 | % |             
|GeoCommerce, Inc. (4)                                   |  | 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 (6)                                           |  | Senior Secured First Lien Debt  |  |  |                       | 12.00 | % |             
|Nima, LLC (6)                                           |  | Senior Secured First Lien Debt  |  |  |                       | 12.00 | % |             
|Nima, LLC (6)                                           |  | 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                         |  |  |                       | —     |   |             
|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                                       |  | Senior Secured First Lien Debt  |  |  |                       | 13.00 | % |             
|Vieste Group, LLC                                       |  | Warrant                         |  |  |                       | —     |   |             



| | (1) | 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, the 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.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Converted from exchange of 12.00% Endeavour International Corp, senior secured first lien debt.                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3) | 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.                                                                                                                                                                          
| | (4) | GeoCommerce, Inc. has requested loan extensions for the loans in default.  We have sent those extensions along with our reservation of rights letters. However, GeoCommerce, Inc. has not taken any action on the loan extensions as they are working to secure third-party financing
to repay the loans.             
| | (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) | Nima, LLC is currently in default of three of their loans. We are currently in discussion with Nima, LLC to either extend the loans or renegotiate the terms.                                                                                                                                                         
| | (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. 
| | (8) | We expect to give loan extensions to Ansgar Media, LLC                                                                                                                                                                                                                                                                



42







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:



| | • | 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  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, 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.



43







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. 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 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.



44







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 year ended
December 31, 2017, we made $7.8 million of investments in new and existing portfolio companies and had $17.3 million in aggregate
amount of exits, maturities and repayments, resulting in net repayments of $9.5 million for the year. During the year ended December
31, 2016, we made $36.5 million of investments in new and existing portfolio companies and had $30.6 million in aggregate amount
of exits, maturities and repayments, resulting in net investments of $5.9 million for the year. During the year ended December
31, 2015, we made $23.2 million of investments in new and existing portfolio companies and had $19.7 million in aggregate amount
of exits, maturities and repayments, resulting in net investments of $3.5 million for the year.



As of December 31,
2017, we have invested an aggregate of approximately $29.5 million in forty-three investment positions in sixteen portfolio companies.
On December 31, 2017, the fair value of our investment positions was $48.1 million (including money market investments of approximately
$.02 million and the interest receivable of $0.6 million). As of such date, our estimated gross annual portfolio yield was 12.1%
and gross annual portfolio yield to maturity was 12.1% (excluding equity investments and non-accrual investments) based on the
purchase price of our investments. The average duration of our debt portfolio was approximately 1.0 year. During the year ended
December 31, 2017, eight T-bills matured, we exited nine portfolio companies in full and two companies in partial, for aggregate
sales proceeds of $17.3 million.



As of December
31, 2016, we have invested an aggregate of approximately $41.6 million in forty-seven investment positions in twenty-nine portfolio
companies. On December 31, 2016, the fair value of our investment positions was $40.9 million (including money market investments
and the accrued interest of $0.4 million). As of such date, our estimated gross annual portfolio yield was 8.6% and gross annual
portfolio yield to maturity was 8.6% (excluding equity investments and non-accrual investments) based on the purchase price of
our investments. The average duration of our debt portfolio was approximately 1.6 years. During the year ended December 31, 2016,
six T-bills matured, one T-bill was sold, and we exited eight portfolio companies in full, for aggregate sales proceeds of $30.6
million.



The following table
presents one debt investment that had not paid coupon interest as due beyond the thirty-day grace period, as of December 31, 2017.
Interest incurred on these investments was recorded through the date that the last coupon payment was received:



|PortfolioCompany   |  | AssetType             |  | InvestmentCoupon Rate |      |   | MaturityDate |                 
|------------------ |  | --------------------- |  | --------------------- | ---- | - | ------------ | ----------------
|Gymboree Corp. (1) |  | Senior Unsecured Debt |  |                       | 9.13 | % |              | December 1, 2018



| | (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.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table
presents twelve equity investments that are non-income producing, as of December 31, 2017:



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



| | (1) | Converted from exchange of 3.00% PIK senior unsecured convertible notes.                                                                                                                                                                                                                                              
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Converted from exchange of 12.00% Endeavour International Corp First Lien Bonds.                                                                                                                                                                                                                                      
| | (3) | Received in exchange of 15.00% Cash/PIK bonds.                                                                                                                                                                                                                                                                        
| | (4) | 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.
| | (5) | Received in exchange of 10.00% senior unsecured debt.                                                                                                                                                                                                                                                                 
| | (6) | Received in exchange of 8.625% senior unsecured notes.                                                                                                                                                                                                                                                                



45







The following table
shows the weighted average yield of our portfolio composition based on fair value at December 31, 2017:



|                                |  | At December 31, 2017         |      
|------------------------------- |  | ---------------------------- | -----
|                                |  | Percentage ofTotal Portfolio |      
|Investments – Money Market      |  |                              | —    
|Senior Secured First Lien Debt  |  |                              | 43.0 
|Senior Secured Second Lien Debt |  |                              | 0.4  
|Senior Unsecured Debt           |  |                              | 0.3  
|Equity Securities               |  |                              | 56.3 
|Total                           |  |                              | 100.0



* 12.1% yield is on
non-defaulted, non-equity positions and excludes money market investments.



As of December 31,
2017, our non-defaulted, non-equity portfolio had a yield to maturity of 12.1%, and an average duration of 1.0 year.



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 ofTotal 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 December 31, 2017 (dollars in thousands):



|                                   |  | At December 31, 2017     |       
|---------------------------------- |  | ------------------------ | ------
|                                   |  | Investments atFair Value |       
|Media: Broadcasting & Subscription |  | $                        | 16,546
|Technology                         |  |                          | 14,282
|Consumer Electronics               |  |                          | 11,694
|Renewable Energy                   |  |                          | 2,624 
|Services: Consumer                 |  |                          | 1,100 
|Telecommunications                 |  |                          | 528   
|Beverage, Food & Tobacco           |  |                          | 266   
|Automobile                         |  |                          | 255   
|Aerospace and Defense              |  |                          | 152   
|Energy: Oil & Gas                  |  |                          | 39    
|Investments - Money Market         |  |                          | 18    
|Retail                             |  |                          | 9     
|Total                              |  | $                        | 47,513



46







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 atFair 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 $47.5 million as of December 31, 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 Ansgar Media, LLC, GeoCommerce, Inc. and Nima, LLC warrants
based on equity valuations of $10.5 million, $10.3 million and $4.9 million, respectively.



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 years ended December 31, 2017, 2016 and 2015 were as follows (in thousands):



|                                                                                       |  | For the YearEndedDecember 31,2017 |        |   | For the YearEndedDecember 31,2016 |   |         | For the YearEndedDecember 31,2015 | 
|-------------------------------------------------------------------------------------- |  | --------------------------------- | ------ | - | --------------------------------- | - | ------- | --------------------------------- | 
|Total investment income                                                                |  | $                                 | 4,234  |   |                                   | $ | 3,120   |                                   | 
|Total operating expenses                                                               |  |                                   | 2,553  |   |                                   |   | 2,651   |                                   | 
|Net investment income                                                                  |  |                                   | 1,681  |   |                                   |   | 469     |                                   | 
|Net realized gain (loss) on non-controlled/non-affiliate investments                   |  |                                   | (3,897 | ) |                                   |   | (13,263 | )                                 | 
|Net unrealized appreciation (depreciation) on non-controlled/non-affiliate investments |  |                                   | 12,145 |   |                                   |   | 18,992  |                                   | 
|Net unrealized appreciation on affiliate investments                                   |  |                                   | 6,977  |   |                                   |   | 1,416   |                                   | 
|Net increase (decrease) in net assets resulting from operations                        |  | $                                 | 16,906 |   |                                   | $ | 7,614   |                                   | 



47







Investment Income



We generated investment
income of $4.2 million for the year ended December 31, 2017, as compared to $3.1 million for the year ended December 31, 2016,
and $3.5 million for the year ended December 31, 2015. Interest income was $4.0 million for the year ended December 31, 2017, as
compared to $3.0 million for the year ended December 31, 2016, and $2.9 million for the year ended December 31, 2015. 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 $0.3 million for the year ended December 31, 2017, as compared to $0.1 million and $0.6 million for the years ended December
31, 2016 and 2015, respectively. Fee income 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 43.7% of investment
portfolio at December 31, 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 year ended December 31, 2017 was lower
than the year ended December 31, 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,
and Digital Golf Technologies, LLC. At December 31, 2017, the weighted average coupon yield of our debt investments was 12.1% as
compared to 8.6% at December 31, 2016, and 7.6% at December 31, 2015. This coupon yield is for the non-defaulted and non-equity
positions. Based on current and prior three quarters’ net assets, average net assets as of December 31, 2017 were $43.1 million,
as compared to $31.8 million as of December 31, 2016, and $39.2 million for the year ended December 31, 2015.



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.



Operating Expenses



The composition of
our operating expenses for the years ended December 31, 2017, 2016 and 2015 was as follows (in thousands):



|                                                                                   |  | For the YearEndedDecember 31,2017 |       |  | For the YearEndedDecember 31,2016 |   |       | For the YearEndedDecember 31,2015 | 
|---------------------------------------------------------------------------------- |  | --------------------------------- | ----- |  | --------------------------------- | - | ----- | --------------------------------- | 
|Professional fees                                                                  |  | $                                 | 612   |  |                                   | $ | 800   |                                   | 
|Director fees                                                                      |  |                                   | 41    |  |                                   |   | 37    |                                   | 
|Insurance                                                                          |  |                                   | 117   |  |                                   |   | 114   |                                   | 
|Interest expense                                                                   |  |                                   | 58    |  |                                   |   | 206   |                                   | 
|Management fees – related parties                                                  |  |                                   | 867   |  |                                   |   | 640   |                                   | 
|Administrative services – related parties                                          |  |                                   | 264   |  |                                   |   | 228   |                                   | 
|General and administrative (includes CFO salary and related party travel expenses) |  |                                   | 463   |  |                                   |   | 489   |                                   | 
|Transfer agent fees                                                                |  |                                   | 131   |  |                                   |   | 137   |                                   | 
|Offering expense                                                                   |  |                                   | —     |  |                                   |   | —     |                                   | 
|Total operating expenses                                                           |  | $                                 | 2,553 |  |                                   | $ | 2,651 |                                   | 



For the years ended
December 31, 2017, 2016 and 2015, our operating expenses were $2.6 million, $2.7 million and $2.7 million, respectively. Included
within general and administrative expenses for the years ended December 31, 2017, 2016 and 2015, were $0.1 million, $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 years ended December 31, 2017, 2016 and 2015 were $0.03 million, $0.04 million
and $0.1 million, respectively, for related party travel expenses reimbursed to the Manager.



The slight decrease
in expenses for the year ended December 31, 2017 as compared to December 31, 2016 was primarily due to lower interest expense as
the line of credit was closed in early 2017. The professional fees were also lower in 2017 as legal fees in connection 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.



48







Management fees for
the years ended December 31, 2017, 2016 and 2015 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 years ended December 31, 2017, 2016 and 2015. However, since the Fund has not been
open to new investments, there has not been any offering costs expense since June 30, 2015.



Net Investment Income



Our net investment
income totaled $1.7 million, $0.5 million and $0.8 million for the years ended December 31, 2017, 2016 and 2015, respectively.
For the years ended December 31, 2017, 2016 and 2015, total investment income was $4.2 million, $3.1 million, and $3.5 million
respectively. For the years ended December 31, 2017, 2016 and 2015, the total investment income included $0.3 million, $0.1 million
and $0.6 million of non-recurring fees, respectively.



The increase in net
investment income for the year ended December 31, 2017 as compared to the year ended December 31, 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 years ended December
31, 2017, 2016 and 2015, total operating expenses were $2.6 million, $2.7 million and $2.7 million, respectively.



Net Realized Gains or Losses from Investments



For the years ended
December 31, 2017, 2016 and 2015, we had $17.3 million, $30.6 million and $19.7 million of sales, maturities, write-offs and principal
repayments, resulting in $(3.9) million, $(13.3) million and $0.4 million of realized gains (losses), respectively.



Net Change in Unrealized Appreciation or Depreciation on
Investments



For the year ended
December 31, 2017, we experienced $19.1 million of unrealized appreciation, mainly because of increased valuation estimates of
equity securities of Ansgar, LLC, GeoCommerce, Inc., and Nima, LLC, and also because of receipt of in-the-money warrants from investments
in Digital Golf Technologies, LLC and Vieste Group, LLC. For the years ended December 31, 2016 and 2015 we experienced $20.4 million
and $(14.6) million of unrealized appreciation (depreciation), respectively.



The
unrealized appreciation during the year ended December 31, 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 years
ended December 31, 2017, 2016 and 2015, we recorded a net increase (decrease) in net assets resulting from operations of
$16.9 million, $7.6 million and $(13.4) million, respectively. For the years ended December 31, 2017, 2016 and 2015, this
increase (decrease) was mainly due to net unrealized appreciation (depreciation) of $19.1 million, $20.4 million and $(14.6)
million, respectively, and net investment income of $1.7 million, $0.5 million and $0.8 million respectively, partially offset by
net realized gains (losses) from investments of $(3.9) million, $(13.3) 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, GeoCommerce, Inc., and warrants of Nima, LLC. Overall, the portfolio experienced a market value increase, with an
increase in net unrealized appreciation on investments of $19.1 for the year ended December 31, 2017. Based on 6,403,225,
6,256,208 and 6,077,127 weighted average common shares outstanding for the years ended December 31, 2017, 2016 and 2015,
respectively, our per share net increase (decrease) in net assets resulting from operations was $2.64, $1.22 and $(2.20),
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 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 flows
primarily 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 December 31, 2017,
we had issued 6.8 million shares of common stock, including 0.7 million shares under our distribution reinvestment plan (“DRIP”)
less 0.3 million shares redeemed under our tender offer. As of December 31, 2017, we had received gross proceeds from our continuous
offering of $63.8 million, including $5.9 million under our DRIP less $2.9 million paid to redeem shares in our prior quarterly
tender offers.



49











As of December 31, 2017, we had approximately $18,000 in money
market funds and subsequent to year end, we have delayed payments to service providers, substantially curtailed shareholder distributions,
and extended certain of our loans’ maturity dates, thereby delaying the timing of cash inflows. This raises substantial doubt
about the ability of the Fund to continue as a going concern. Management plans to work with portfolio companies that are in default
of loan repayments to refinance their outstanding debt obligations to the Fund. In addition, management plans to raise cash by
selling certain of its loans to other parties. Also, management has requested the Board of the Directors to reduce shareholder
distributions. Based upon the Fund’s plans to sell portfolio investments to raise capital, receipt
of loan payments and reducing shareholder distributions, the Fund believes it is probable it will have sufficient resources to
meet its financial obligations for the next 12 months from the issuance of these financial statements.



If we are unable to sell our investments
or receive loan repayments in a timely manner, we may be required to reduce, defer, or discontinue certain or all of our operations
or we would be less able to create and maintain a broad portfolio of investments and achieve our investment objective, which may
negatively impact our results of operations and reduce our ability to make distributions to our shareholders or we may not be able
to continue as a going concern.



In the event the Fund
is able to reorganize and convert to a closed-end Interval Fund and raise new capital, the net proceeds from the sale of common
stock will be used for our investment opportunities, operating expenses and for payment of various fees and expenses such as base
management fees, inventive fees and other expenses. Any working capital reserves we maintain may not be sufficient for investment
purposes, and we may require debt or equity financing to operate. Any loan defaults from portfolio companies will negatively impact
our results of operations, reduce our overall liquidity and cash flows needed to continue as a going concern. Any defaults would
also increase the difficulty in securing alternative sources of funding, and there can be no assurances that we will be able to
obtain such funding on favorable terms or at all.







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 year ended
December 31, 2017, we experienced a net decrease in money market investments of $0.1 million. For the year ended December 31, 2017,
approximately $9.2 million was used for our financing activities, which primarily consisted of $8.6 million repayments of the priority
credit line and $2.8 million in distributions, partially offset by $2.2 million received through the priority credit line. We generated
approximately $9.2 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 $17.3 million, partially offset by the purchase of
new portfolio debt investments of $7.8 million.



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. 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 55% 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:



|Period                                    |  | Per Share |          |  | NetInvestmentIncome |  |    | RealizedGain FromInvestments |  |  | ReturnofCapital |  
|----------------------------------------- |  | --------- | -------- |  | ------------------- |  | -- | ---------------------------- |  |  | --------------- | -
|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 | %                            |  |  | —               | %
|October 1, 2017 – December 31, 2017****** |  |           | 0.160779 |  |                     |  | 50 | %                            |  |  | —               | %



50







* 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.



****** For the period
from October 1, 2017 to December 31, 2017, the Fund had a realized loss from investments of approximately $3.5 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 as declared by our Board of Directors, 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 a 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
if, 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
31st 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 fiscal years ended December 31, 2017, 2016 and 2015:



|Source of Distributions:                        |  | Year endedDecember 31, 2017 |       |  | Year endedDecember 31, 2016 |  |       | Year endedDecember 31, 2015 | 
|----------------------------------------------- |  | --------------------------- | ----- |  | --------------------------- |  | ----- | --------------------------- | 
|Distributions from net investment income        |  | $                           | 1,681 |  |                             |  | 40.8  | %                           | 
|Distributions from realized gain on investments |  |                             | 98    |  |                             |  | 2.4   | %                           | 
|Distributions from paid in capital              |  |                             | 2,339 |  |                             |  | 56.8  | %                           | 
|Total                                           |  | $                           | 4,118 |  |                             |  | 100.0 | %                           | 



51







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 |  |                   | $ | —  |                                                                                                                                                                     |  | $ | 1,681                                                                    |  |  |                                                                    | 41 | % |                                                                             | 
| | 2016 |  |                   | $ | —  |                                                                                                                                                                     |  | $ | 473                                                                      |  |  |                                                                    | 13 | % |                                                                             | 
| | 2015 |  |                   | $ | 96 |                                                                                                                                                                     |  | $ | 926                                                                      |  |  |                                                                    | 21 | % |                                                                             | 



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 Annual Report
on Form 10-K for additional information regarding such contractual obligations.



