UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549








Form 10-K/A

(Amendment No. 1)








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



For the fiscal year ended
December 31, 2012



| |  ̈ | 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-KBR 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)



255 Shoreline Drive, Suite 428

Redwood City, California 94065

(Address of principal executive offices)



(877) 700-0527

(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: YesxNo ̈



Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes ̈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, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):



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



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



There is no established market for the Registrant’s
shares of common stock. The Registrant is currently conducting an ongoing public offering of its shares of common stock pursuant
to a Registration Statement on Form N-2 (File No. 333-166636), which shares are being sold at $10.00 per share as of December 31,
2012, with discounts available for certain categories of purchasers, or at a price necessary to ensure that shares are not sold
at a price below net asset value per share.



The number of shares
of the Registrant’s common stock, par value $0.001 per share, outstanding as of February 15, 2013 was 1,365,239.



Documents Incorporated by Reference



Portions of the registrant’s definitive Proxy Statement
relating to the registrant’s 2013 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission
within 120 days following the end of the Company’s fiscal year, are incorporated by reference in Part III of this Annual
Report on Form 10-K as indicated herein.











Explanatory Note



VII Peaks-KBR Co-Optivist Income BDC II,
Inc. (the “Company”) is filing this Amendment No. 1 (the “Amendment”) to its Annual Report on Form 10-K
for the year ended December 31, 2012, filed with the Securities and Exchange Commission on February 19, 2013 for the purpose of
restating its financial statements to comply with the investment advisory agreement between the Company and the Company’s
investment manager, VII Peaks-KBR BDC Advisor II, LLC (the “Manager”). Specifically, the restatement is resulting from
a correction of a misinterpretation of the investment advisory agreement between the Company and the Manager, regarding organization
and offering expenses. The Manager is entitled to receive reimbursement of organization and offering costs of up to 1.5% of the
gross proceeds raised until all organization and offering costs have been reimbursed. Previously, the Company (i) expensed all
organization expenses in the period incurred, (ii) capitalized all offering expenses incurred prior to the date the Company commenced
operations (July 12, 2012) and amortized such amount over 12 months from such date, and (iii) expensed all offering expenses incurred
after the Company commenced operations. The Company has restated its financial statements to reflect changes in its organization
and offering expenses so that it expenses all such amounts only when they are reimbursable to the Manager, and does not capitalize
any offering expenses. In addition to the changes to the financial statements resulting from the adoption of a different accounting
method for organization and offering expenses, the change also resulted in changes to “Note 2. Significant Accounting Policies,”
“Note 4. Related Party Transactions,” “Note 5. Earnings per Share,” “Note 7. Distributions,”
“Note 8. Financial Highlights,” “Note 9. Selected Quarterly Data (Unaudited).” The Company also revised
its disclosure of related party transactions in Note 4. Related Party Transactions” and updated its disclosure of subsequent
events in “Note 10. Subsequent Events.” The changes to the financial statements resulted in changes to Items 5, 6 and
7 of Form 10-K.











Forward Looking Statements



The following information contains statements
that constitute forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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-OptivistTM approach in executing our investment strategy;
| | - | ---------------------------------------------------------------------------------------------------

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

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

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

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



For a discussion of factors that could cause
our actual results to differ from forward-looking statements contained in this Annual Report, please see the discussion under Part
I, Item 1A “Risk Factors”. You should not place undue reliance on these forward-looking statements. The forward-looking
statements made in this Annual Report relate only to events as of the date on which the statements are made. We undertake no obligation
to update any forward-looking statement to reflect events or circumstances occurring after the date of this Annual Report.



2







VII PEAKS-KBR CO-OPTIVIST INCOME BDC
II, INC.

FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 2012



TABLE OF CONTENTS



|                                                                                                                     |  | Page    
|-------------------------------------------------------------------------------------------------------------------- |  | --------
|PART I                                                                                                               |  |         
|                                                                                                                     |  |         
|Item 1. Business                                                                                                     |  | 4       
|Item 1A. Risk Factors                                                                                                |  | 15      
|Item 1B. Unresolved Staff Comments                                                                                   |  | 27      
|Item 2. Properties                                                                                                   |  | 27      
|Item 3. Legal Proceedings                                                                                            |  | 27      
|Item 4. Mine Safety Disclosures                                                                                      |  | 27      
|PART II                                                                                                              |  |         
|                                                                                                                     |  |         
|Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 28      
|Item 6. Selected Financial Data                                                                                      |  | 29      
|Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations                        |  | 30      
|Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                                  |  | 39      
|Item 8. Financial Statements and Supplementary Data                                                                  |  | F-
    1
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 40      
|Item 9A. Controls and Procedures                                                                                     |  | 40      
|Item 9B. Other Information                                                                                           |  | 40      
|PART III                                                                                                             |  |         
|                                                                                                                     |  |         
|Item 10. Directors, Executive Officers and Corporate Governance                                                      |  | 41      
|Item 11. Executive Compensation                                                                                      |  | 41      
|Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters              |  | 41      
|Item 13. Certain Relationships and Related Transactions, and Director Independence                                   |  | 41      
|Item 14. Principal Accountant Fees and Services                                                                      |  | 41      
|PART IV                                                                                                              |  |         
|                                                                                                                     |  |         
|Item 15. Exhibits and Financial Statement Schedules                                                                  |  | 42      
|Signatures                                                                                                           |  | 43      



3







Part I



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 (the “1940 Act”). In addition, we have elected to be treated for federal income tax purpose,
and intend to qualify annually, as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986,
as amended, or the Code.



We are managed by VII
Peaks-KBR BDC Advisor II, LLC (the “Manager”), a registered investment adviser under the Investment Advisers Act of
1940, as amended, (the “Advisers Act”). Our Manager is responsible for sourcing and conducting research on prospective
investments, analyzing opportunities, structuring our portfolio, and monitoring our investments and portfolio companies on an ongoing
basis.



On August 9, 2011,
we filed a registration statement on Form N-2 to sell up to 75.0 million 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 Securities Exchange
Commission (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,
2012, we issued 1.0 million shares of common stock for gross proceeds of $9.5 million.



We invest in discounted
corporate debt and equity-linked debt securities of public and private companies that trade on the secondary loan market for institutional
investors and provide distributions to investors. 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”), and is being used with their permission) in executing
our investment strategy, which entails proactively engaging the target company management on average 24 months prior to a redemption
event (typically a put or maturity event) to create an opportunity for growth in the investments. Our strategy is not dependent
on restructuring to generate distributions.



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 Investment’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 define a “redemption event”
as a maturity event or a put event (where investors in the Target Investment’s debt security can have a redemption right
at a pre-determined price). We hold such debt an average of 12 – 18 months, during which time we anticipate working
actively with the Target Investment’s management to effect and/or participate in a restructuring or exchange of the invested
securities for new securities.



We make Target Investments
that meet our investment criteria. The size of an individual investment will vary based on numerous factors. 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 $0.25 million. 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 Investment. We invest in debt and equity-linked
debt of Target Investment’s with a minimum enterprise value of $200.0 million and whose debt and equity-linked debt is actively
traded in the secondary loan market. 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.



We offer our stockholders
the ability to receive distributions as well as the potential capital appreciation resulting from the restructuring of the debt
of our Target Investments. To the extent we have distributable income available we anticipate declaring and paying distributions
on a semi-monthly basis. We declared and paid distributions beginning in August, 2012 at $0.03063 per share each (an annualized
rate of 7.35% based on our initial public offering price of $10.00 per share) to stockholders. On December 27, 2012, for shareholders
of record on December 27, 2012, and a payable date of January 17, 2013, the board of directors authorized a special distribution
of $0.07664 per share, together with the routine distribution of $0.03063 per share, for a total one time annualized return of
8.11%.