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



The compensation we
pay to our Manager was not entered 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.



The managing members of VII Peaks Capital are also officers of Alesiatec. Inc, a software technology. In 2016, GeoCommerce
made a non-recurring engineering payment of $400,000 to Alesiatec to use Alesiatec software technology. In addition, Alesiatec
also issued $100,000 of Series A stock to GeoCommerce to use GeoCommerce's online database technology.



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
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



52







Due from related
party of $196,000 at December 31, 2017 consists of approximately $35,000 of true up for management fees from writing
down certain portfolio investments at the end of a quarter in prior quarters, $45,000 in Blue Sky state filing fees paid by
the Fund instead of our Manager, $25,000 in allocation of the Directors and Officers insurance policy costs to our Manager,
and $91,000 in expenses related to legal and other operational costs allocated to our Manager instead of the Fund.



Due from related party at December 31, 2016 of $239,000 consisted of approximately $67,000 of true up for management fees
from writing down certain portfolio investments at the end of a quarter in prior quarters, $67,000 in Blue Sky state filing
fees by the Fund instead of our Manager, $13,000 in allocation of the Directors and Officers insurance policy costs to out
Manager, and $90,000 in expenses related to legal and other operational costs allocated to out 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 year ended December 31, 2017, 2016 and 2015
totaled $222,500, $475,000, and $25,000, 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 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



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



Assuming that our current
financial condition remains constant and no actions are taken to alter our existing interest rate sensitivity, a 100 basis point
move in interest rates up or down from their December 31, 2017 levels would result in an increase or decrease in net asset value
of $0.5 million or 1.0%.



53







ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA



Index to Financial Statements



|                                                                                         | Page
|---------------------------------------------------------------------------------------- | ----
|                                                                                         |     
|Report of Independent Registered Public Accounting Firm                                  | F-1 
|Report of Previous Independent Registered Public Accounting Firm                         | F-2 
|Statements of Assets and Liabilities as of December 31, 2017 and 2016                    | F-3 
|Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015            | F-4 
|Statements of Changes in Net Assets for the Years Ended December 31, 2017, 2016 and 2015 | F-5 
|Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015            | F-6 
|Schedules of Investments as of December 31, 2017 and 2016                                | F-7 
|Notes to Financial Statements                                                            | F-11



54







REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders
of

VII Peaks Co-Optivist Income BDC
II, Inc.

Orinda,
California



Opinion
on the Financial Statements



We have audited
the accompanying statements of assets and liabilities of VII Peaks Co-Optivist Income BDC II, Inc. (the “Fund”), including
the schedules of investments, as of December 31, 2017 and 2016, and the related statements of operations, changes in net assets,
and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to
as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Fund at December 31, 2017 and 2016, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in
the United States of America.



Basis
for Opinion



These
financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the
Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.



We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly,
we express no such opinion.



Our audits
included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as
of December 31, 2017 and 2016 by correspondence with the custodian and portfolio companies, or by other appropriate auditing procedures
where replies were not received. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.



|/s/
    OUM & Co. LLP                                | 
|---------------------------------------------------- | 
|                                                     | 
|San
    Francisco, California                        | 
|November
    5, 2018                                 | 
|We
    have served as the Fund's auditor since 2016. | 



F-1







REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and

Stockholders of VII Peaks Co-Optivist Income
BDC II, Inc.



Opinion on the Financial Statements



We have audited the accompanying statements
of operations, changes in net assets and cash flows for the year ended December 31, 2015, and the related notes (collectively referred
to as the “financial statements”) of VII Peaks Co-Optivist Income BDC II, Inc. (the “Fund”). In our opinion,
the financial statements present fairly, in all material respects, the results of the Fund’s operations and its cash flows
for the year ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.



Basis for Opinion



These financial statements are the responsibility
of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our
audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.



We conducted our audit in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to
obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.



Our audit included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable
basis for our opinion.





We ceased to serve as the Company’s
auditor in 2016.





|/s/
    BPM LLP           | 
|------------------------- | 
|                          | 
|San Francisco, California | 
|April 14, 2016            | 



F-2









VII PEAKS
CO-OPTIVIST INCOME BDC II, INC.



STATEMENTS
OF ASSETS AND LIABILITIES

(in thousands,
except share and per share data)





|                                                                                                                                                                                                                  |  | As of             |        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------
|                                                                                                                                                                                                                  |  | December 31, 2017 |        
|                                                                                                                                                                                                                  |  |                   |        
|ASSETS                                                                                                                                                                                                            |  |                   |        
|                                                                                                                                                                                                                  |  |                   |        
|Investments, at fair value                                                                                                                                                                                        |  |                   |        
|Non-controlled/non-affiliate investments (cost of $23,403 and $35,575, respectively)                                                                                                                              |  | $                 | 30,949 
|Affiliate investments (cost of $6,050 and $5,850, respectively)                                                                                                                                                   |  |                   | 16,546 
|Investments, money market at fair value (cost of $18 and $157, respectively)                                                                                                                                      |  |                   | 18     
|Total investments, at fair value                                                                                                                                                                                  |  |                   | 47,513 
|Interest receivable                                                                                                                                                                                               |  |                   | 582    
|Prepaid expenses                                                                                                                                                                                                  |  |                   | 12     
|Due from related party, net                                                                                                                                                                                       |  |                   | 196    
|Receivable for unsettled trades                                                                                                                                                                                   |  |                   | 127    
|Total assets                                                                                                                                                                                                      |  | $                 | 48,430 
|                                                                                                                                                                                                                  |  |                   |        
|LIABILITIES                                                                                                                                                                                                       |  |                   |        
|Priority credit line -Wells Fargo                                                                                                                                                                                 |  | $                 | -      
|Interest payable                                                                                                                                                                                                  |  |                   | -      
|Deferred loan fee                                                                                                                                                                                                 |  |                   | 217    
|Prepaid interest from investments (includes prepaid interest of $29 from Digital Golf
    Technologies, LLC, $81 from Nima, LLC, $139 from Vieste Group, LLC and $21 from Ansgar Media, LLC at December 31, 2017) |  |                   | 270    
|Accounts payable and accrued liabilities                                                                                                                                                                          |  |                   | 166    
|Stockholder distributions payable                                                                                                                                                                                 |  |                   | 144    
|Total liabilities                                                                                                                                                                                                 |  |                   | 797    
|                                                                                                                                                                                                                  |  |                   |        
|Commitments and Contingencies (Note 11)                                                                                                                                                                           |  |                   |        
|                                                                                                                                                                                                                  |  |                   |        
|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; 6,778,976 and 6,639,019
    shares issued and 6,477,563 and 6,337,606 outstanding as of December 31, 2017 and December 31, 2016, respectively   |  |                   | 6      
|Paid-in capital in excess of par value                                                                                                                                                                            |  |                   | 61,347 
|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                                                                                                           |  |                   | (28,872
|Net unrealized appreciation (depreciation) on investments                                                                                                                                                         |  |                   | 18,043 
|Total net assets                                                                                                                                                                                                  |  |                   | 47,633 
|Total liabilities and net assets                                                                                                                                                                                  |  | $                 | 48,430 
|                                                                                                                                                                                                                  |  |                   |        
|Net asset value per share                                                                                                                                                                                         |  | $                 | 7.35   



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



F-3







VII PEAKS CO-OPTIVIST INCOME
BDC II, INC.



STATEMENTS
OF OPERATIONS

(in thousands,
except share and per share data)





|                                                                                                                                                                                                   |  | For the Year Ended |           |   | For the Year Ended |   |           | For the Year Ended | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ------------------ | - | --------- | ------------------ | 
|                                                                                                                                                                                                   |  | December 31, 2017  |           |   | December 31, 2016  |   |           | December 31, 2015  | 
|                                                                                                                                                                                                   |  |                    |           |   |                    |   |           |                    | 
|Investment income:                                                                                                                                                                                 |  |                    |           |   |                    |   |           |                    | 
|Interest from investments                                                                                                                                                                          |  |                    |           |   |                    |   |           |                    | 
|Non-controlled/non-affiliate investments                                                                                                                                                           |  | $                  | 3,285     |   |                    | $ | 2,513     |                    | 
|Affiliate investments                                                                                                                                                                              |  |                    | 697       |   |                    |   | 504       |                    | 
|Interest from cash and cash equivalents                                                                                                                                                            |  |                    |           |   |                    |   |           |                    | 
|Non-controlled/non-affiliate investments                                                                                                                                                           |  |                    | 1         |   |                    |   | -         |                    | 
|Fee income                                                                                                                                                                                         |  |                    |           |   |                    |   |           |                    | 
|Non-controlled/non-affiliate investments                                                                                                                                                           |  |                    | 183       |   |                    |   | 66        |                    | 
|Affiliate investments                                                                                                                                                                              |  |                    | 68        |   |                    |   | 37        |                    | 
|Other income                                                                                                                                                                                       |  |                    |           |   |                    |   |           |                    | 
|Non-controlled/non-affiliate investments                                                                                                                                                           |  |                    | -         |   |                    |   | -         |                    | 
|Total investment income                                                                                                                                                                            |  |                    | 4,234     |   |                    |   | 3,120     |                    | 
|                                                                                                                                                                                                   |  |                    |           |   |                    |   |           |                    | 
|Operating expenses:                                                                                                                                                                                |  |                    |           |   |                    |   |           |                    | 
|Professional fees                                                                                                                                                                                  |  |                    | 612       |   |                    |   | 800       |                    | 
|Directors fees                                                                                                                                                                                     |  |                    | 41        |   |                    |   | 37        |                    | 
|Insurance                                                                                                                                                                                          |  |                    | 117       |   |                    |   | 114       |                    | 
|Interest expense                                                                                                                                                                                   |  |                    | 58        |   |                    |   | 206       |                    | 
|Management fees - related parties                                                                                                                                                                  |  |                    | 867       |   |                    |   | 640       |                    | 
|Administrative services - related parties                                                                                                                                                          |  |                    | 264       |   |                    |   | 228       |                    | 
|General and administrative (includes $142, $124 and $110 of CFO salary (accounting) and $27, $42
    and $118 of related party travel expenses, respectively for the year ended December 31, 2017) |  |                    | 463       |   |                    |   | 489       |                    | 
|Transfer agent fees                                                                                                                                                                                |  |                    | 131       |   |                    |   | 137       |                    | 
|Offering expense                                                                                                                                                                                   |  |                    | -         |   |                    |   | -         |                    | 
|Total operating expenses                                                                                                                                                                           |  |                    | 2,553     |   |                    |   | 2,651     |                    | 
|                                                                                                                                                                                                   |  |                    |           |   |                    |   |           |                    | 
|Net investment income                                                                                                                                                                              |  |                    | 1,681     |   |                    |   | 469       |                    | 
|                                                                                                                                                                                                   |  |                    |           |   |                    |   |           |                    | 
|Realized and unrealized gain (loss) on investments:                                                                                                                                                |  |                    |           |   |                    |   |           |                    | 
|Net realized gain (loss) on non-controlled/non-affiliate investments                                                                                                                               |  |                    | (3,897    | ) |                    |   | (13,263   | )                  | 
|Net unrealized appreciation (depreciation) on non-controlled/non-affiliate investments                                                                                                             |  |                    | 12,145    |   |                    |   | 18,992    |                    | 
|Net unrealized appreciation on affiliate investments                                                                                                                                               |  |                    | 6,977     |   |                    |   | 1,416     |                    | 
|Net realized and unrealized gain (loss) on investments                                                                                                                                             |  |                    | 15,225    |   |                    |   | 7,145     |                    | 
|                                                                                                                                                                                                   |  |                    |           |   |                    |   |           |                    | 
|Net increase (decrease) in net assets resulting from operations                                                                                                                                    |  | $                  | 16,906    |   |                    | $ | 7,614     |                    | 
|                                                                                                                                                                                                   |  |                    |           |   |                    |   |           |                    | 
|Per share information - basic and diluted:                                                                                                                                                         |  |                    |           |   |                    |   |           |                    | 
|Net investment income                                                                                                                                                                              |  | $                  | 0.26      |   |                    | $ | 0.07      |                    | 
|Net increase (decrease) in net assets resulting from operations                                                                                                                                    |  | $                  | 2.64      |   |                    | $ | 1.22      |                    | 
|Weighted average common shares outstanding                                                                                                                                                         |  |                    | 6,403,225 |   |                    |   | 6,256,208 |                    | 





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



F-4







VII PEAKS
CO-OPTIVIST INCOME BDC II, INC.



STATEMENTS
OF CHANGES IN NET ASSETS

(in thousands,
except share and per share data)





|                                                                                                        |  | For the Year Ended
December 31, 2017 |           |   | For the Year Ended
December 31, 2016 |   |           | For the Year Ended
December 31, 2015 | 
|------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | --------- | - | ------------------------------------ | - | --------- | ------------------------------------ | 
|                                                                                                        |  |                                      |           |   |                                      |   |           |                                      | 
|Operations:                                                                                             |  |                                      |           |   |                                      |  
|Net investment income                                                                                   |  | $                                    | 1,681     |   |                                      | $ | 469       |                                      | 
|Net realized gain (loss) from investments                                                               |  |                                      | (3,897    | ) |                                      |   | (13,263   | )                                    | 
|Net unrealized appreciation (depreciation) on investments                                               |  |                                      | 19,122    |   |                                      |   | 20,408    |                                      | 
|Net increase (decrease) in net assets from operations                                                   |  |                                      | 16,906    |   |                                      |   | 7,614     |                                      | 
|Stockholder distributions:                                                                              |  |                                      |           |   |                                      |   |           |                                      | 
|Distributions from net investment income                                                                |  |                                      | (1,681    | ) |                                      |   | (473      | )                                    | 
|Distributions from net realized gain on investments                                                     |  |                                      | (98       | ) |                                      |   | (78       | )                                    | 
|Distributions from paid in capital                                                                      |  |                                      | (2,339    | ) |                                      |   | (3,195    | )                                    | 
|Net decrease in net assets from stockholder distributions                                               |  |                                      | (4,118    | ) |                                      |   | (3,746    | )                                    | 
|Capital share transactions:                                                                             |  |                                      |           |   |                                      |   |           |                                      | 
|Issuance of common stock, net of issuance costs                                                         |  |                                      | -         |   |                                      |   | -         |                                      | 
|Reinvestment of stockholder distributions                                                               |  |                                      | 1,163     |   |                                      |   | 1,324     |                                      | 
|Treasury capital (redemptions)                                                                          |  |                                      | -         |   |                                      |   | -         |                                      | 
|Net increase in net assets from capital share transactions                                              |  |                                      | 1,163     |   |                                      |   | 1,324     |                                      | 
|                                                                                                        |  |                                      |           |   |                                      |   |           |                                      | 
|Total increase (decrease) in net assets                                                                 |  |                                      | 13,951    |   |                                      |   | 5,192     |                                      | 
|Net assets at beginning of year                                                                         |  |                                      | 33,682    |   |                                      |   | 28,490    |                                      | 
|Net assets at end of year                                                                               |  | $                                    | 47,633    |   |                                      | $ | 33,682    |                                      | 
|                                                                                                        |  |                                      |           |   |                                      |   |           |                                      | 
|Net asset value per common share                                                                        |  | $                                    | 7.35      |   |                                      | $ | 5.31      |                                      | 
|Common shares outstanding at end of year                                                                |  |                                      | 6,477,563 |   |                                      |   | 6,337,606 |                                      | 
|                                                                                                        |  |                                      |           |   |                                      |   |           |                                      | 
|Accumulated distribution in excess of net investment income and net realized gain (loss) on investments |  | $                                    | (28,872   | ) |                                      | $ | (22,538   | )                                    | 



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





F-5







VII PEAKS
CO-OPTIVIST INCOME BDC II, INC.



STATEMENTS
OF CASH FLOWS

(in thousands,
except share and per share data)





|                                                                                                                                       |  | For the Year Ended
 December 31, 2017 |         |   | For the Year Ended
 December 31, 2016 |   |         | For the Year Ended
 December 31, 2015 | 
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------------------------- | - | ------- | ------------------------------------- | 
|                                                                                                                                       |  |                                       |         |   |                                       |   |         |                                       | 
|Operating activities:                                                                                                                  |  |                                       |         |   |                                       |   |         |                                       | 
|Net increase (decrease) in net assets resulting from operations                                                                        |  | $                                     | 16,906  |   |                                       | $ | 7,614   |                                       | 
|Adjustments to reconcile net increase (decrease) in net assets from operations to net cash provided by (used in) operating activities: |  |                                       |         |   |                                       |   |         |                                       | 
|Paid-in-kind interest income                                                                                                           |  |                                       | (22     | ) |                                       |   | (12     | )                                     | 
|Net accretion of discounts and amortization of premiums                                                                                |  |                                       | (1,461  | ) |                                       |   | (513    | )                                     | 
|Sales and repayments of investments                                                                                                    |  |                                       | 17,343  |   |                                       |   | 30,593  |                                       | 
|Purchase of investments                                                                                                                |  |                                       | (7,785  | ) |                                       |   | (36,545 | )                                     | 
|Repayments of investments - money market                                                                                               |  |                                       | 21,821  |   |                                       |   | 37,314  |                                       | 
|Purchase of investments - money market                                                                                                 |  |                                       | (21,682 | ) |                                       |   | (31,262 | )                                     | 
|Net realized (gain) loss from investments                                                                                              |  |                                       | 3,897   |   |                                       |   | 13,263  |                                       | 
|Net unrealized (appreciation) depreciation on investments                                                                              |  |                                       | (19,122 | ) |                                       |   | (20,408 | )                                     | 
|Proceeds from loan fees received                                                                                                       |  |                                       | 181     |   |                                       |   | 310     |                                       | 
|Accretion of deferred loan fees                                                                                                        |  |                                       | (232    | ) |                                       |   | (92     | )                                     | 
|(Increase) decrease in operating assets:                                                                                               |  |                                       |         |   |                                       |   |         |                                       | 
|Interest receivable                                                                                                                    |  |                                       | (180    | ) |                                       |   | 127     |                                       | 
|Prepaid expenses                                                                                                                       |  |                                       | 64      |   |                                       |   | (64     | )                                     | 
|Due from related party, net                                                                                                            |  |                                       | 43      |   |                                       |   | (86     | )                                     | 
|Origination fee receivable                                                                                                             |  |                                       | -       |   |                                       |   | 63      |                                       | 
|Receivable for unsettled trades                                                                                                        |  |                                       | (127    | ) |                                       |   | -       |                                       | 
|Increase (decrease) in operating liabilities:                                                                                          |  |                                       |         |   |                                       |   |         |                                       | 
|Interest payable                                                                                                                       |  |                                       | (3      | ) |                                       |   | 2       |                                       | 
|Payable for unsettled trades                                                                                                           |  |                                       | -       |   |                                       |   | -       |                                       | 
|Management fees payable                                                                                                                |  |                                       | -       |   |                                       |   | -       |                                       | 
|Prepaid interest from investments                                                                                                      |  |                                       | (509    | ) |                                       |   | 779     |                                       | 
|Accounts payable and accrued liabilities                                                                                               |  |                                       | 45      |   |                                       |   | (146    | )                                     | 
|Net cash provided by (used in) operating activities                                                                                    |  |                                       | 9,177   |   |                                       |   | 937     |                                       | 
|                                                                                                                                       |  |                                       |         |   |                                       |   |         |                                       | 
|Financing activities:                                                                                                                  |  |                                       |         |   |                                       |   |         |                                       | 
|Proceeds from issuance of shares of common stock, net                                                                                  |  |                                       | -       |   |                                       |   | -       |                                       | 
|Stockholder distributions                                                                                                              |  |                                       | (2,811  | ) |                                       |   | (2,772  | )                                     | 
|Treasury stock, net of redemption of common stock                                                                                      |  |                                       | -       |   |                                       |   | -       |                                       | 
|Borrowings - priority credit line                                                                                                      |  |                                       | 2,201   |   |                                       |   | 13,522  |                                       | 
|Repayments - priority credit line                                                                                                      |  |                                       | (8,567  | ) |                                       |   | (11,687 | )                                     | 
|Net cash provided by (used in) financing activities                                                                                    |  |                                       | (9,177  | ) |                                       |   | (937    | )                                     | 
|                                                                                                                                       |  |                                       |         |   |                                       |   |         |                                       | 
|Net change in cash and cash equivalents                                                                                                |  |                                       | -       |   |                                       |   | -       |                                       | 
|Cash and cash equivalents, beginning of year                                                                                           |  |                                       | -       |   |                                       |   | -       |                                       | 
|Cash and cash equivalents, end of year                                                                                                 |  | $                                     | -       |   |                                       | $ | -       |                                       | 
|                                                                                                                                       |  |                                       |         |   |                                       |   |         |                                       | 
|Supplemental disclosure of non-cash information:                                                                                       |  |                                       |         |   |                                       |   |         |                                       | 
|Distribution reinvestment plan distribution payable                                                                                    |  | $                                     | -       |   |                                       | $ | -       |                                       | 
|Cash distribution payable                                                                                                              |  | $                                     | 143     |   |                                       | $ | -       |                                       | 
|Distribution reinvestment plan distribution paid                                                                                       |  | $                                     | 1,163   |   |                                       | $ | 1,324   |                                       | 
|                                                                                                                                       |  |                                       |         |   |                                       |   |         |                                       | 
|Supplemental disclosure of cash flow information:                                                                                      |  |                                       |         |   |                                       |   |         |                                       | 
|Cash interest paid during the year                                                                                                     |  | $                                     | 61      |   |                                       | $ | 204     |                                       | 



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







F-6







VII PEAKS
CO-OPTIVIST INCOME BDC II, INC.



SCHEDULE
OF INVESTMENTS

(dollars
and shares in thousands)



December 31, 2017





|Portfolio Company                                       |  | Industry                           |  | Investment
    Coupon
 Rate, Maturity Date |                                                                | Principal
    / No. of
 Shares |   | Amortized
    Cost |  | Fair
    Value |        | %
    of Net Assets |  
|------------------------------------------------------- |  | ---------------------------------- |  | ------------------------------------------ | -------------------------------------------------------------- | ------------------------------ | - | ------------------ |  | -------------- | ------ | ------------------- | -
|Senior
    Secured First Lien Debt - 42.9% (b)          |  |                                    |  |                                            |                                                                |                                |   |                    |  |                |        |                     |  
|Ansgar Media,
    LLC (e) (g)                           |  | Media: Broadcasting & Subscription |  |                                            | 12.00%,
                                         1/11/2019     |                                | $ | 2,000              |  | $              | 2,000  |                     | $
|Ansgar Media, LLC (e)
    (g)                           |  | Media: Broadcasting & Subscription |  |                                            | 12.00%,
                                         10/24/2018    |                                |   | 400                |  |                | 400    |                     |  
|Ansgar Media, LLC (e)
    (g)                           |  | Media: Broadcasting & Subscription |  |                                            | 12.00%,
                                         10/27/2018    |                                |   | 1,650              |  |                | 1,650  |                     |  
|Ansgar Media, LLC (e)
    (g)                           |  | Media: Broadcasting & Subscription |  |                                            | 12.00%,
                                         9/8/2019      |                                |   | 2,000              |  |                | 2,000  |                     |  
|Digital Golf Technologies,
    LLC (g)                  |  | Services: Consumer                 |  |                                            | 13.00%,
                                         1/11/2020     |                                |   | 1,000              |  |                | 932    |                     |  
|GeoCommerce, Inc.                                       |  | Technology                         |  |                                            | 12.00%,
                                         4/27/2018     |                                |   | 1,500              |  |                | 1,316  |                     |  
|GeoCommerce, Inc.                                       |  | Technology                         |  |                                            | 12.00%,
                                         5/15/2018     |                                |   | 1,000              |  |                | 917    |                     |  
|GeoCommerce, Inc.                                       |  | Technology                         |  |                                            | 12.00%,
                                         10/14/2018    |                                |   | 750                |  |                | 549    |                     |  
|GeoCommerce, Inc.                                       |  | Technology                         |  |                                            | 12.00%,
                                         12/21/2018    |                                |   | 750                |  |                | 514    |                     |  
|Goodman Networks, Inc.
    (c) (h)                      |  | Telecommunications                 |  |                                            | 8.00%,
                                         5/11/2022      |                                |   | 277                |  |                | 848    |                     |  
|Nima, LLC (g)                                           |  | Consumer Electronics               |  |                                            | 12.00%,
                                         5/20/2018     |                                |   | 2,000              |  |                | 1,717  |                     |  
|Nima, LLC (g)                                           |  | Consumer Electronics               |  |                                            | 12.00%,
                                         8/11/2018     |                                |   | 1,000              |  |                | 1,000  |                     |  
|Nima, LLC (g)                                           |  | Consumer Electronics               |  |                                            | 12.00%,
                                         11/2/2018     |                                |   | 750                |  |                | 750    |                     |  
|Nima, LLC (g)                                           |  | Consumer Electronics               |  |                                            | 12.00%,
                                         12/21/2018    |                                |   | 750                |  |                | 750    |                     |  
|Nima, LLC (g)                                           |  | Consumer Electronics               |  |                                            | 12.00%,
                                         2/16/2019     |                                |   | 450                |  |                | 450    |                     |  
|Nima, LLC (g)                                           |  | Consumer Electronics               |  |                                            | 12.00%,
                                         4/6/2019      |                                |   | 500                |  |                | 500    |                     |  
|Nima, LLC (g)                                           |  | Consumer Electronics               |  |                                            | 12.00%,
                                         6/19/2019     |                                |   | 500                |  |                | 500    |                     |  
|Nima, LLC (g)                                           |  | Consumer Electronics               |  |                                            | 12.00%,
                                         8/4/2019      |                                |   | 300                |  |                | 300    |                     |  
|Nima, LLC (g)                                           |  | Consumer Electronics               |  |                                            | 12.00%,
                                         8/31/2019     |                                |   | 225                |  |                | 225    |                     |  
|Nima, LLC (g)                                           |  | Consumer Electronics               |  |                                            | 12.00%,
                                         10/16/2018    |                                |   | 332                |  |                | 332    |                     |  
|Vieste Group, LLC (f)
    (g)                           |  | Renewable Energy                   |  |                                            | 13.00%,
                                         4/7/2019      |                                |   | 1,340              |  |                | 1,257  |                     |  
|Vieste Group, LLC (f)
    (g)                           |  | Renewable Energy                   |  |                                            | 13.00%,
                                         7/14/2019     |                                |   | 150                |  |                | 139    |                     |  
|Vieste Group, LLC (f)
    (g)                           |  | Renewable Energy                   |  |                                            | 13.00%,
                                         8/1/2019      |                                |   | 240                |  |                | 222    |                     |  
|Vieste Group, LLC (f)
    (g)                           |  | Renewable Energy                   |  |                                            | 13.00%,
                                         8/17/2019     |                                |   | 150                |  |                | 139    |                     |  
|Vieste Group, LLC (f)
    (g)                           |  | Renewable Energy                   |  |                                            | 13.00%,
                                         8/31/2019     |                                |   | 120                |  |                | 111    |                     |  
|Vieste
    Group, LLC (f) (g)                           |  | Renewable Energy                   |  |                                            | 13.00%,
                                         10/2/2019     |                                |   | 380                |  |                | 349    |                     |  
|Sub Total Senior Secured
    First Lien Debt            |  |                                    |  |                                            |                                                                |                                | $ | 20,514             |  | $              | 19,867 |                     | $
|                                                        |  |                                    |  |                                            |                                                                |                                |   |                    |  |                |        |                     |  
|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 |                                | $ | 179                |  | $              | 165    |                     | $
|Sub Total Senior Secured
    Second Lien Debt           |  |                                    |  |                                            |                                                                |                                | $ | 179                |  | $              | 165    |                     | $
|                                                        |  |                                    |  |                                            |                                                                |                                |   |                    |  |                |        |                     |  
|Senior
    Unsecured Debt - 0.3% (b)                    |  |                                    |  |                                            |                                                                |                                |   |                    |  |                |        |                     |  
|Colt Defense, LLC                                       |  | Aerospace and Defense              |  |                                            | 8.00%,
                                         7/12/2021      |                                | $ | 148                |  | $              | 1,043  |                     | $
|DynCorp International Inc.                              |  | Aerospace and Defense              |  |                                            | 11.88%,
                                         11/30/2020    |                                |   | 4                  |  |                | 2      |                     |  
|Gymboree
    Corp.(c) (h)                               |  | Retail                             |  |                                            | 9.13%,
                                         12/1/2018      |                                |   | 810                |  |                | 755    |                     |  
|Sub Total Senior Unsecured
    Debt                     |  |                                    |  |                                            |                                                                |                                | $ | 962                |  | $              | 1,800  |                     | $
|                                                        |  |                                    |  |                                            |                                                                |                                |   |                    |  |                |        |                     |  
|Equity
    Securities - 56.1% (b)                       |  |                                    |  |                                            |                                                                |                                |   |                    |  |                |        |                     |  
|Aspect Software, Inc.
    (c)                           |  | Telecommunications                 |  |                                            |                                                                |                                |   | 8                  |  | $              | 244    |                     | $
|Aspire Holdings (c)                                     |  | Energy: Oil & Gas                  |  |                                            |                                                                |                                |   | 26                 |  |                | 551    |                     |  
|Education Management,
    LLC (c)                       |  | Services: Consumer                 |  |                                            |                                                                |                                |   | 2,530              |  |                | 5      |                     |  
|Logan's Roadhouse, Inc.
    (c)                         |  | Beverage, Food & Tobacco           |  |                                            |                                                                |                                |   | 86                 |  |                | 633    |                     |  
|NII Holdings, Inc. (a)
    (c) (h)                      |  | Telecommunications                 |  |                                            |                                                                |                                |   | 17                 |  |                | 768    |                     |  
|UCI
    International, Inc. (c)                         |  | Automobile                         |  |                                            |                                                                |                                |   | 31                 |  |                | 1,354  |                     |  
|Total Common Stock                                      |  |                                    |  |                                            |                                                                |                                |   |                    |  |                | 3,555  |                     |  
|                                                        |  |                                    |  |                                            |                                                                |                                |   |                    |  |                |        |                     |  
|                                                        |  |                                    |  |                                            |                                                                |                                |   |                    |  |                |        |                     |  
|Ansgar Media, LLC -
    Class B Units (c) (d) (e)       |  | Media: Broadcasting & Subscription |  |                                            |                                                                |                                |   | -                  |  |                | -      |                     |  
|Digital Golf Technologies,
    LLC (c)                  |  | Services: Consumer                 |  |                                            |                                                                |                                |   | 22                 |  |                | 91     |                     |  
|Education Management,
    LLC (c)                       |  | Services: Consumer                 |  |                                            |                                                                |                                |   | 1,554              |  |                | 876    |                     |  
|GeoCommerce, Inc. (c)                                   |  | Technology                         |  |                                            |                                                                |                                |   | 875                |  |                | 1,883  |                     |  
|Nima, LLC (c)                                           |  | Consumer Electronics               |  |                                            |                                                                |                                |   | 2,000              |  |                | 1,000  |                     |  
|Vieste
    Group, LLC (c)                               |  | Renewable Energy                   |  |                                            |                                                                |                                |   | 173                |  |                | 216    |                     |  
|Total Warrants                                          |  |                                    |  |                                            |                                                                |                                |   |                    |  |                | 4,066  |                     |  
|                                                        |  |                                    |  |                                            |                                                                |                                |   |                    |  |                |        |                     |  
|Sub Total Equity Securities                             |  |                                    |  |                                            |                                                                |                                |   |                    |  |                | 7,621  |                     |  
|                                                        |  |                                    |  |                                            |                                                                |                                |   |                    |  |                |        |                     |  
|Investments
    - Money Market - 0.0% (b)               |  |                                    |  |                                            |                                                                |                                |   |                    |  |                |        |                     |  
|Investments - U.S. Bank Money Market                    |  |                                    |  |                                            | 0.20%                                                          |                                | $ | 18                 |  | $              | 18     |                     | $
|Sub Total Investments -
    Money Market                |  |                                    |  |                                            |                                                                |                                | $ | 18                 |  | $              | 18     |                     | $
|                                                        |  |                                    |  |                                            |                                                                |                                |   |                    |  |                |        |                     |  
|TOTAL
    INVESTMENTS - 99.7% (b)                       |  |                                    |  |                                            |                                                                |                                |   |                    |  | $              | 29,471 |                     | $









| | (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 0.01% 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 $47,633 as of December 31, 2017.
| | --- | -----------------------------------------------------------------------

| | (c) | Non-income
producing as of December 31, 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. Transactions during the year ended December 31, 2017 in which the issuer was an Affiliate is as follows:
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





|Portfolio
    Company                 |  | Principal
    /  No. of Shares |       |  | Fair
    Value at  December 31, 2016 |   |       | Gross
     Addition |  |   | Gross
     Reductions |  |  | Net
    Realized  Gains (Losses) |   |  | Change
    in Unrealized
    Gains (Losses) |   |   | Fair
    Value at  December 31, 2017 |  |   | Dividends
    and 
    Interest Income |  |  | Other
     income |       
|------------------------------------- |  | ------------------------------ | ----- |  | ------------------------------------ | - | ----- | ------------------- |  | - | --------------------- |  |  | -------------------------------- | - |  | ------------------------------------------- | - | - | ------------------------------------ |  | - | -------------------------------------- |  |  | ----------------- | ------
|Ansgar Media,
    LLC                 |  | $                              | 6,050 |  |                                      | $ | 5,850 |                     |  | $ | 200                   |  |  | $                                | - |  |                                             | $ | - |                                      |  | $ | -                                      |  |  | $                 | 6,050 
|Ansgar
    Media, LLC - Class B Units |  |                                | -     |  |                                      |   | 3,519 |                     |  |   | -                     |  |  |                                  | - |  |                                             |   | - |                                      |  |   | 6,977                                  |  |  |                   | 10,496
|                                      |  |                                |       |  |                                      | $ | 9,369 |                     |  | $ | 200                   |  |  | $                                | - |  |                                             | $ | - |                                      |  | $ | 6,977                                  |  |  | $                 | 16,546





| | (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 December 31, 2017, the Fund has loaned Vieste Group, LLC $2,380 thousand; the time and amounts of the
additional $1,870 thousand in funding will be at the mutual agreement between the Fund and Vieste Group, LLC.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (g) | 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.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | (h) | 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.







F-7









VII PEAKS
CO-OPTIVIST INCOME BDC II, INC.