4







Between 2001 and 2008,
corporate debt levels and the supply of leverage offered by banks and other investors steadily increased. We believe a significant
amount of this debt will be subject to a redemption event prior to 2015. Many of the companies that have outstanding issues of
such debt have not, or been unable to proactively refinance, creating a “refinancing wall” that we believe will create
a liquidity shortfall for many issuers. The value of the debt securities of these companies as reflected in prices quoted in the
secondary loan market, may be at a significant discount to par, and represent a premium yield to maturity reflective of these liquidity
concerns, creating the opportunity for us to identify and invest in the debt securities of select companies at attractive current
market valuations. We believe that our Co-Optivist TM approach can help our Target Investments 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.



Our investment activities
are managed by our Manager who is registered as an investment adviser under 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, who has extensive experience in underwriting and issuing debt products that include
high-yield, bank debt and convertible debt and has acted as financial adviser to private equity funds, venture capital firms and
corporations in mergers and acquisitions, recapitalization and corporate finance transactions, and has served as principal investor
in private equity and leveraged buyout transactions.



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. Our
investment committee currently consists of Mr. Chandhoke, our chief executive officer, Mr. Shea and Mr. Shah, who serves on our
board of directors as well.



As a BDC, we are required
to comply with certain regulatory requirements. For instance, we have to invest at least 70% of our total assets in “qualifying
assets,” including securities of U.S. operating companies whose securities are not listed on a national securities exchange
(i.e., New York Stock Exchange, American Stock Exchange and The NASDAQ Global Market), U.S. operating companies with listed securities
that have equity market capitalizations of less than $250 million, cash, cash equivalents, U.S. government securities and high-quality
debt investments that mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage,
which, as defined in the 1940 Act, measures the ratio of total assets less total liabilities (excluding borrowings) to total borrowings,
equals at least 200% after such borrowing, with certain limited exceptions.



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.



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 refinance 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 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
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 company. 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 12 – 18 months. During this hold period we anticipate working co-operatively with Target Investment management and other debt holders on a debt restructuring or exchange.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



5







| | • | 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 Investment. 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Relationships With and Experience Working With Senior Management.   Certain Target Investments may be companies for which the officers of our Manager previously worked with and built relationships. The officers of our Manager also have experience in working with senior management teams of companies from a wide range of industries and will seek to leverage their contacts and experiences in executing our investment decisions.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Investment Criteria and Strategy



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 Investment to increase its liquidity and strengthen its balance sheet.
Our typical Target Investment 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 Investment more flexibility to explore strategic alternatives, since the terms of the
existing debt structure often limits strategic options for the Target Investment.



The following is our
primary investment criteria for our Target Investments:



| | • | 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;
| | - | ------------------------------------------------------------------------------------------------------------------------------



| | • | 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
Investment 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 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | 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 Investment’s equity securities.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



6







| | • | 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 company’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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We employ our Co-Optivist
TM approach in executing our investment strategy, which entails taking an influential position and proactively engaging
the Target Investment 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 Investment or changing management or members of the Target Investment’s board of directors or actively negotiating
the terms of the restructuring. Rather, we look to establish a positive working relationship in assisting our Target Investment
to achieve shared goals.



We apply strict investment
criteria to, and perform comprehensive due diligence on, each investment opportunity prior to making an investment decision. We
define a base case as a situation where no debt restructuring occurs and the Target Investment management chooses to meet the redemption
event. With a successful restructuring, we see a potential for further upside in returns that could potentially exceed our base
case. In connection with our investments, we actively pursue various hedging strategies to manage the volatility and risk profile
of our overall investment portfolio, which may include purchasing derivatives or other securities. We do not anticipate that such
equity exposure including overall hedging costs will exceed 5% of the overall portfolio.



Investment Selection Process



Our investment committee
is responsible for reviewing, discussing and approving each investment idea we seek to pursue. Our investment committee meets routinely,
to discuss new and existing ideas and developments on current investments. Our investment committee currently consists of Mr. Chandhoke,
our chief executive officer, Mr. Shea and Mr. Shah, who serves on our board of directors as well.



At the start of the
investment selection process, the investment team distributes to the investment committee a preliminary memorandum for each investment
opportunity detailing how the investment fits our investment criteria and the associated opportunities and risks of such investment.
The investment committee then decides whether to expend resources and proceed with further due diligence on a particular investment
opportunity. For the opportunities that are approved for further diligence, the investment team commences detailed due diligence.
Upon completion of due diligence, the investment team circulates a final due diligence report to the investment committee, which
will include a full investment memorandum detailing the investment opportunities and risks along with all supplemental due diligence
materials and exhibits, including industry and market research, due diligence summaries and financial analyses. The investment
committee reviews and discusses all materials and conducts a final vote on whether to execute on an investment. We will only make
investments that are approved by a majority of the investment committee members, and no investment can be approved without the
favorable vote on the investment by our chief executive officer.



Below is a summary
of our investment and approval process.







7







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.



Investment Exit Strategy



We employ a strict
sell discipline to our investments. 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 Investment 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 Investment. Following that, we expect that it will
take a minimum of an additional two to four weeks to approach management of the Target Investment with a debt restructuring proposal.
Assuming the Target Investment 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 Investment is unwilling
to pursue our debt restructuring proposal, we will seek to dispose of our position in the Target Investment 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.



Portfolio Monitoring



Valuation process
.    Each quarter, we value investments in our portfolio, and such values are disclosed 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 will determine 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 deems worthy and relevant, including independent third-party valuation firms, if applicable.



Managerial assistance.
As a BDC, 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 board
of directors. 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 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:



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



| | • | preliminary valuation conclusions are then documented and discussed with the members of our board of directors; and
| | - | -------------------------------------------------------------------------------------------------------------------



| | • | our board of directors discuss valuations and determine 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 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.



8







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



ASC Topic 820 clarifies
that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability
in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous
market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at
the measurement date, considered from the perspective of 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 company 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 offer our shares
on a continuous basis at a current offering price of $10.00 per share; however, 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 net asset value per share. To the extent that the net asset value per share increases subsequent
to the last semi-monthly 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 semi-monthly 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 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.



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.



9







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.



Election to be taxed as a RIC



We have elected to
be treated as a RIC under Subchapter M of the Code effective for our taxable year ended December 31, 2012, 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 BDC 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 ending October 31 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.



Our Manager



Pursuant to the Investment
Advisory and Management Services Agreement (the "Advisory Agreement"), 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 Mr. Chandhoke, who also serves as
our chief executive officer, Mr. Shea and Mr. Shah, who serves on our board of directors as well. 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.



10







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



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, the Manager has a fiduciary responsibility for the safeguarding and use of our assets. The 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.



Administrator



Our Manager serves
as our administrator. Pursuant to an administration agreement, our Manager furnishes us with office facilities, equipment, clerical,
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, being responsible for the financial records
which we are required to maintain and preparing reports to our stockholders. In addition, our Manager assists us in determining
and publishing our net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of
reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional
services rendered to us by others. Payments under the administration agreement are equal to an amount based upon our allocable
portion of our Manager’s overhead in performing its obligations under the administration agreement, including rent, the fees
and expenses associated with performing compliance functions and our allocable portion of the compensation of our chief financial
officer and any administrative support staff. 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 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.



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.” We have also entered into a license agreement with KBR Capital Partners,
LLC under which KBR Capital Partners, LLC has agreed to grant us a non-exclusive, royalty-free license to use the name “KBR.”
Under these agreements, we will have a right to use the “VII Peaks,” “Co-Optivist” and “KBR”
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,” “Co-Optivist” or “KBR” 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 our operations 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:



11







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 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.



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. In addition, the officers of KBR may also be involved
in other ventures, some of which may compete with us for investment opportunities.



As a BDC, 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.



Affiliated Dealer
Manager



The dealer manager
for our offering is KBR Capital Markets, LLC, which is an affiliate of us and our Manager. This relationship may create conflicts
in connection with KBR Capital Markets, LLC due diligence obligations under the federal securities laws.