SCHEDULE
OF INVESTMENTS

(dollars
in thousands)



The following
table shows the portfolio composition by industry grouping at fair value at December 31, 2017:



|                                       |  | At December
    31, 2017 |       
|-------------------------------------- |  | ------------------------ | ------
|                                       |  | Investments atFair Value |       
|Media: Broadcasting
    & Subscription |  | $                        | 16,546
|Technology                             |  |                          | 14,282
|Consumer Electronics                   |  |                          | 11,694
|Renewable Energy                       |  |                          | 2,624 
|Services: Consumer                     |  |                          | 1,100 
|Telecommunications                     |  |                          | 528   
|Beverage, Food & Tobacco               |  |                          | 266   
|Automobile                             |  |                          | 255   
|Aerospace and Defense                  |  |                          | 152   
|Energy: Oil & Gas                      |  |                          | 39    
|Investments - Money Market             |  |                          | 18    
|Retail                                 |  |                          | 9     
|Total                                  |  | $                        | 47,513



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





| | (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.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------







|Portfolio Company                 |  | Principal
    /  No. of Shares |       |  | Fair
    Value at  December 31, 2015 |   |       | Gross
     Addition |  |   | Gross
     Reductions |  |  | Net
    Realized  Gains (Losses) |   |  | Change
    in Unrealized  Gains (Losses) |   |   | Fair
    Value at  December 31, 2016 |  |   | Dividends
    and 
Interest Income |  |  | Other
     income |      
|--------------------------------- |  | ------------------------------ | ----- |  | ------------------------------------ | - | ----- | ------------------- |  | - | --------------------- |  |  | -------------------------------- | - |  | ---------------------------------------- | - | - | ------------------------------------ |  | - | ---------------------------------- |  |  | ----------------- | -----
|Ansgar Media, LLC                 |  | $                              | 5,850 |  |                                      | $ | 2,000 |                     |  | $ | 3,850                 |  |  | $                                | - |  |                                          | $ | - |                                      |  | $ | -                                  |  |  | $                 | 5,850
|Ansgar Media, LLC - Class B Units |  |                                | -     |  |                                      |   | 2,102 |                     |  |   | -                     |  |  |                                  | - |  |                                          |   | - |                                      |  |   | 1,417                              |  |  |                   | 3,519
|                                  |  |                                |       |  |                                      | $ | 4,102 |                     |  | $ | 200                   |  |  | $                                | - |  |                                          | $ | - |                                      |  | $ | 1,417                              |  |  | $                 | 9,369







| | (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.





F-9







VII PEAKS
CO-OPTIVIST INCOME BDC II, INC.



SCHEDULE
OF INVESTMENTS

(dollars
in thousands)



The
following table shows the portfolio composition by industry grouping at fair value at December 31, 2016:



|                                              |  | At December
    31, 2016 |       
|--------------------------------------------- |  | ------------------------ | ------
|                                              |  | Investments atFair 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



F-10









VII PEAKS
CO-OPTIVIST INCOME BDC II, INC.



NOTES TO
FINANCIAL STATEMENTS



December
31, 2017



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 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.



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.



F-11







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 December 31, 2017, we issued 6.8 million shares of common
stock, including 0.7 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 $63.8 million, including $5.9 million under our DRIP
less $2.9 million paid to redeem shares in our prior quarterly tender offers.





Liquidity and Going Concern



Our audited financial statements for the
year ended December 31, 2017 have been prepared assuming we will continue to operate as a going concern, although because
of our portfolio defaults and inability to convert to an Interval Fund and raise additional capital, it raises substantial doubt
about our ability to continue as such.



As of December 31, 2017, we had approximately
$18,000 in money market funds and subsequent to year end, we have delayed payments to service providers, substantially curtailed
shareholder distributions, and extended certain of our loans’ maturity dates, thereby delaying the timing of cash inflows.
This raises substantial doubt about the ability of the Fund to continue as a going concern. Management plans to work with portfolio
companies that are in default of loan repayments to refinance their outstanding debt obligations to the Fund. In addition, management
plans to raise cash by selling certain of its loans to other parties. Also, management has requested the Board of the Directors
to reduce shareholder distributions. Based upon the Fund’s plans to sell portfolio investments
to raise capital, receipt of loan payments and reducing shareholder distributions, the Fund believes it is probable it will have
sufficient resources to meet its financial obligations for the next 12 months from the issuance of these financial statements.



If we are unable to sell our investments
or receive loan repayments in a timely manner, we may be required to reduce, defer, or discontinue certain or all of our operations
or we would be less able to create and maintain a broad portfolio of investments and achieve our investment objective, which may
negatively impact our results of operations and reduce our ability to make distributions to our shareholders or we may not be able
to continue as a going concern.



In the event the Fund is able to reorganize
and convert to a closed-end Interval Fund and raise new capital, the net proceeds from the sale of common stock will be used for
our investment opportunities, operating expenses and for payment of various fees and expenses such as base management fees, inventive
fees and other expenses. Any working capital reserves we maintain may not be sufficient for investment purposes, and we may require
debt or equity financing to operate. Any loan defaults from portfolio companies will negatively impact our results of operations,
reduce our overall liquidity and cash flows needed to continue as a going concern. Any defaults would also increase the difficulty
in securing alternative sources of funding, and there



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")
and pursuant to the requirements for reporting on Form 10-K and Articles 6 or 10 of Regulation S-X. The Fund is a single reportable
segment.



Our
audited financial statements for the year ended December 31, 2017 have been prepared assuming we will continue to operate as a
going concern, although because of our portfolio defaults and inability to convert to an Interval Fund and raise additional
capital, it raises substantial doubt about our ability to continue as such.





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 $270 and $779
at December 31, 2017 and December 31, 2016, respectively (in thousands) is comprised of $81 and $333, respectively, from Nima,
LLC; zero and $258, respectively, from GeoCommerce, Inc.; $21 and $188, respectively, from Ansgar Media, LLC; $29 and zero, respectively,
from Digital Golf Technologies, LLC; and $139 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.



F-12







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.



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.



Accounting
Pronouncements Adopted



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
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 required any additional disclosures
regarding the Fund’s ability as a going concern in the Fund’s financial statements. Note 2 of our financial
statements include our disclosure regarding the Fund’s ability to continue as a going concern.



Recently
Issued Accounting Pronouncements Not Yet Adopted



In
May 2014, the FASB issued ASU No. 2014-09, Revenue with Contracts from Customers (Topic 606), to provide guidance on revenue
recognition. ASU No. 2014-09 requires a company to recognize revenue when it transfers promised goods or services
to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods
or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance.
These may include identifying performance obligations in the contract, estimating the amount of variable consideration
to include in the transaction price and allocating the transaction price to each separate performance obligation. In August
2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic606): Deferral
of the Effective Date, which provided for the adoption of the new standard for fiscal years beginning after December
15, 2017. Accordingly, ASU No. 2014-09 is effective for the Company in the first quarter of 2018. Early
adoption up to the first quarter of 2017 was permitted. Upon adoption, ASU No. 2014-09 can
be applied retrospectively to all periods presented or only to the most current period presented with the cumulative effect of
changes reflected in the opening balance of retained earnings in the most current period presented. The FASB has also issued the
following standards which clarify ASU No. 2014-09 and have the same effective date as the original standard:



F-13







| | · | ASU No.
    2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue
    Gross versus Net);                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | ASU No. 2016-10, Identifying
    Performance Obligations and Licensing (Topic 606);                                                                                                                                                                        
| | · | ASU No. 2016-11, Revenue
    Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards
    Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting;
| | · | ASU No. 2016-12, Revenue
    from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and                                                                                                                            
| | · | ASU No. 2016-20, Revenue
    from Contracts with Customers (Topic 606): Technical Corrections and Improvements.                                                                                                                                            



The
new standard became effective on January 1, 2018. The Company has completed its evaluation and believes the adoption of the
ASU will not have any material impact on the Fund’s financial statements as the Company does not have any contracts with
customers.



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 does not believe
that the adoption of this guidance will have a material impact on the Fund's financial statements, as the Fund does not currently
have restricted cash.



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”). In February of 2018, the FASB issued
ASU 2018-03: Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10) to further
clarify the guidance. ASU’s 2016-01 and 2018-03, retain many current requirements for the classification and measurement
of financial instruments; however, the new guidance 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
2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic230): Classification
of Certain Cash Receipts and Cash Payments, addressing eight specific cash flow issues in an effort to reduce
diversity in practice. The amended guidance is effective for fiscal years beginning after December 15, 2017, and for
interim periods within those years. Early adoption is permitted. The Company does not expect the amended guidance to
have a material impact on its Statements of Cash Flows.



In August
2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements
to Accounting for Hedging Activities, to address stakeholder concerns that hedge accounting is often difficult to interoperate
and to improve clarity in the financial statements regarding an entity’s risk management strategy. The amended guidance
is effective for fiscal years beginning after December 15, 2018, and for interim periods within those years. Early adoption
is permitted. The Company is currently evaluating the impact of the adoption of this standard on the Fund’s Financial Statements.



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.



F-14







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 $4.2 million for the year ended December 31, 2017, as compared to $3.1 million for the year ended
December 31, 2016 and $3.5 million for the year ended December 31, 2015, 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
December 31, 2017, the weighted average coupon yield was 12.1%, as compared to 8.6% at December 31, 2016 and 7.6% at December
31, 2015. This coupon yield is for the non-defaulted and non-equity positions. Based on current and prior three quarter’s
net assets, average net assets as of December 31, 2017 were $43.1 million, as compared to $31.8 and $39.2 million for the years
ended December 31, 2016 and 2015, respectively.



For
the year ended December 31, 2017, thirteen 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 thirteen investments:



|PortfolioCompany                      |  | AssetType                    |  |  | InvestmentCoupon Rate |      |   | MaturityDate |                     
|------------------------------------- |  | ---------------------------- |  |  | --------------------- | ---- | - | ------------ | --------------------
|Ansgar Media,
    LLC - Class B Units |  | Equity –
    Preferred Stock |  |  |                       | —    |   |              | —                   
|Aspect Software, Inc. (1)             |  | Equity – Common Stock        |  |  |                       | —    |   |              | —                   
|Aspire Holdings (2)                   |  | Equity – Common Stock        |  |  |                       | —    |   |              | —                   
|Digital Golf Technologies, LLC        |  | Warrant                      |  |  |                       | —    |   |              | —                   
|Education
    Management LLC (3)      |  | Equity
    – Common Stock    |  |  |                       | —    |   |              | —                   
|Education
    Management LLC (3)      |  | Warrant                      |  |  |                       | —    |   |              | —                   
|GeoCommerce,
    Inc.                 |  | Warrant                      |  |  |                       | —    |   |              | —                   
|Gymboree
    Corp.                    |  | Senior
    Unsecured Debt    |  |  |                       | 9.13 | % |              | December
    1, 2018
|Logan's
    Roadhouse, Inc. (4)       |  | Equity
    – Common Stock    |  |  |                       | —    |   |              | —                   
|NII
    Holdings, Inc. (5)            |  | Equity
    – Common Stock    |  |  |                       | —    |   |              | —                   
|Nima, LLC                             |  | Warrant                      |  |  |                       | —    |   |              | —                   
|UCI International, Inc. (6)           |  | Equity – Common Stock        |  |  |                       | —    |   |              | —                   
|Vieste Group, LLC                     |  | Warrant                      |  |  |                       | —    |   |              | —                   



|(1) | Converted
    from exchange of 3.00% PIK senior unsecured convertible notes.                                                                                                                                                                                                                                                      
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Converted
    from exchange of 12.00% Endeavour International Corp First Lien Bonds.                                                                                                                                                                                                                                              
|(3) | Received
    in exchange of 15.00% Cash/PIK bonds.                                                                                                                                                                                                                                                                                
|(4) | 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.
|(5) | Received
    in exchange of 10.00% senior unsecured debt.                                                                                                                                                                                                                                                                         
|(6) | Received
    in exchange of 8.625% senior unsecured notes.                                                                                                                                                                                                                                                                        



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:



F-15







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 December 31, 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 publicly-traded or have no closing market price, as of December 31, 2017:



|PortfolioCompany                                            |  | AssetType                          |  |  | InvestmentCoupon Rate |       |   | MaturityDate |                      
|----------------------------------------------------------- |  | ---------------------------------- |  |  | --------------------- | ----- | - | ------------ | ---------------------
|Ansgar Media,
    LLC - Class B Units                       |  | Equity –
    Preferred Stock       |  |  |                       | —     |   |              | —                    
|Ansgar Media, LLC                                           |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | January
    11, 2019 
|Ansgar
    Media, LLC                                       |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | September
    8, 2019
|Ansgar
    Media, LLC (8)                                   |  | Senior
    Secured First Lien Debt |  |  |                       | 12.00 | % |              | October
    24, 2018 
|Ansgar Media, LLC (8)                                       |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | October
    27, 2018 
|Aspect Software, Inc. (1)                                   |  | Equity – Common Stock              |  |  |                       | —     |   |              | —                    
|Aspire Holdings (2)                                         |  | Equity – Common Stock              |  |  |                       | —     |   |              | —                    
|Colt Defense, LLC (3)                                       |  | Senior Unsecured Debt              |  |  |                       | 8.00  | % |              | July
    12, 2021    
|Digital Golf Technologies, LLC                              |  | Senior Secured First Lien Debt     |  |  |                       | 13.00 | % |              | January
    11, 2020 
|Digital Golf Technologies, LLC                              |  | Warrant                            |  |  |                       | —     |   |              | —                    
|Education
    Management LLC                                |  | Equity
    – Common Stock          |  |  |                       | —     |   |              | —                    
|Education
    Management LLC                                |  | Warrant                            |  |  |                       | —     |   |              | —                    
|GeoCommerce, Inc. (4)                                       |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | April
    27, 2018   
|GeoCommerce, Inc. (4)                                       |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | May
    15, 2018     
|GeoCommerce, Inc. (4)                                       |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | October
    14, 2018 
|GeoCommerce, Inc.                                           |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | December
    21, 2018
|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  | % |              | November
    23, 2020
|Nima, LLC (6)                                               |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | May
    20, 2018     
|Nima, LLC (6)                                               |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | August
    11, 2018  
|Nima, LLC (6)                                               |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | October
    16, 2018 
|Nima, LLC                                                   |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | November
    2, 2018 
|Nima, LLC                                                   |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | December
    21, 2018
|Nima, LLC                                                   |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | February
    16, 2019
|Nima, LLC                                                   |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | April
    6, 2019    
|Nima, LLC                                                   |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | June
    19, 2019    
|Nima, LLC                                                   |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | August
    4, 2019   
|Nima, LLC                                                   |  | Senior Secured First Lien Debt     |  |  |                       | 12.00 | % |              | August
    31, 2019  
|Nima, LLC                                                   |  | Warrant                            |  |  |                       | —     |   |              | —                    
|UCI International, Inc. (7)                                 |  | Equity – Common Stock              |  |  |                       | —     |   |              | —                    
|Vieste Group, LLC                                           |  | Senior Secured First Lien Debt     |  |  |                       | 13.00 | % |              | April
    7, 2019    
|Vieste Group, LLC                                           |  | Senior Secured First Lien Debt     |  |  |                       | 13.00 | % |              | July
    14, 2019    
|Vieste Group, LLC                                           |  | Senior Secured First Lien Debt     |  |  |                       | 13.00 | % |              | August
    1, 2019   
|Vieste Group, LLC                                           |  | Senior Secured First Lien Debt     |  |  |                       | 13.00 | % |              | August
    17, 2019  
|Vieste Group, LLC                                           |  | Senior Secured First Lien Debt     |  |  |                       | 13.00 | % |              | August
    31, 2019  
|Vieste Group, LLC                                           |  | Senior Secured First Lien Debt     |  |  |                       | 13.00 | % |              | October
    2, 2019  
|Vieste Group, LLC                                           |  | Warrant                            |  |  |                       | —     |   |              | —                    



F-16







|(1) | 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, the 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Converted
    from exchange of 12.00% Endeavour International Corp, senior secured first lien debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(3) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(4) | GeoCommerce,
    Inc. has requested loan extensions for the loans in default.  We have sent those extensions along with our reservation
    of rights letters. However, GeoCommerce, Inc. has not taken any action on the loan extensions as they are working to secure
    financing to repay the loans.                                                                                                                                                                                                                                                                                                                                                                                            
|(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) | Nima,
    LLC is currently in default of three of their loans. We are currently in discussion with Nima, LLC to either extend the loans
    or renegotiate the terms.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(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.                                                                                                                                                                                                                                                                                                                                                                    
|(8) | We expect to give loan extensions to Ansgar Media, LLC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



Securities
that are not publicly-traded are valued at fair value as determined in good faith by the Management, 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:



| | • | 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, 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 December 31, 2017 per the fair value hierarchy
(dollars in thousands):



|                                    |  | Level
    1 |    |  | Level
    2 |   |     | Level
    3 |  |   | Total  | 
|----------------------------------- |  | ----------- | -- |  | ----------- | - | --- | ----------- |  | - | ------ | 
|Investments
    – Money Market      |  | $           | 18 |  |             | $ | —   |             |  | $ | —      | 
|Senior
    Secured First Lien Debt  |  |             | —  |  |             |   | 190 |             |  |   | 20,237 | 
|Senior
    Secured Second Lien Debt |  |             | —  |  |             |   | —   |             |  |   | 179    | 
|Senior
    Unsecured Debt           |  |             | —  |  |             |   | 13  |             |  |   | 148    | 
|Equity
    Securities               |  |             | —  |  |             |   | 7   |             |  |   | 26,721 | 
|Total                               |  | $           | 18 |  |             | $ | 210 |             |  | $ | 47,285 | 



F-17







The
following table presents fair value measurements of investments, by major class, as of December 31, 2016 per 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 | 



There
was one transfer from Level 2 to Level 3 for the year ended December 31, 2017. The transfer was UCI International, Inc. 8.63%
senior unsecured debt, due February 15, 2019, which was converted to equity. There were two transfers from Level 3 to Level 2
for the year ended December 31, 2017. The transfers were Nuverra Environmental Solutions, Inc. 10% senior secured second lien
debt, due April 15, 2021 and Nuverra Environmental Solutions, Inc. warrants.



During the year
ended December 31, 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               |  |             | — |  |             |   | 11   |             |  |   | 227   |  
|Total                               |  | $           | — |  |             | $ | 42   |             |  | $ | (42   | )



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 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.



F-18







Changes
in Level 3 assets measured at fair value for the year ended December 31, 2017 are as follows (dollars in thousands):



|                                   |  | FairValueatDecember 31,2016 |        |  | Transfersin / (out) |   |      | Reclassification |  |   | Purchases(SalesandSettlement) (1) |   |  | AmortizationandAccretionof FixedIncomePremiumsandDiscounts |       |   | RealizedandUnrealizedGains(Losses) |   |       | FairValueatDecember 31,2017 |  |   | Change inUnrealizedappreciation(depreciation) forinvestments heldas of December 31,2017 |  
|---------------------------------- |  | --------------------------- | ------ |  | ------------------- | - | ---- | ---------------- |  | - | --------------------------------- | - |  | ---------------------------------------------------------- | ----- | - | ---------------------------------- | - | ----- | --------------------------- |  | - | --------------------------------------------------------------------------------------- | -
|Senior Secured
    First Lien Debt |  | $                           | 14,882 |  |                     | $ | -    |                  |  | $ | -                                 |   |  | $                                                          | 5,203 |   |                                    | $ | 1,488 |                             |  | $ | (1,336                                                                                  | )
|Senior Secured Second Lien Debt    |  |                             | 518    |  |                     |   | (269 | )                |  |   | (87                               | ) |  |                                                            | 17    |   |                                    |   | 1     |                             |  |   | (1                                                                                      | )
|Senior Unsecured Debt              |  |                             | 325    |  |                     |   | -    |                  |  |   | -                                 |   |  |                                                            | (140  | ) |                                    |   | 5     |                             |  |   | (42                                                                                     | )
|Equity Securities                  |  |                             | 9,584  |  |                     |   | 227  |                  |  |   | 87                                |   |  |                                                            | 308   |   |                                    |   | -     |                             |  |   | 16,515                                                                                  |  
|Total                              |  | $                           | 25,309 |  |                     | $ | (42  | )                |  | $ | -                                 |   |  | $                                                          | 5,388 |   |                                    | $ | 1,494 |                             |  | $ | 15,136                                                                                  |  



|(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 on investments
in the statements of operations. The change in unrealized appreciation (depreciation) for Level 3 investments still held as of
December 31, 2017 of $15.1 million is included in net unrealized appreciation on investments in the statements of operations for
the year ended December 31, 2017.



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



|                                   |  | FairValueatDecember 31,2015 |       |  | Transfersin / (out) |   |       | Reclassification |  |   | Purchases(Sales
        andSettlement) (1) |   |  | AmortizationandAccretion
        of
        Fixed
        IncomePremiumsandDiscounts |        |  | RealizedandUnrealizedGains |   |   | Fair
        Valueat
        December
        31,
        2016 |  |   | Change inUnrealizedappreciation(depreciation) forInvestments heldas of December 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.



The
following table provides quantitative information regarding Level 3 fair value measurements as of December 31, 2017 (dollars in
thousands):



|                                    |  |                    |        |  |                    |                                                                     |                   |                                                             |      |   | Range   | 
|----------------------------------- |  | ------------------ | ------ |  | ------------------ | ------------------------------------------------------------------- | ----------------- | ----------------------------------------------------------- | ---- | - | ------- | 
|                                    |  | Fair
        Value |        |  | ValuationTechnique |                                                                     | UnobservableInput |                                                             | Mean |   | Minimum | 
|Senior
    Secured First Lien Debt  |  | $                  | 20,237 |  |                    | Discounted
Cash Flow analysis / EBITDA multiples / Enterprise Value |                   | Transaction
    Value Market premium for loan interest rate |      | $ | 20,237  | 
|Senior
    Secured Second Lien Debt |  |                    | 179    |  |                    | Liquidation                                                         |                   | Transaction Value                                           |      |   | 179     | 
|Senior
    Unsecured Debt           |  |                    | 148    |  |                    | Liquidation                                                         |                   | Transaction Value                                           |      |   | 148     | 
|Equity
    Securities               |  |                    | 26,721 |  |                    | Income Approach / Market
Approach                                   |                   | Transaction Value / Discounted
    Cash Flows               |      |   | 26,721  | 
|Total                               |  | $                  | 47,285 |  |                    |                                                                     |                   |                                                             |      |   |         | 





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 $25.67million (Ansgar Media,, LLC, Geocommerce, Inc. and Nima, LLC) of the $26.72 million equity securities were valued
using the Discounted Cash Flow (DCF) and Guideline Public Company (GPC) method. The range of discount rate used for DCF method
was 30% to 75% and the range for EBITDA multiple used for GPC method was 2.5x to 15x.



F-19







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



|                                    |  |                    |        |  |                    |                                                                     |                   |                                                         |      |   | Range   | 
|----------------------------------- |  | ------------------ | ------ |  | ------------------ | ------------------------------------------------------------------- | ----------------- | ------------------------------------------------------- | ---- | - | ------- | 
|                                    |  | Fair
        Value |        |  | ValuationTechnique |                                                                     | UnobservableInput |                                                         | 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.).



The
composition of the Fund’s investments as of December 31, 2017, at amortized cost and fair value were as follows (dollars
in thousands):



|                                    |  | Investments
    atAmortized Cost |        |  | Investments
    atFair Value |   |        | Fair
    ValuePercentage ofTotal Portfolio | 
|----------------------------------- |  | -------------------------------- | ------ |  | ---------------------------- | - | ------ | ------------------------------------------ | 
|Investments
    – Money Market      |  | $                                | 18     |  |                              | $ | 18     |                                            | 
|Senior
    Secured First Lien Debt  |  |                                  | 19,867 |  |                              |   | 20,427 |                                            | 
|Senior
    Secured Second Lien Debt |  |                                  | 165    |  |                              |   | 179    |                                            | 
|Senior
    Unsecured Debt           |  |                                  | 1,800  |  |                              |   | 161    |                                            | 
|Equity
    Securities               |  |                                  | 7,621  |  |                              |   | 26,728 |                                            | 
|Total                               |  | $                                | 29,471 |  |                              | $ | 47,513 |                                            | 



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
    atAmortized Cost |        |  | Investments
    atFair Value |   |        | Fair
    Value Percentage ofTotal 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 and repayments of securities during the year ended December 31, 2017, other than short-term securities and U.S. government
obligations, were $7.8 million and $17.3 million, respectively. Purchases and sales and repayments of securities during the
year ended December 31, 2016, other than short-term securities and U.S. government obligations, were $36.5 million and $30.6 million,
respectively. Purchases and sales and repayments of securities during the year ended December 31, 2015, other than short-term
securities and U.S. government obligations, were $23.2 million and $19.7 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.



F-20









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.



The
managing members of VII Peaks Capital are also officers of Alesiatec. Inc, a software technology. In 2016, GeoCommerce made
a non-recurring engineering payment of $400,000 to Alesiatec to use Alesiatec software technology. In addition, Alesiatec
also issued $100,000 of Series A stock to GeoCommerce to use GeoCommerce’s online database technology.



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 $196,000 at December 31, 2017 consists of approximately $35,000 of true up for management fees from
writing down certain portfolio investments at the end of a quarter in prior quarters, $45,000 in Blue Sky state filing fees
paid by the Fund instead of our Manager, $25,000 in allocation of the Directors and Officers insurance policy costs to
our Manager, and $91,000 in expenses related to legal and other operational costs allocated to our Manager instead of
the Fund.



Due
from related party at December 31, 2016 of $239,000 consisted of approximately $67,000 of true up for management fees from
writing down certain portfolio investments at the end of a quarter in prior quarters, $67,000 in Blue Sky state filing fees by
the Fund instead of our Manager, $13,000 in allocation of the Directors and Officers insurance policy costs to our Manager,
and $90,000 in expenses related to legal and other operational costs allocated to out 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 year ended December
31, 2017, 2016 and 2015 totaled $222,500, $475,000 and $25,000, 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 years ended December 31, 2017,
2016 and 2015, the Fund incurred $0.9 million, $0.6 million and $0.8 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 years ended December 31, 2017, 2016 and 2015, the Fund
did not incur any incentive fees related to net investment income or capital gains.



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



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



F-21







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 December 31, 2017, the Fund has
issued 6.8 million shares of common stock net of 301,413  treasury shares, for gross proceeds of $63.8 million including the
purchases made by the Manager.



During
the year ended December 31, 2017, the Fund did not sell any shares of common stock as its prospectus was not effective. Also,
for the year ended December 31, 2017, there were no treasury shares repurchased.



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 December 31, 2017 and December 31, 2016, the outstanding
balance under this credit line was $0 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.  Income
Taxes



The
Fund has elected to be treated as a RIC under Subchapter M of the Code. As a RIC, the Fund is not taxed on any investment company
taxable income or capital gains which it distributes to shareholders. The Fund intends to make the requisite distributions to
its stockholders which will relieve the Fund from U.S. federal income taxes. Accordingly, no provision for U.S. federal income
tax has been made in the financial statements.



F-22







Dividends
from net investment income and distributions from net realized capital gains are determined in accordance with U.S. federal tax
regulations, which may differ from amounts in accordance with U.S. GAAP and those differences could be material.



Significant
U.S. federal tax reform legislation was recently enacted that, among other things, permanently reduces the maximum federal corporate
income tax rate, reduces the maximum individual income tax rate (effective for taxable years 2018 through 2025), restricts the
deductibility of business interest expense, changes the rules regarding the calculation of net operating loss deductions that
may be used to offset taxable income, and, under certain circumstances, requires accrual method taxpayers to recognize income
for U.S. federal income tax purposes no later than the income is taken into account as revenue in an applicable financial statement.



We
cannot predict with certainty how any future changes in the tax laws might affect us, our investors or our portfolio investments.
New legislation and any U.S. Treasury regulations, administrative interpretations or court decisions interpreting such legislation
could significantly and negatively affect our ability to qualify for tax treatment as a RIC or the U.S. federal income tax consequences
to us and our investors of such qualification, or could have other adverse consequences. Investors are urged to consult with their
tax advisor regarding tax legislative, regulatory or administrative developments and proposals and their potential effect on an
investment in our securities.



Note 8.  Earnings
(Loss) Per Share



In
accordance with the provisions of FASB ASC 260, Earnings per Share (“ASC 260”), net increase (decrease) in
net assets per share is computed by dividing net increase (decrease) 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 (decrease) in net assets
from operations per share for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands except share and per share
amounts):



|                                                                               |  | For
    the YearEndedDecember 31, |           |  | For
    the YearEndedDecember 31, |   |           | For
    the YearEndedDecember 31, | 
|------------------------------------------------------------------------------ |  | --------------------------------- | --------- |  | --------------------------------- | - | --------- | --------------------------------- | 
|                                                                               |  | 2017                              |           |  | 2016                              |   |           | 2015                              | 
|Basic
    and diluted:                                                         |  |                                   |           |  |                                   |   |           |                                   | 
|Net
    increase (decrease) in net assets resulting from operations            |  | $                                 | 16,906    |  |                                   | $ | 7,614     |                                   | 
|Weighted
    average common shares outstanding                                 |  |                                   | 6,403,225 |  |                                   |   | 6,256,208 |                                   | 
|Net
    increase (decrease) in net assets resulting from operations, per share |  | $                                 | 2.64      |  |                                   | $ | 1.22      |                                   | 



The Fund had
no potentially dilutive securities as of December 31, 2017, resulting in the same number of shares for basic and diluted computations.



Note 9. 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 year ended
December 31, 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 |  | RepurchaseDate       |  | SharesRepurchased |         |  | Percent of SharesTenderedthat wereRepurchased |  |     | RepurchasePricePer Share |  |   | AggregateConsiderationFor RepurchasedShares (‘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** |  |                   | —       |  |                                               |  | —   |                          |  |   | —                                                    | 
|December
    31, 2017    |  | December 31, 2017**  |  |                   | —       |  |                                               |  | —   |                          |  |   | —                                                    | 
|                         |  |                      |  |                   |         |  |                                               |  |     |                          |  |   |                                                      | 



F-23







*
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, September 30, 2017, and December 31, 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.



Note 10.  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. Prior to the September 30, 2015,
we paid distributions on a semi-monthly basis. We changed to paying distributions monthly, when declared by our Board of Directors,
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 December 31, 2017, the Fund has accrued $0.1 million stockholder distributions that were unpaid. As of December 31, 2016, the
Fund had not accrued any 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
        Investment |   | Realized
        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 
|October 1, 2017 - December 31,
    2017****** |  |               | 0.160779 |                        |   | 527                                |  |               | —   |       |   | 512         |  |      | 1,039 
|TOTAL                                         |  | $             | 1.979469 |                        | $ | 3,252                              |  | $             | 601 |       | $ | 8,501       |  | $    | 12,354



F-24







* 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.



******
For the period from October 1, 2017 to December 31, 2017, the Fund had a realized loss from investments of approximately $3.5
million. That amount is reflected on the source of distributions table below in the distributions from paid in capital amount.
The Fund had stockholder distributions payable of $0.1 million.



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 | %             |  |  | —       | %
|October 1, 2017 – December
    31, 2017 |  |               | 0.160779 |  |            |  | 50 | %             |  |  | —       | %



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 fiscal years ended December 31, 2017, 2016 and 2015:



|Source
    of Distributions:                 |  | Year
    endedDecember 31, 2017 |       |  | Year
    endedDecember 31, 2016 |  |       | Year
    endedDecember 31, 2015 | 
|-------------------------------------------- |  | ------------------------------- | ----- |  | ------------------------------- |  | ----- | ------------------------------- | 
|Distributions
    from net investment income |  | $                               | 1,681 |  |                                 |  | 40.8  | %                               | 
|Distributions from realized gains            |  |                                 | 98    |  |                                 |  | 2.4   | %                               | 
|Distributions from paid in capital           |  |                                 | 2,339 |  |                                 |  | 56.8  | %                               | 
|Total                                        |  | $                               | 4,118 |  |                                 |  | 100.0 | %                               | 



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 subject to Board approval. 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.



F-25







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)





|     |  |  | OfferingExpenses |    |  | Distribution fromNet Investment Incomeexcluding offering costs |   |       | % Distribution fromNet Investment Incomeexcluding offering costs |  |  | % Distributions fromRealized Gainsexcluding offering costs |   |  | % Distributions fromPaid In Capitalexcluding offering costs |  
|---- |  |  | ---------------- | -- |  | -------------------------------------------------------------- | - | ----- | ---------------------------------------------------------------- |  |  | ---------------------------------------------------------- | - |  | ----------------------------------------------------------- | -
|2017 |  |  | $                | —  |  |                                                                | $ | 1,681 |                                                                  |  |  | 41                                                         | % |  |                                                             | 2
|2016 |  |  | $                | —  |  |                                                                | $ | 473   |                                                                  |  |  | 13                                                         | % |  |                                                             | 2
|2015 |  |  | $                | 96 |  |                                                                | $ | 926   |                                                                  |  |  | 21                                                         | % |  |                                                             | 9



Note
11.  Commitments and Contingencies



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



|Name
    of Portfolio Company |  | Investment
    Type                |  | December 31, 2017 |       | December 31, 2016 |  
|----------------------------- |  | ---------------------------------- |  | ----------------- | ----- | ----------------- | -
|Vieste Group, LLC             |  | Senior Secured First Lien
    Debt |  | $                 | 1,870 |                   | $
|                              |  |                                    |  | $                 | 1,870 |                   | $



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 December 31, 2017, the Fund has loaned Vieste Group, LLC $2,380 thousand; the time and amounts of the
additional $1,870 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.