Regulation



We have elected to
be regulated as a BDC under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between
BDCs 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 BDC 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 BDC, we are not permitted to invest
in any portfolio company in which our Adviser or any of their affiliates currently have an investment or to make any co-investments
with our Adviser or any of their affiliates without an exemptive order from the SEC.



As a BDC, 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.



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 BDC, 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.



12







Qualifying Assets



Under the 1940 Act,
a BDC 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 Company) 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 BDC or a group of companies including a BDC, the BDC actually exercises a controlling influence over the
management or policies of the eligible portfolio company, and, as a result thereof, the BDC 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



In order to count portfolio
securities as qualifying assets for the purpose of the 70% test, the BDC 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 BDC purchases such securities in conjunction with one or more other persons acting together, the BDC 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 BDC, 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.



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 will 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.



13







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 this 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.



As an investment adviser
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.



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.



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.



You may obtain information
about how we voted proxies by making a written request for proxy voting information to: Chief Compliance Officer, VII Peaks-KBR
Co-Optivist Income BDC II, Inc., 255 Shoreline Drive, Suite 428, Redwood City, California 94065.

14







Available Information



We file with or submit
to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements
of the Exchange Act. You may inspect and copy these reports, proxy statements and other information 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. The risks set forth below are not the only risks we face. If any of the following
risks occur, our business and financial condition could be materially adversely affected. In such case, the net asset value of
our common stock could decline, and you may lose all or part of your investment.



Risks Related to Our Business and Structure



We are a newly formed, development stage
entity with limited operating history, and you have limited basis on which to evaluate our ability to achieve our business objectives.



We are a recently formed
development stage entity with limited operating history, commencing operations in July 2012 upon success in raising an aggregate
of $1.0 million from investors unaffiliated with us or our Manager. Because we lack an extended operating history, there is no
basis on which to evaluate our ability to achieve our business objectives. We have no long-term plans, arrangements or understandings
with any prospective Target Investments and may be unable to make continued investments in discounted corporate debt and equity-linked
debt securities pursuant to our investment strategy.



Our Manager is a newly-formed entity
with limited history of managing a portfolio of debt securities.



Our Manager is a newly-formed
entity and has no prior experience managing a portfolio of debt securities. Therefore, our Manager may not be able to successfully
operate our business or achieve our investment objectives. As a result, an investment in shares of our common stock entails more
risk than investing in a comparable company with a substantial operating history.



We face competition.



We face competition
from a range of competitors, including mutual funds, private equity, hedge funds, and leveraged buyout funds. Many of these entities
may have greater financial resources than we do or access to financing on more favorable terms than we will. These entities could
make it more difficult or expensive to make investments in the debt securities of our Target Investments at appropriate price levels.



We may not have sufficient resources
to cover our operating expenses and the expenses of consummating our business acquisitions.



If we do not raise
sufficient proceeds from our offering and other sources of financing to fund our operating expenses and the expenses of consummating
our business acquisitions, we may be unable to achieve our business objectives and may be forced to dissolve or liquidate.



Our Manager 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 affect on your investment.



To the extent that
we have income available, we will continue to authorize and declare distributions semi-monthly and pay distributions on a semi-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 Investments in which we invest will generally have near-term
liquidity issues that make investments in them highly speculative. If one or more of our Target Investments is not successful,
it may adversely impact our ability to make distributions to shareholders.



We have not completed the selection
of the full portfolio of any potential Target Investments in which to invest. As a result, you will be unable to ascertain the
merits or risks of the business or businesses in which we may ultimately invest.



We invest in discounted
corporate debt and equity-linked debt securities of public and private companies that trade on the secondary loan market for institutional
investors. However, there is no basis for you to evaluate the possible merits or risks of the particular business or businesses
in which we may ultimately invest. As a result, this may be deemed to be a “blind pool” offering. Further, you will
not have the opportunity to vote on any potential investment opportunity. As a result, you must rely on our Manager’s judgment
and ability with respect to its use of the proceeds from our offering to achieve our investment objectives. We cannot assure you
that the members of our investment committee will properly ascertain or assess all of the significant risks present in our Target
Investments. Even if they properly assess those risks, some of the risks may be outside of our control or ability to affect.