Note 12.  Financial
Highlights



The following
is a schedule of financial highlights for the years ended December 31, 2017, 2016, 2015, 2014 and 2013:



|                                                                         |  | For
    the yearendedDecember 31,2017 |           |   | For
    the yearendedDecember 31,2016 |   |           | For
    the yearendedDecember 31,2015 |  |   | For
    the yearendedDecember 31,2014 |    |  | For
    the yearendedDecember 31,2013 |          
|------------------------------------------------------------------------ |  | ------------------------------------- | --------- | - | ------------------------------------- | - | --------- | ------------------------------------- |  | - | ------------------------------------- | -- |  | ------------------------------------- | ---------
|Per share
    data:                                                      |  |                                       |           |   |                                       |   |           |                                       |  |   |                                       |    |  |                                       |          
|Net
    asset value, beginning of period                                 |  | $                                     | 5.31      |   |                                       | $ | 4.61      |                                       |  | $ | 7.34                                  |    |  | $                                     | 8.70     
|                                                                         |  |                                       |           |   |                                       |   |           |                                       |  |   |                                       |    |  |                                       |          
|Results
    of operations (1)                                            |  |                                       |           |   |                                       |   |           |                                       |  |   |                                       |    |  |                                       |          
|Net
    investment income                                                |  |                                       | 0.26      |   |                                       |   | 0.07      |                                       |  |   | 0.14                                  |    |  |                                       | 0.19     
|Net
    realized gain (loss) on investments                              |  |                                       | (0.61     | ) |                                       |   | (2.12     | )                                     |  |   | 0.06                                  |    |  |                                       | 0.04     
|Net
    unrealized appreciation (depreciation) on investments            |  |                                       | 2.99      |   |                                       |   | 3.27      |                                       |  |   | (2.40                                 | )  |  |                                       | (1.46    
|Net
    increase (decrease) in net assets resulting from operations      |  |                                       | 2.64      |   |                                       |   | 1.22      |                                       |  |   | (2.20                                 | )  |  |                                       | (1.23    
|                                                                         |  |                                       |           |   |                                       |   |           |                                       |  |   |                                       |    |  |                                       |          
|Stockholder
    distributions (2)                                        |  |                                       |           |   |                                       |   |           |                                       |  |   |                                       |    |  |                                       |          
|Distributions
    from net investment income                             |  |                                       | (0.26     | ) |                                       |   | (0.08     | )                                     |  |   | (0.14                                 | )  |  |                                       | (0.19    
|Distributions
    from realized gains                                    |  |                                       | (0.02     | ) |                                       |   | (0.01     | )                                     |  |   | (0.06                                 | )  |  |                                       | (0.04    
|Distributions
    from capital                                           |  |                                       | (0.37     | ) |                                       |   | (0.51     | )                                     |  |   | (0.54                                 | )  |  |                                       | (0.50    
|Net
    decrease in net assets resulting from stockholder distributions  |  |                                       | (0.65     | ) |                                       |   | (0.60     | )                                     |  |   | (0.74                                 | )  |  |                                       | (0.73    
|                                                                         |  |                                       |           |   |                                       |   |           |                                       |  |   |                                       |    |  |                                       |          
|Capital
    share transactions                                           |  |                                       |           |   |                                       |   |           |                                       |  |   |                                       |    |  |                                       |          
|Impact
    from issuance of common stock (3)                             |  |                                       | —         |   |                                       |   | —         |                                       |  |   | 0.21                                  |    |  |                                       | 0.60     
|Impact
    from reinvestment of stockholder distributions (4)            |  |                                       | 0.07      |   |                                       |   | 0.10      |                                       |  |   | —                                     |    |  |                                       | —        
|Net
    increase in net assets resulting from capital share transactions |  |                                       | 0.07      |   |                                       |   | 0.10      |                                       |  |   | 0.21                                  |    |  |                                       | 0.60     
|Other
    (5)                                                            |  |                                       | (0.02     | ) |                                       |   | (0.02     | )                                     |  |   | —                                     |    |  |                                       | —        
|Net
    asset value, end of period                                       |  | $                                     | 7.35      |   |                                       | $ | 5.31      |                                       |  | $ | 4.61                                  |    |  | $                                     | 7.34     
|Shares
    outstanding at end of period                                  |  |                                       | 6,477,563 |   |                                       |   | 6,337,606 |                                       |  |   | 6,181,515                             |    |  |                                       | 5,546,292
|Total
    return (7)                                                     |  |                                       | 49.52     | % |                                       |   | 23.62     | %                                     |  |   | (31.96                                | )% |  |                                       | (8.88    
|Ratio/Supplemental
    data:                                             |  |                                       |           |   |                                       |   |           |                                       |  |   |                                       |    |  |                                       |          
|Net
    assets, end of period (in thousands)                             |  | $                                     | 47,633    |   |                                       | $ | 33,682    |                                       |  | $ | 28,490                                |    |  | $                                     | 40,688   
|Average
    net assets (in thousands)                                    |  | $                                     | 43,106    |   |                                       | $ | 31,831    |                                       |  | $ | 39,246                                |    |  | $                                     | 36,686   
|Ratio
    of net investment income to average net assets (6) (9)         |  |                                       | 3.90      | % |                                       |   | 1.47      | %                                     |  |   | 2.12                                  | %  |  |                                       | 2.23     
|Ratio
    of operating expenses to average net assets (6) (9)            |  |                                       | 5.92      | % |                                       |   | 8.33      | %                                     |  |   | 6.83                                  | %  |  |                                       | 6.65     
|Ratio
    of expenses reimbursed to average net assets (9)               |  |                                       | —         | % |                                       |   | 0.65      | %                                     |  |   | —                                     | %  |  |                                       | —        
|Portfolio
    turnover ratio (8)                                         |  |                                       | 17.65     | % |                                       |   | 83.71     | %                                     |  |   | 56.67                                 | %  |  |                                       | 36.08    



F-26
















|(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 years ended December 31, 2017, December 31, 2016, December 31, 2015 and December 31, 2014. Net investment
    income per share excluding the expense reimbursements equals ($0.06) for the year ended December, 31, 2013.                                                                                                                                                                                                                                      
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The
    per share data for distributions reflects the actual amount of distributions declared per share during the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(3) | The
    issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance
    of shares of common stock in the Fund’s continuous offering.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(4) | The
    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.                                                                                                                                                                                                                                                                                                                                                                                                                               
|(5) | 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.                                                                                                                                                                                                                                                                                                                       
|(6) | 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 years ended December 31, 2017, December 31, 2016, December 31, 2015 and
    December 31, 2014, there was no expense waiver and reimbursement. For the year ended December 31, 2013, excluding the expense
    reimbursement, the ratio of net investment income and operating expenses to average net assets is (0.14)% and 7.90%, respectively.                                                                                                       
|(7) | 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 years ended December 31, 2017, December 31, 2016, December 31,
    2015 and December 31, 2014, there was no expense reimbursement. The total return based on net asset value for the year ended
    December 31, 2013, includes the effect of the expense reimbursement which equaled 3.63%.
|(8) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(9) | Ratios
    calculated based on average net assets using current and prior 3 quarters’ net assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



Note 13.  Selected
Quarterly Data (Unaudited)



The following
is the quarterly results of operations for the years ended December 31, 2017 and 2016. The operating results for any quarter are
not necessarily indicative of results for any future period (dollars in thousands except share and per share amounts):



|                                                         |  | Quarter
    Ended    |          
|-------------------------------------------------------- |  | -------------------- | ---------
|                                                         |  | December
    31,2017 |          
|Investment
    income                                    |  | $                    | 1,148    
|Operating expenses                                       |  |                      | 621      
|Net investment income                                    |  |                      | 527      
|Realized and unrealized gain,
    net                    |  |                      | 3,976    
|Net increase in net assets
    resulting from operations |  | $                    | 4,503    
|Per share information - basic
    and diluted            |  |                      |          
|Net investment income                                    |  | $                    | 0.08     
|Net increase in net assets resulting
    from operations |  | $                    | 0.70     
|Weighted average shares outstanding                      |  |                      | 6,455,063



|                                                         |  | Quarter
    Ended    |          
|-------------------------------------------------------- |  | -------------------- | ---------
|                                                         |  | December
    31,2016 |          
|Investment
    income                                    |  | $                    | 785      
|Operating expenses                                       |  |                      | 625      
|Net investment income (loss)                             |  |                      | 160      
|Realized and unrealized gain,
    net                    |  |                      | 812      
|Net increase in net assets
    resulting from operations |  | $                    | 972      
|Per share information - basic
    and diluted            |  |                      |          
|Net investment income                                    |  | $                    | 0.03     
|Net increase in net assets resulting
    from operations |  | $                    | 0.15     
|Weighted average shares outstanding                      |  |                      | 6,313,427



|(1) | For the quarters
    ended September 30, 2016 and June 30, 2016, the investment income, net investment income and realized and unrealized gain,
    net amounts are different than previously reported as a result of the correction of an accounting error.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-27







Note 14.  Subsequent
Events



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



On
March 5, 2018, the Fund sold the $1 million Digital Golf Technologies Senior Secured First Lien Loan, at par, to a private
party. The Fund still holds a warrant for 22,222 shares of Series A Preferred Stock in Digital Golf.



On
March 6, 2018, the Board of Directors of the Fund declared two monthly distributions and consented to keep the annual
distribution rate at 7.35% of the current $8.75 gross offering price. The distributions were to shareholders of record on
March, 6, 2018, payable March 30, 2018 and to shareholders of record on April 2, 2018, payable April 30, 2018. However, the
March distribution was not paid until May 17, 2018  due to the default of the loans and interest from two of the portfolio
companies, GeoCommerce, Inc. and Nima, LLC. On September 28, 2018, the Board of Directors of the Company revised the
previously declared distribution for April 2018 and declared a monthly distribution of $.00384 per share. This distribution
year to date, reflects a reduced 2.23% annualized distribution rate based on the current offering price of $8.75. The
distribution was to stockholders of record on September 28, 2018, and paid on October 3, 2018. As of the issuance
date of these financial statements, there have been no additional declarations of distributions.



On
June 6, 2018, the Fund amended the Senior Secured First Lien Loan Agreement with GeoCommerce, Inc., governing its $1.5 million
note originally entered into on April 27, 2016 with a maturity date of April 27, 2018, to extend the maturity date to June 22,
2018. As part of this amendment, the Fund received a warrant for an additional 375,000 shares. The interest rate accrued from
the original maturity date of April 27, 2018 to the amended maturity date of June 22, 2018 at a rate of 14% per annum. Because
the loan was not repaid by the amended maturity date of June 22, 2018, interest is now accruing at a rate of 16% per annum. As
of the date of this filing, only partial repayments of $366,333 have been made. GeoCommerce, Inc. requested a loan extension,
which we sent along with our reservation of rights letter. However, GeoCommerce, Inc. has not taken any action on the loan extensions
as they are working to secure financing to repay the loan.



On
June 6, 2018, the Fund amended the Senior Secured First Lien Loan Agreement with GeoCommerce, Inc., governing its $1 million note
originally entered into on May 15, 2016 with a maturity date of May 15, 2018, to extend the maturity date to June 30, 2018. As
part of this amendment, the Fund received a warrant for an additional 125,000 shares. The interest rate accrued from the original
maturity date of May 15, 2018 to the amended maturity date of June 30, 2018 at a rate of 14% per annum. Because the loan was not
repaid by amended maturity date of June 30, 2018, interest is accruing at a rate of 16% per annum. As of the date of this
filing, the loan has not been repaid. GeoCommerce, Inc. requested a loan extension, which we sent along with our reservation of
rights letter. However, GeoCommerce, Inc. has not taken any action on the loan extensions as they are working to secure financing
to repay the loan. GeoCommerce, Inc. is also currently in default of its loan agreement originally entered into on October 14,
2016.



Nima,
LLC is currently in default of three of their loans totaling $3,436,750. We are currently in discussion with Nima, LLC to either extend the
loans or renegotiate the terms.



On
September 11, 2018, the Fund sold 30,714 shares of UCI International common stock for a net of $502,942 to a
private party.



F-28







ITEM 9. CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



| | (a) | Dismissal
    of BPM LLP
| | --- | ------------------------



| | (1) | Effective
    June 27, 2016, we dismissed BPM LLP as our principal independent registered public accounting firm.  Our audit committee
    approved the dismissal of BPM LLP.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | The
    report of BPM on our financial statements for the fiscal years ended December 31, 2015 and 2014 did not contain an adverse
    opinion or disclaimer of opinion, nor was it modified as to uncertainty, audit scope or accounting principles.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | During
    the fiscal year ended December 31, 2015 and during the subsequent period through the date of BPM’s dismissal, there
    were no disagreements between us and BPM, whether or not resolved, on any matter of accounting principles or practices, financial
    statement disclosure, or auditing scope or procedure, which if not resolved to the satisfaction of BPM, would have caused
    BPM to make reference thereto in its report on our audited financial statements. In connection with the audits of the fiscal
    years ended December 31, 2015 and 2014, and the interim period ended March 31, 2016, there have been no “reportable
    events” (as defined in Item 304(a)(1)(v) of Regulation S-K).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Engagement
    of OUM & Co. LLP
| | --- | -------------------------------



| | (1) | Effective
    June 27, 2016, we engaged OUM & Co. LLP (“OUM”) as our independent registered public accounting firm. The
    engagement was approved by the board of directors, which also serves the role of audit committee.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | In
    connection with our appointment of OUM as our independent registered accounting firm, we had not consulted OUM on any matter
    relating to the application of accounting principles to a specific transaction, either completed or contemplated, or the type
    of audit opinion that might be rendered on our financial statements.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 9A. CONTROLS AND PROCEDURES



Disclosure
Controls



In
accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an
evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of
the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K and determined that the disclosure controls
and procedures were not effective.



Management’s
report on Internal Control Over Financial Reporting



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, 2017.



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 material weaknesses resulting from the following:



The
Fund has not been able to file its December 31, 2017 10-K report or its subsequent 2018 10-Q reports in a timing manner.
The Fund had to wait for the financial statements from its privately held portfolio companies. Those companies are not
required to file audited financial statements and therefore do not have the same reporting deadlines as the Fund. Once
financial statements are received by the Fund, they are forwarded to a third-party to prepare independent valuations of the
warrants issued by those companies. To avoid these delays in the future, management has concluded that it will use the
financials from those privately held portfolio companies for the period ending September 30 to provide to its third-party
valuation firm to prepare the December 31 valuations, if their December 31 financials are not available by January 30 of the
following year. Management plans to bring in additional outside resources with US GAAP reporting experience to help complete
financial statements in a timely manner.



Subsequent
to December 31, 2016, our Board of Directors elected to restate our financial statements for the three and six months ended June
30, 2016, and 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 III 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 these material weaknesses will be remediated by the additional controls and procedures that have been implemented.



Change
in Internal Control Over Financial Reporting



There
were no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act)
during the year ended December 31, 2017 that have materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting except as noted above regarding financial statements from privately-held portfolio companies.



ITEM 9B.
OTHER INFORMATION



None.



55







Part III



ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE



Our business and affairs are managed under the direction of our Board of Directors. The responsibilities of the Board of Directors
include, among other things, the oversight of our investment activities, the quarterly valuation of our assets, oversight of our
financing arrangements and corporate governance activities. Pursuant to our charter, the Board is divided into three classes,
designated Class I, Class II, and Class III. At each annual meeting of our stockholders, the successors to the class of directors
whose terms expire at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held
in the third year following the year of their election. Each director will hold office for the term to which he or she is elected
and until his or her successor is duly elected and qualifies.



Biographical
Information



Biographical
information for each of our executive officers and directors is set forth below. The address for each executive officer and director
is c/o VII Peaks Co-Optivist Income BDC II, Inc., 4 Orinda Way, Suite 125-A, Orinda, CA 94563.



Directors



On
July 23, 2018, independent director Jeya Kumar, resigned from the Board to pursue other professional opportunities. Concurrently,
Stephen Shea, an interested director, resigned from the Board in order to permit the Company to maintain a majority of independent
directors as required pursuant to certain provisions of the Investment Company Act of 1940. The following persons serve as our
current directors and on the committees indicated:



|Nominee                             |  | Age |  | DirectorSince |  | Independent |  | Expirationof Term |  | Principal Occupation or
    Affiliation     |  | Committees                                    
|----------------------------------- |  | --- |  | ------------- |  | ----------- |  | ----------------- |  | ------------------------------------------- |  | ----------------------------------------------
|Robert
    Winspear                 |  | 53  |  | 2012          |  | Yes         |  | 2020              |  | President
    of Winspear Investments, LLC  |  | Audit,
    Nominating and Corporate Governance
|Gurpreet
    (Gurprit) S. Chandhoke |  | 44  |  | 2012          |  | No          |  | 2018              |  | Director
    and Member of Audit Committees |  | Chairman                                      
|Amit
    Mahajan                    |  | 43  |  | 2012          |  | Yes         |  | 2018              |  | Director
    at PineBridge Investments      |  | Nominating
    and Corporate Governance       



Executive
Officers



The
following persons serve as our executive officers in the following capacities:



|Name                                |  | Age |  | Position
    Held                                   
|----------------------------------- |  | --- |  | ----------------------------------------------------
|Gurpreet
    (Gurprit) S. Chandhoke |  | 44  |  | Chief
    Executive Officer and President           
|Michelle
    E. MacDonald           |  | 51  |  | Chief
    Financial Officer, Treasurer and Secretary
|Douglas
    Tyre (1)                |  | 38  |  | Chief
    Compliance Officer                        
|Garima
    Kakani                   |  | 33  |  | Controller                                          
|Milton
    Balbuena (2)             |  | 50  |  | Co-Chief
    Investment Officer                     










| | (1) | Douglas Tyre of Cipperman Compliance
Services was appointed Chief Compliance Officer on June 28, 2018 after the previous Chief Compliance Office, Emily Silva, resigned
from Cipperman Compliance to pursue other professional opportunities.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Milton Balbuena was appointed
Co-Chief Investment Officer of VII Peaks Capital, LLC, the Fund Manager, in March of 2018.
| | --- | ------------------------------------------------------------------------------------------------------------------------



Information
about Directors



Gurpreet
(Gurprit) S. Chandhoke



Mr.
Chandhoke has been our Chief Executive Officer and President since our inception. Mr. Chandhoke has also been a Managing Partner
and Chief Investment Officer of the Manager since its inception in April 2009. From August 2006 to February 2009, Mr. Chandhoke
was Senior Vice President of Deutsche Bank Technology Investment Banking Group in San Francisco. From August 2005 to August 2006,
Mr. Chandhoke worked for UBS Investment Bank as an Associate Director.



Before
founding the Manager in 2009, Mr. Chandhoke had more than six years investment banking experience. Mr. Chandhoke led several different
types of debt issuances and restructuring discussions and transactions with technology companies and financial sponsors while
at Deutsche Bank and UBS Investment Bank. During his tenure at both institutions he also participated in diverse corporate finance
and M&A transactions in the internet, enterprise software and infrastructure and communications technology sectors. Mr. Chandhoke’s
responsibilities at Deutsche Bank and UBS Investment Bank also involved the issuance of debt securities ranging from bank debt,
corporate debt, high yield and convertible debt securities. Mr. Chandhoke also worked on corporate finance transactions ranging
from mergers and acquisitions, initial public offerings, follow-on offerings, debt issuances and recapitalizations at both Deutsche
Bank and UBS Investment Bank.



56







Mr.
Chandhoke received a Master of Business Administration in Finance and Entrepreneurship from the Wharton School of Business. Mr.
Chandhoke also received a Master’s Degree of Science in Electrical Engineering and a Master Degree of Science in Mechanical
Engineering from the University of Minnesota and a Bachelor’s Degree in Electrical Engineering from the Government College
of Engineering, University of Pune, India. Mr. Chandhoke was chosen as a J.N. Tata Scholar to pursue his graduate studies in the
United States.



Mr.
Chandhoke’s broad and extensive investment banking experience and involvement in a number of diverse corporate finance and
M&A transactions as well as his experience as Chief Investment Officer for the Manager supports his appointment to the Board.