15







If we are unsuccessful in raising significant
proceeds in the continuous offering, we may not be able to invest in a diversified group of companies.



If we are unsuccessful
in raising significant proceeds in the offering, we may not be able to invest in a diversified portfolio of investments. If our
investment portfolio is not diversified, our performance will be more dependent on individual investments. If any of the companies
in which we invest ultimately are forced to file for bankruptcy protection or otherwise be unable to satisfy the covenants in their
financing agreements, we would be disproportionately and adversely affected as a result of our lack of diversification of investments.
In addition, our ability to make distributions depends on our ability to successfully invest pursuant to our investment objectives.
If we are unsuccessful in employing our Co-Optivist TM approach in executing our investment strategy, the timing and
amount of distributions to our shareholders may be adversely impacted and our shareholders could lose some or all of their investment
in us.



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.



Resources could be expended in researching
investment opportunities that are not consummated, which could materially adversely affect subsequent attempts to locate and invest
in other businesses.



It is anticipated that
the investigation of each specific Target Investment and the negotiation, drafting, and execution of relevant agreements, disclosure
documents, and other instruments necessary to restructure and de-lever their balance sheets will require substantial management
time and attention and substantial costs for accountants, attorneys, and others. If a decision is made not to complete a specific
investment, the costs incurred up to that point for the proposed transaction may not be recoverable. Furthermore, even if an agreement
is reached relating to a specific Target Investment, we may fail to consummate the transaction for any number of reasons including
those beyond our control. Any such event will result in a loss to us of the related costs incurred which could materially adversely
affect subsequent attempts to locate additional investment opportunities.



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 continues
to be somewhat subdued as unemployment rates remain high. Despite this, capital has steadily flowed into the financial markets
since the nadir of the credit crisis, as general risk aversion has subsided. As a result, corporate interest rate risk premiums,
otherwise known as credit spreads, have declined significantly throughout most of 2009 through 2011. However, credit spreads remain
above historical averages, particularly in the loan and high yield bond markets. The improving economic and market conditions which
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.



16







The downgrade in the U.S.’s credit
rating and the economic crisis in Europe could materially adversely affect our business, financial condition and results of operations.



On August 5, 2011,
Standard & Poor’s downgraded the U.S.’s credit rating to AA+ from its top rank of AAA. The current U.S. debt ceiling
and budget deficit concerns have increased the possibility of further credit-rating agency downgrades and an economic slowdown.
The downgrade of the U.S.’s credit rating, together with signs of deteriorating sovereign debt and conditions in Europe,
could have a material adverse effect on the financial markets and economic conditions in the U.S. and throughout the world. Additionally,
austerity measures necessary to reduce the U.S.’s deficit could accelerate an already slowing U.S. economy in the near term.



The U.S.’s credit
rating downgrade could negatively impact the trading market for U.S. government securities and would likely impact the credit risk
associated with our investments in U.S. Treasury securities. This could reduce the value of the U.S. Treasury securities that we
may hold in our portfolio. In addition, adverse market and economic conditions that could occur due to a downgrade of the U.S.’s
credit rating on the U.S.’s debt could result in rapidly rising interest rates, a falling dollar, shakier financial markets
and slowing or negative economic growth in the near term. These events could adversely affect our business in many ways, including,
but not limited to, adversely impacting our portfolio companies’ ability to obtain financing, or obtaining financing but
at significantly lower valuations than the preceding financing rounds. If any of these events were to occur, it could materially
adversely affect our business, financial condition and results of operations.



A substantial portion of our investment
portfolio may be recorded at fair value as determined in good faith by our board of directors 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. 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.



Certain factors that
may be considered in determining the fair value of our investments include 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 non-traded securities existed. Due to this uncertainty, 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.