Robert
Winspear



Mr.
Winspear has been the President of Winspear Investments LLC, a Dallas based private investment firm specializing in lower middle
market transactions, since September 2002. Winspear Investments has made investments in a wide range of industries including banking,
real estate, distribution, supply chain management, mega yacht marinas and hedge funds.



Robert
Winspear has served as the Chief Financial Officer of Excel Corporation from May 2014 to June 2017. Excel Corporation (OTC: EXCC)
provides transaction processing and related services to medium and small businesses in the US.



Prior
to forming Winspear Investments, Mr. Winspear was Vice President and Chief Financial Officer of Associated Materials Incorporated,
a nationwide manufacturer and distributor of residential building products consisting primarily of vinyl siding and windows, from
June 1993 to May 2002.



Mr.
Winspear began his professional career in the Dallas office of Arthur Andersen where he worked as an auditor from 1988 to 1993.
He holds a Bachelor of Business Administration and a Master of Professional Accounting from the University of Texas at Austin.



Mr.
Winspear is on the Board of Directors of Alpha Financial Technologies/EAM Corporation, located in Grapevine, Texas.



Mr.
Winspear’s extensive investment experience as an executive or board member of various private and public companies as well
as his investment experience at Winspear Investments support his appointment to the Board.



Amit Mahajan



Since
August 2005, Mr. Mahajan has been a Director at PineBridge Investments, a global multi-asset investment manager, where he has
been responsible for sourcing, due diligence, and negotiating secondary private equity transactions. Before assuming his current
duties at PineBridge, Mr. Mahajan was previously responsible for executing private equity investments across several industries
with a focus on global emerging markets.



Mr.
Mahajan has over ten years of experience in private equity, banking, and consulting, and began his career with Deloitte Consulting,
where he advised multinational clients in energy, telecom, insurance, utilities, and the technology sector. He holds a Bachelor
of Science in Computer Science and Engineering from the Institute of Technology, Delhi, India, and a Master of Business Administration
from Columbia Business School.



Mr.
Mahajan’s extensive experience with investments and private equity transactions at various companies support his appointment
to the Board.



Mr.
Mahajan owns interests in the following investment funds managed by the Manager:



|Name
        ofDirector |  | Name
        of Owners
        and
        Relationships
        to
        Director |  | Company                                   |  | Title
        of
        Class  |  | Value
        ofSecurities |   |     | Percent
        of
        Class | 
|----------------------- |  | ------------------------------------------------------------------------------------ |  | ----------------------------------------- |  | ------------------------------- |  | -------------------------- | - | --- | -------------------------------- | 
|Amit
    Mahajan        |  | CXI
    Valley I, LLC (1)                                                            |  | VII
    Peaks Venture Capital II, LLC (2) |  | Series
    A-1 Preferred Shares |  | $                          | — | (3) |                                  | 



| | (1) | Mr.
    Mahajan and his spouse are the owners of CXI Valley I, LLC.
| | --- | -------------------------------------------------------------------



| | (2) | VII
    Peaks Capital, LLC is the managing member of the Fund. In addition, the Class A Interests are entitled to receive their pro
    rata share of a royalty payable by VII Peaks Capital, LLC in the amount of $25,000 per month.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Valuation
    is the capital account value as of December 31, 2016.
| | --- | -------------------------------------------------------------------



57







Information about
Executive Officers Who Are Not Directors



The
following information pertains to our executive officers who are not directors of the Fund.



|Name, Address and Age      |  | Position(s) Held with Company                        |  | Principal Occupation(s) during Past Five Years                                                                                                                                                                                                                                                                                                                                                                              
|-------------------------- |  | ---------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Michelle E. MacDonald (51) |  | Chief
    Financial Officer, Treasurer and Secretary |  | Vice
    President of Compliance for VII Peaks Capital, LLC since August 2014; Chief Compliance Officer at KBR Capital Markets from
    April 2013 to September 2013; Chief Financial Officer for a real estate fund manager from July 2012 to April 2013; Chief Operating
    Office for a broker dealer from May 2006 to December 2012; instructor and tutor in securities licensing review courses from
    1998 to 2015.
|Douglas Tyre (38)          |  | Chief
    Compliance Officer                         |  | Assistant
    Compliance Director of Cipperman Compliance LLC 2014 to present; Chief Services & Operations Specialist – Senior
    Associate of Echo Point Investment Management 2010-2014.                                                                                                                                                                                                                                 
|Milton Balbuena (50)       |  | Co-Chief
    Investment Officer                      |  | Co-Chief
    Investment Officer VII Peaks Capital, LLC since March 2018; CEO and CIO Blue Hall Capital since March 2013; Chief Investment
    Officer for Contango Capital Advisors from 2004 to 2011; Research Analyst Charles Schwab from 2000 to 2002.                                                                                                                                                                   
|Garima Kakani (33)         |  | Controller                                           |  | Senior
    Analyst with VII Peaks Capital, LLC since December 2013; Manager of Reporting and Analytics with KBR Capital Markets from
    March 2011 to September 2013; Various positions at D.E. Shaw (Indian branch) from March 2007 to September 2009.                                                                                                                                                                    



Corporate Governance and Board
Matters



Our
business and affairs are managed under the direction of our Board of Directors. The responsibilities of the Board of Directors
include, among other things, the oversight of our investment activities, the quarterly valuation of our assets, oversight of our
financing arrangements and corporate governance activities. Our Board of Directors is divided into three classes. Each class of
directors holds office for a three-year term. However, the initial members of the three classes have initial terms of one, two
and three years, respectively. At each annual meeting of our stockholders, the successors to the class of directors whose terms
expire at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held in the third
year following the year of their election. Each director will hold office for the term to which he or she is elected and until
his or her successor is duly elected and qualifies.



The
Board of Directors currently has an audit committee and a nominating and corporate governance committee and may establish additional
committees from time to time as necessary. Although the number of directors may be increased or decreased, a decrease will not
have the effect of shortening the term of any incumbent director. Any director may resign at any time and may be removed with
or without cause by the stockholders upon the affirmative vote of at least a majority of all the votes entitled to be cast at
a meeting called for the purpose of the proposed removal. The notice of the meeting shall indicate that the purpose, or one of
the purposes, of the meeting is to determine if the director shall be removed.



A
vacancy created by an increase in the number of directors or the death, resignation, removal, adjudicated incompetence or other
incapacity of a director may be filled only by a vote of a majority of the remaining directors. As provided in our charter, nominations
of individuals to fill the vacancy of a Board of Directors seat previously filled by an independent director will be made by the
remaining independent directors.



Committees of the Board of Directors



Our
Board of Directors has the following committees:



Audit
Committee and Financial Expert. The audit committee is responsible for selecting, engaging and discharging our independent
accountants, reviewing the plans, scope and results of the audit engagement with our independent accountants, approving professional
services provided by our independent accountants (including compensation therefore), reviewing the independence of our independent
accountants and reviewing the adequacy of our internal controls over financial reporting. The sole member of the audit committee
is Robert Winspear, who is an independent director. Robert Winspear also serves as the chairman of the audit committee. Our Board
of Directors has determined that Robert Winspear is an “audit committee financial expert” as defined under SEC rules.



58







Nominating
and Corporate Governance Committee. The nominating and corporate governance committee selects and nominates directors for
election by our stockholders, selects nominees to fill vacancies on our Board of Directors or a committee thereof, develops and
recommends to our Board of Directors a set of corporate governance principles and oversees the evaluation of our Board of Directors
and our management. The nominating and corporate governance committee is currently composed of Amit Mahajan and Robert Winspear,
both are independent.



Board Leadership Structure



Our
business and affairs are managed under the direction of our Board of Directors. Among other things, our Board of Directors sets
broad policies for us and approves the appointment of our investment adviser, administrator and officers. The role of our Board
of Directors, and of any individual director, is one of oversight and not of management of our day-to-day affairs.



Under
our bylaws, our Board of Directors may designate one of our directors as chair to preside over meetings of our Board of Directors
and meetings of stockholders and to perform such other duties as may be assigned to him or her by our Board of Directors.



Presently,
Mr. Gurpreet S. Chandhoke serves as the Chairman of our Board. Mr. Chandhoke is an “interested person” of the
Fund as defined in Section 2(a)(19) of the 1940 Act by virtue of his role as Chief Executive Officer of the Fund, his service
on the Investment Committee and is a Managing Member of the Manager. We believe that Mr. Chandhoke’s history with the
Fund, familiarity with its investment platform, and extensive knowledge of the financial services industry qualify him to serve
as the Chairman of our Board of Directors. We believe that the Fund is best served through this existing leadership structure,
as Mr. Chandhoke’s relationship with the Manager provides an effective bridge and encourages an open dialogue between
management and the Board of Directors, ensuring that both groups act with a common purpose.



Our
Board of Directors does not currently have a designated lead independent director. We are aware of the potential conflicts that
may arise when a non-independent director is chairman of the Board of Directors, but believe these potential conflicts are offset
by our strong corporate governance policies. Our corporate governance policies include regular meetings of the independent directors
in executive session without the presence of interested directors and management, the establishment of the audit committee and
the nominating and corporate governance committee, each comprised solely of independent directors and the appointment of a chief
compliance officer, with whom the independent directors meet at least once a year without the presence of interested directors
and other members of management, for administering our compliance policies and procedures.



We
recognize that different board leadership structures are appropriate for companies in different situations. We re-examine our
corporate governance policies on an ongoing basis to ensure that they continue to meet our needs.



The
independent directors play an active role on the Board of Directors. The independent directors compose a majority of our Board
of Directors and are closely involved in all material deliberations related to us. Our Board of Directors believes that, with
these practices, each independent director has an equal involvement in the actions and oversight role of our Board of Directors
and equal accountability to us and our stockholders. Our independent directors are expected to meet separately (i) as part
of each regular board meeting and (ii) with our Chief Compliance Officer, as part of at least one board meeting each year.



Our
Board of Directors believes that its leadership structure is the optimal structure for us at this time. Our Board of Directors,
which will review its leadership structure periodically as part of its annual self-assessment process, further believes that its
structure is presently appropriate to enable it to exercise its oversight of us.



Risk Oversight and Board Structure



Through
its direct oversight role, and indirectly through its committees, the Board of Directors performs a risk oversight function for
the Fund consisting of, among other things, the following activities: (1) at regular and special board meetings, and on an ad
hoc basis as needed, receiving and reviewing reports related to the performance and operations of the Fund; (2)reviewing and approving,
as applicable, the compliance policies and procedures of the Fund; (3) meeting with, or reviewing reports prepared by, the representatives
of key service providers, including the investment adviser, administrator, distributor, transfer agent, custodian and independent
registered public accounting firm of the Fund, to review and discuss the activities of the Fund and to provide direction with
respect thereto; and (4) engaging the services of the chief compliance officer of the Fund to test the compliance procedures of
the Fund and its service providers. Gurpreet Chandhoke, who is an “interested person” of the Fund as defined in Section
2(a)(19) of the 1940 Act, serves as both the chief executive officer and chairman of the Board of Directors. The Board of Directors
feels that Mr. Chandhoke, as chief executive officer of the Fund, is the director with the most knowledge of the Fund’s
business strategy and is best situated to serve as chairman of the Board of Directors. The Fund’s charter, as well as regulations
governing business development companies generally, requires that a majority of the Board of Directors be persons other than “interested
persons” of the Fund, as defined in Section 2(a)(19) of the 1940 Act. The Board of Directors does not currently have a lead
independent director. The Board, after considering various factors, has concluded that its structure is appropriate at this time
given the fact that it is a newly-formed entity with no assets. As the Fund’s assets increase, the Board of Directors will
continue to monitor its structure and determine whether it remains appropriate based on the complexity of the Fund’s operations.



59







Procedure for Contacting the
Board of Directors



Our
board of directors welcomes communications from our stockholders. Stockholders may send communications to the board of directors
or to any particular director to the following address: VII Peaks Capital, LLC, Pine Grove Financial Center, 4 Orinda Way, Suite
125A, Orinda, CA 94563, attention Chief Financial Officer. Stockholders should indicate clearly the director or directors to whom
the communication is being sent. All stockholder communications received in this manner will be delivered to one or more members
of the board of directors.



Compensation Committee Interlocks
and Insider Participation



Our
board of directors did not have a separate compensation committee during the fiscal year ended December 31, 2017, and as a result
our full board served as the compensation committee. Gurpreet Chandhoke and Stephen Shea were the only members of our board of
directors who is an officers during the fiscal year ended December 31, 2017. The board does not pay compensation to its officers,
and therefore the board of directors did not engage in deliberations regarding executive compensation. Messrs. Chandhoke and Shea
are each partial owners of our Manager, which receives compensation under an investment advisory agreement with us.



No
executive officer of us served as a member of (i) the compensation committee of another entity of which one of the executive
officers of such entity served on our compensation committee (or board committee performing equivalent functions) or (ii) the
board of directors of another entity of which one of the executive officers of such entity served on our board, during the fiscal
year ended December 31, 2017.



Section 16(a) Beneficial
Ownership Reporting Compliance



Pursuant
to Section 16(a) of the Exchange Act, the Fund’s directors and executive officers, and any persons holding more than
10% of its common stock, are required to report their beneficial ownership and any changes therein to the SEC and the Fund. Specific
due dates for those reports have been established, and the Fund is required to report herein any failure to file such reports
by those due dates. Based solely on a review of the copies of such reports and written representations delivered to the Fund by
such persons, all filings were made timely during the year ending December 31, 2017.



ITEM 11.
EXECUTIVE COMPENSATION



We
currently have no employees. We are managed by our Manager who is registered as an investment adviser under the Investment Advisers
Act of 1940, as amended, or the Advisers Act. We do not compensate our executive officers directly. Our Manager is responsible
for managing our business, as well as 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 is led by Gurpreet (Gurprit) S. Chandhoke, who also serves as our Chief Executive Officer, and Stephen F. Shea. They
are supported by the Manager’s team of employees, including investment professionals who have extensive experience in underwriting
and issuing debt products that include high-yield, bank debt and convertible debt and have acted as financial advisers to private
equity funds, venture capital firms and corporations in mergers and acquisitions, recapitalization and corporate finance transactions,
and have served as principal investors in private equity and leveraged buyout transactions. See “Item 13. Certain Relationships
and Related Transactions, and Director Independence” for a discussion of fees and expenses payable to our Advisers and their
respective affiliates.



Our
Manager has an investment committee that is responsible for reviewing, discussing and approving each investment opportunity we
seek to pursue. We anticipate that our investment committee will meet once a week to discuss new and existing opportunities and
developments on current investments. Our investment committee currently consists of Mr. Chandhoke, our Chief Executive Officer,
and Mr. Milton Balbuena, Co-Chief Investment Officer.



We
entered into our current investment advisory agreement on August 20, 2013, that was approved by our shareholders on December 13,
2013. The current agreement was in effect for an initial two-year period from the date that it was approved by our shareholders,
and is now annually reapproved by a majority of our directors who are not interested persons.



As
required by the 1940 Act, the investment advisory agreement provides that we may terminate the agreement without penalty upon
60 days’ written notice to our Manager. If our Manager wishes to voluntarily terminate the investment advisory agreement,
it must give stockholders a termination and must pay all expenses associated with its termination. The investment advisory agreement
may also be terminated, without penalty, upon the vote of a majority of our outstanding voting securities.



Without
the vote of a majority of our outstanding voting securities, our investment advisory agreement may not be materially amended,
nor may we engage in a merger or other reorganization with our Manager. In addition, should we or our Manager elect to terminate
the investment advisory agreement, a new investment adviser may not be appointed without approval of a majority of our outstanding
common stock, except in limited circumstances where a temporary adviser may be appointed without stockholder consent, consistent
with the 1940 Act, for a time period not to exceed 150 days following the date on which the previous contract terminates.



On
September 11, 2018, the board conducted an annual review of the current advisory agreement. In connection with the foregoing approvals,
the Board determined that the Manager had the capabilities, resources and personnel necessary to provide the services to the Fund
required under the current advisory agreement. The disinterested members of the board noted that, in their consideration of advisory
agreement, they relied upon the information provided to them in connection with their most recent approval of the current advisory
agreement. The disinterested members further noted that the Manager confirmed that there were no material changes to such previously
provided information.



60







In
voting to approve the advisory agreement, the Board of Directors considered the overall fairness of the advisory agreement and
factors it deemed relevant, including, but not limited to: (i) the nature, extent and quality of the services to be provided by
the Manager, (ii) the investment performance of the Fund and the Manager’s investment personnel who would manage the Fund,
(iii) the proposed fees and expenses of the Fund, including comparative expense information, (iv) the projected profitability
of the Fund to the Manager and its affiliates; (v) whether the projected economies of scale would be realized as the Fund grows
and whether the proposed breakpoints or any other breakpoints are appropriate and (vi) other benefits that may accrue to the Manager
from its relationship with the Fund.



Advisory
Fees



We
pay our Manager a fee for its services under the investment advisory agreement consisting of two components — a
base management fee and an incentive fee. The cost of both the base management fee payable to our Manager and any incentive fees
it earns are ultimately borne by our stockholders.



Base
Management Fee



Our
base management fee is calculated as follows and payable monthly in arrears: 2.00% if our net assets are below $100 million; 1.75%
if our net assets are between $100 million and $250 million; and 1.50% if our net assets are above $250 million. The base management
fee may or may not be taken in whole or in part at the discretion of our Manager. All or any part of the base management fee not
taken as to any month shall be deferred without interest and may be taken in such other month as our Manager shall determine.
The base management fee for any partial month will be appropriately pro-rated.



Incentive
Fee



The
incentive fee has two parts. The first part, which we refer to as the subordinated incentive fee on income, is calculated and
payable quarterly in arrears based upon our “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). For this purpose, “pre-incentive fee net investment income” means interest income, dividend
income and any other income (including any other fees, other than fees for providing managerial assistance, such as commitment,
origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during
the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses reimbursed to
our Manager under the investment advisory agreement and any interest expense and distributions paid on any issued and outstanding
preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments
with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon
securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any
realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. The calculation of the subordinated
incentive fee on income for each quarter is as follows:



| | • | No
    incentive fee is payable to our Manager in any calendar quarter in which our pre-incentive fee net investment income does
    not exceed the return rate of 2.0%;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | 20.0%
    of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.0% in any calendar quarter (8.0% annualized)
    is payable to our Manager once the return is reached.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



“Adjusted
capital” shall mean cumulative gross proceeds generated from sales of our common stock (including our distribution reinvestment
plan) reduced for distributions to investors of proceeds from non-liquidating dispositions of our investments and amounts paid
for share repurchases pursuant to our tender offer program.



The
second part of the incentive fee, which we refer to as 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 20.0% of our incentive fee capital gains, which equals
our realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net
of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously
paid capital gains incentive fees.



61







Director
Compensation



Each
of our independent directors is entitled to compensation for his services as a director in the amounts depicted below. We will
not pay compensation to our interested directors. In addition, the independent directors will be reimbursed for reasonable out-of-pocket
expenses incurred in connection with attending board and committee meetings. There are no pension or retirement benefits being
offered to our directors at this time. Amounts payable under this arrangement are determined and paid quarterly in arrears as
follows:



|Net Asset Value                  |  | Annual
        RetainerFee |        |  | Board Meeting
        and CommitteeMeeting Fees(in Person) |   | Board Meeting
        and Committee
        Meeting Fees(by Phone) |  |   | AnnualChairperson
        Fee | 
|-------------------------------- |  | -------------------------- | ------ |  | ---------------------------------------------------------- | - | ------------------------------------------------------------------ |  | - | ----------------------------- | 
|$0
    to $100 million           |  | $                          | 10,000 |  |                                                            | $ | 500/$250                                                           |  | $ | 250                           | 
|$100
    million to $300 million |  | $                          | 20,000 |  |                                                            | $ | 1,000/$500                                                         |  | $ | 250                           | 
|$300
    million to $500 million |  | $                          | 30,000 |  |                                                            | $ | 1,500/$750                                                         |  | $ | 250                           | 
|Above
    $500 million           |  | $                          | 40,000 |  |                                                            | $ | 2,000/$1,000                                                       |  | $ | 250                           | 



The following
table sets forth the compensation of the Fund’s directors for the year ended December 31, 2017:



|Name                     |  | Fees Earned andPayable in Cash |        |  | All OtherCompensation |  |   | Total | 
|------------------------ |  | ------------------------------ | ------ |  | --------------------- |  | - | ----- | 
|Interested
    Directors |  |                                |        |  |                       |  |   |       | 
|Gurpreet S. Chandhoke    |  |                                | —      |  |                       |  | — |       | 
|                         |  |                                |        |  |                       |  |   |       | 
|Independent Directors    |  |                                | —      |  |                       |  | — |       | 
|Amit Mahajan             |  | $                              | 11,520 |  |                       |  | — |       | 
|Robert Winspear          |  | $                              | 14,770 |  |                       |  | — |       | 



ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



The
following table sets forth, as of November 5, 2018, information with respect to the beneficial ownership of our common stock
by:



| | • | Each
    person known to us to beneficially own more than 5% of the outstanding shares of our common stock;
| | - | -----------------------------------------------------------------------------------------------------------



| | • | Each
    of our directors and executive officers; and
| | - | -----------------------------------------------------



| | • | All
of our directors and executive officers as a group.
| | - | -------------------------------------------------------



Beneficial
ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities.
There is no common stock subject to options that are currently exercisable or exercisable within 60 days of the offering. Percentage
of beneficial ownership is based on 6,511,714 shares of common stock outstanding as of November 5, 2018.



|                                                      |  | Shares Beneficially OwnedImmediately Prior toThis Offering |  
|----------------------------------------------------- |  | ---------------------------------------------------------- | -
|Name                                                  |  | Number                                                     |  
|5%
    Stockholders                                   |  |                                                            |  
|None                                                  |  |                                                            | —
|Executive
    Officers:                               |  |                                                            |  
|Michelle
    E. MacDonald                             |  |                                                            | —
|Douglas
    Tyre                                      |  |                                                            | —
|Garima
    Kakani                                     |  |                                                            | —
|Interested
    Directors:                             |  |                                                            |  
|Gurpreet
    (Gurprit) S. Chandhoke                   |  |                                                            | —
|Independent
    Directors:                            |  |                                                            |  
|Amit
    Mahajan                                      |  |                                                            | —
|Robert
    Winspear                                   |  |                                                            | —
|All
    officers and directors as a group (6 persons) |  |                                                            | —



The
following table sets forth, as of the date of this proxy statement, the dollar range of our equity securities that is expected
to be beneficially owned by each of our directors.



|                                    |  | Dollar Range ofEquity SecuritiesBeneficiallyOwned |     
|----------------------------------- |  | ------------------------------------------------- | ----
|Interested
    Directors:           |  |                                                   |     
|Gurpreet
    (Gurprit) S. Chandhoke |  |                                                   | None
|Independent
    Directors:          |  |                                                   |     
|Amit
    Mahajan                    |  |                                                   | None
|Robert
    Winspear                 |  |                                                   | None



62







ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE



Since
August 20, 2013, the Fund has been managed by VII Peaks Capital, LLC (the “Manager”).



Investment
Advisory Agreement



The
Fund has entered into an investment advisory agreement with the Manager to manage the Company’s investment activities dated
August 20, 2013. Prior to August 20, 2013, the Fund’s investment activities were managed by the Prior Manager pursuant to
an investment advisory agreement that had substantially the same terms as the Fund’s present agreement with the Manager.
On September 11, 2018, the non-interested Board Members re-approved the agreement between the Manager and the Fund under the agreement’s
existing terms. 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. The Manager is responsible for,
among other duties, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings
and performing asset management duties. Under the investment advisory agreement, the Manager is entitled to a base management
and incentive fee as outlined in the investment advisory agreement with the Fund. The base management fee is 2% of net assets
below $100 million; 1.75% of net assets between $100 million and $250 million; and 1.5% of net assets over $250 million. For the
years ended December 31, 2017, 2016 and 2015, and the Fund incurred $0.9 million, $0.6 million and $0.8 million of base management
fees, respectively.



The
incentive fee has two parts. The first part, the subordinated incentive fee on income, is calculated and payable quarterly in
arrears based upon the Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter.
The subordinated incentive fee on income is 20% of pre-incentive net investment income subject to a quarterly return to investors,
expressed as a rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 2.0% (8.0%
annualized). The second part of the incentive fee, the incentive fee on capital gains, is an incentive fee on capital gains earned
on liquidated investments from the portfolio and is determined and payable in arrears as of the end of each calendar year (or
upon termination of the investment advisory agreement). This fee equals 20% of the Fund’s incentive fee capital gains, which
will equal the Fund’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar
year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate
amount of any previously paid capital gains incentive fees. For the years ended December 31, 2017, 2016 and 2015, the Fund did
not incur any incentive fees related to net investment income or capital gains.



Under 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. GAAP requires that the capital gains incentive fee accrual assume the cumulative
aggregate unrealized capital appreciation is realized, even though such unrealized capital appreciation is not payable under the
investment advisory agreement. Accordingly, the Fund accrues a provisional capital gains incentive fee taking into account any
unrealized gains or losses. There can be no assurance that such unrealized capital appreciation will be realized in the future
and that the provisional capital gains incentive fee will become payable.



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



The
Manager agreed to assume and pay the Fund all amounts due the Fund from the Prior Manager as reflected in the Fund’s books
and records as of August 20, 2013, including any amounts due under the Expense Reimbursement Agreement between the Fund and the
Prior Manager, and in consideration the Fund agreed to pay the Manager any reimbursable organization and offering expenses incurred
by Prior Manager which the Fund would otherwise be obligated to reimburse Prior Manager from future sales of the Fund’s
securities, beginning with any sales of securities occurring after August 20, 2013.



The
Fund expects that the Manager will continue to incur organizational and offering costs as the Fund’s offering continues,
and such additional organizational and offering costs will increase the amount to which the Manager will be entitled to reimbursement
from gross offering proceeds. Organizational and offering expenses paid for by the Manager and reimbursed by the Fund are expensed
on the Fund’s statement of operations as they are payable to the Manager.



Expense
Reimbursement Agreement



On
November 9, 2012, the Fund entered into an expense reimbursement agreement with the Prior Manager under which the Prior Manager
agreed to reimburse the Fund for all operating expenses, excluding management fees recognized on the quarterly financial statements
of the Fund for 2012, retroactive to the date of formation of the Fund on August 3, 2011. In 2013, the expense reimbursement agreement
was modified to exclude management fees and incentive fees payable to the Manager effective as of January 1, 2013. The Fund terminated
the expense reimbursement agreement with the Prior Manager when it terminated the investment advisory agreement with the Prior
Manager on August 20, 2013. While the Fund entered into a new investment advisory agreement with the Manager on August 20, 2013,
it did not enter into a new expense reimbursement agreement with the Manager. However, the investment advisory agreement with
the Manager includes the Manager’s undertaking to assume and pay the Prior Manager’s obligation to pay us the $1.3
million which had accrued under the Prior Manager’s expense reimbursement agreement. In consideration for such assumption,
the Fund agreed to pay the Manager all organization and offering costs previously borne by the Prior Manager, subject to the limitation
that such organization and offering costs may only be reimbursed to the extent of 1.5% of offering proceeds. The Manager’s
right to recoup amounts paid by the Manager under the expense reimbursement agreement expired in 2016.



63







Administration
Agreement



The
Fund has also entered into an administration agreement with the Manager under which the Manager provides the Fund with office
facilities, equipment and clerical, bookkeeping and record keeping services at such facilities and provides or oversees the performance
of, the Fund’s required administrative services, which include, among other things, being responsible for the financial
records which the Fund is required to maintain and preparing reports to its stockholders. Under the administration agreement,
we are obligated to reimburse our Manager for our allocable portion of overhead cost incurred by the Manager. During the years
ended December 31, 2017, 2016 and 2015, the Fund reimbursed the Manager for $0.3 million, $0.2 million and $0.2 million in administration
expenses under the administration agreement, respectively.



ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES



The
table below summarizes the fees billed for the years ending December 31, 2017 and 2016 by our auditor OUM & Co., LLP.



|                       |  | 2017 |         |  | 2016 |  
|---------------------- |  | ---- | ------- |  | ---- | -
|Audit
    Fees         |  | $    | 102,070 |  |      | $
|Audit
    Related Fees |  |      | —       |  |      |  
|Tax
    Fees           |  |      | 5,500   |  |      |  
|Other                  |  |      | 9,011   |  |      |  
|Total                  |  | $    | 116,581 |  |      | $



Audit
Fees: Audit fees include fees for services that normally would be provided by OUM in connection with statutory and regulatory
filings or engagements and that generally only an independent accountant can provide. In addition to fees for the audit of our
annual financial statements and the review of our quarterly financial statements in accordance with generally accepted auditing
standard, this category contains fees for comfort letters, statutory audits, consents, and assistance with and review of documents
filed with the SEC.



Audit-Related
Fees: Audit-related services consist of fees billed for assurance and related services that are reasonably related to the
performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These services
include attest services that are not required by statute or regulation and consultations concerning financial accounting and reporting
standards.



Tax
Services Fees: Tax services fees consist of fees billed for professional tax services. These services also include assistance
regarding federal, state, and local tax compliance.



All
Other Fees: Other fees would include fees for products and services other than the services reported above.



64







PART IV



ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



| | a. | The
    following documents are filed as part of this Annual Report:
| | -- | --------------------------------------------------------------------



The following
financial statements are set forth in Item 8:



|                                                                                             | Page
|-------------------------------------------------------------------------------------------- | ----
|                                                                                             |     
|Report
    of Independent Registered Public Accounting Firm                                  | F-1 
|Report
    of Previous Independent Registered Public Accounting Firm                         | F-2 
|Statements
    of Assets and Liabilities as of December 31, 2017 and 2016                    | F-3 
|Statements
    of Operations for the Years Ended December 31, 2017, 2016 and 2015            | F-4 
|Statements
    of Changes in Net Assets for the Years Ended December 31, 2017, 2016 and 2015 | F-5 
|Statements
    of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015            | F-6 
|Schedules
    of Investments as of December 31, 2017 and 2016                                | F-7 
|Notes
    to Financial Statements                                                            | F-11



| | b. | Exhibits:
| | -- | ---------



The
following exhibits are included, or incorporated by reference to exhibits previously filed with the SEC, in this Annual Report
on Form 10-K for the year ended December 31, 2017 (and are numbered in accordance with Item 601 of Regulation S-K):



|Exhibit
    No. |  | Description
    of Document                                                                                                                                                                                                                                                    
|--------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1             |  | Articles
    of Incorporation of VII Peaks-KBR Co-Optivist Income BDC II, Inc. (Incorporated by reference to Exhibit (a)(1) to Amendment
    No. 1 to registration statement on Form N-2 filed on December 19, 2011)                                                           
|3.2             |  | Articles
    of Amendment and Restatement of VII Peaks-KBR Co-Optivist Income BDC II, Inc. (Incorporated by reference to Exhibit (a)(2)
    to Amendment No. 1 to registration statement on Form N-2 filed on March 1, 2012)                                                   
|3.3             |  | Second Articles of Amendment and Restatement
    to Articles of Incorporation of VII Peaks-KBR Co-Optivist Income BDC II, Inc. (Incorporated by reference to Exhibit 3.1
    to Form 8-K filed on June 28, 2012)                                                               
|3.4             |  | Articles of Amendment to Articles of Incorporation
    of VII Peaks Co-Optivist Income BDC II, Inc. (Incorporated by reference to Exhibit (a) to Form 8-K filed on September 16,
    2013)                                                                                     
|3.5             |  | Bylaws
    of the Registrant (Incorporated by reference to Exhibit (b) to Amendment No. 1 to registration statement on Form N-2 filed
    on December 19, 2011)                                                                                                                
|4.1             |  | Form of Subscription Agreement (Incorporated
    by reference to Exhibit (d) to Amendment No. 7 to registration statement on Form N-2 filed on July 28, 2014)                                                                                                                  
|4.2             |  | Form of Additional Subscription Agreement (
    Incorporated by reference to Exhibit (d) to Amendment No. 7 to registration statement on Form N-2 filed on July 28, 2014)                                                                                                      
|4.3             |  | Distribution
    Reinvestment Plan (Incorporated by reference to Exhibit (e) to Amendment No. 2 to the registration statement on Form N-2
    filed on February 15, 2012)                                                                                                      
|10.1            |  | Investment Advisory Agreement between VII Peaks
    Co-Optivist Income BDC II, Inc. and VII Peaks Capital, LLC dated August 20, 2013 (Incorporated by reference to Exhibit
    (g) to Form 8-K filed on August 23, 2013)                                                       
|10.2            |  | Dealer Manager Agreement between VII Peaks Co-Optivist
    Income BDC II, Inc. and Arete Wealth Management, LLC (Incorporated by reference to Exhibit (h) to Form 8-K filed on March
    11, 2016)                                                                             
|10.3            |  | Form of Selected Dealer Agreement (Included
    as Exhibit A to the Dealer Manager Agreement) (Incorporated by reference to Exhibit (h) to Form 8-K filed on March 11,
    2016)                                                                                               
|10.4            |  | Form of Custody Agreement (Incorporated by
    reference to Exhibit (j) to Amendment No. 2 to the registration statement on Form N-2 filed on February 15, 2012)                                                                                                               
|10.5            |  | Custodian Agreement with Wells Fargo Bank, N.A.
    (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on November 30, 2016)                                                                                                                   
|10.6            |  | Administration Agreement between VII Peaks Co-Optivist
    Income BDC II, Inc. and VII Peaks Capital, LLC dated February 24, 2014 (Incorporated by reference to the Annual Report
    on Form 10-K filed on March 11, 2014)                                                    
|10.7            |  | License Agreement between VII Peaks Capital,
    LLC, VII Peaks-KBR BDC Advisor II, LLC and VII Peaks Co-Optivist Income BDC II, Inc. (Incorporated by reference to Exhibit
    (k)(2) to Amendment No. 2 to the registration statement on Form N-2 filed on February 15, 2012)



65









|14    |  | Code
    of Ethics (Incorporated by reference to Exhibit (r) to Amendment No. 2 to the registration statement on Form N-2 filed
    on February 15, 2012)                                  
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|21.1* |  | Subsidiaries
    of VII Peaks Co-Optivist Income BDC II, Inc.                                                                                                                              
|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



ITEM 16.
FORM 10-K SUMMARY



None.



66







SIGNATURES



Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                               | VII Peaks Co-Optivist
    Income BDC II, Inc.
|------------------------------ | ---------------------------------------------
|                               |                                              
|Date:
    November 5,     2018 | By                                           
|                               |                                              
|                               |                                              
|                               |                                              
|                               |                                              



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 5,
    2018 | By                                           
|                               |                                              
|                               |                                              
|                               |                                              
|                               |                                              



|                                | VII Peaks Co-Optivist
    Income BDC II, Inc.
|------------------------------- | ---------------------------------------------
|                                |                                              
|Date:

    November 5,     2018 | By                                           
|                                |                                              
|                                |                                              
|                                |                                              
|                                |                                              



|Date:

    November 5,     2018 | By | /s/
    Amit Mahajan  
|------------------------------- | -- | ----------------------
|                                |    | Amit Mahajan          
|                                |    | (Independent Director)



|Date:

    November 5,     2018 | By | /s/
    Robert Winspear
|------------------------------- | -- | -----------------------
|                                |    | Robert Winspear        
|                                |    | (Independent Director) 





67