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 provisions of the Sarbanes-Oxley Act and the related rules and regulations promulgated
by the SEC. Beginning with our fiscal year ending December 31, 2013, our management will be 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 will be 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. As a newly-formed company, developing an effective
system of internal controls may require significant expenditures, which may negatively impact our financial performance and our
ability to make distributions. This process will also result in a diversion of management’s time and attention. We cannot
be certain as to the timing of the completion of our evaluation, testing and remediation actions or the impact of the same on our
operations and we may not be able to ensure that the process is effective or that our internal control over financial reporting
is or will be effective in a timely manner. In the event that we are unable to develop or maintain an effective system of internal
controls and maintain or achieve compliance with the Sarbanes-Oxley Act and related rules, we may be adversely affected.



17







The impact of recent financial reform
legislation on us is uncertain.



In light of current
conditions in the U.S. and global financial markets and the U.S. and global economy, legislators, the presidential administration
and regulators have increased their focus on the regulation of the financial services industry. The recently enacted Dodd-Frank
Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, institutes a wide range of reforms that will have an impact
on all financial institutions. Many of the requirements called for in the Dodd-Frank Act will be implemented over time, most of
which will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner
in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the
full impact such requirements will have on our business, results of operations or financial condition is unclear. The changes resulting
from the Dodd-Frank Act may require us to invest significant management attention and resources to evaluate and make necessary
changes in order to comply with new statutory and regulatory requirements. Failure to comply with any such laws, regulations or
principles, or changes thereto, may negatively impact our business, results of operations and financial condition. While we cannot
predict what effect any changes in the laws or regulations or their interpretations would have on us as a result of the Dodd-Frank
Act, these changes could be materially adverse to us and our shareholders.



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.



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



Potential investors
will not have preemptive rights to any shares we issue in the future. Our certificate of incorporation authorizes us to issue 200.0
million 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. 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,
an investor may also experience dilution in the book value and fair value of his/her shares.



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.



18







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.



Risks Related to our Manager



Our Manager has limited prior experience
managing a BDC or a RIC.



Our Manager is a new
entity and has limited prior experience managing a BDC 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 BDC 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 BDCs and RICs that do not apply to the other types of investment vehicles.
For example, under the 1940 Act, BDCs 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 BDC or a RIC or could force us to pay unexpected taxes and penalties, which could
be material. Our Manager has no experience managing a BDC 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.



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 to the affairs of our Manager and performing services for other
entities. 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 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 KBR may also be involved in other ventures, some of which may compete with us for investment opportunities.



Our Manager will receive compensation
regardless of profitability.



Our Manager is entitled
to receive certain fees and other compensation, payments and reimbursements regardless of us being profitable. For example, we
will pay our Manager an annualized management fee 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 management fee
will be calculated based on the net asset value of our assets under management as of the last business day of each month and paid
monthly in arrears.



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 Manager is entitled
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.



19







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. If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible
that accrued interest previously included in the calculation of the incentive fee will become uncollectible. Our Manager is not
obligated to reimburse us for any part of the incentive fee it received that was based on accrued income that we never received
as a result of a subsequent default. Such circumstances would result in us paying an incentive fee on income we never receive captured
in one reporting period, with the related reduction in the incentive fee paid in the subsequent period.



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) 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.



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.



Our Manager’s influence on conducting
our operations, including on our conducting of transactions, gives it the ability to increase its fees, which may reduce the amount
of cash flow available for distribution to our shareholders.



Our Manager is paid
a management fee calculated as a percentage of our net assets and is unrelated to net income or any other performance base or measure.
Our Manager may advise us to consummate transactions or conduct our operations in a manner that, in our Manager’s reasonable
discretion, are in the best interests of our shareholders. These transactions, however, may increase the amount of fees paid to
our Manager. Our Manager’s ability to influence the management fee paid to it by us could reduce the amount of cash flow
available for distribution to our shareholders.



20







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 BDC.



As a BDC, 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 BDC, 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
BDC would reduce our operating flexibility.



If we do not remain
a BDC, 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 BDC 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 BDC, therefore, we continuously issue equity at a rate more frequent
than our privately owned competitors, which may lead to greater shareholder dilution.



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.



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



We will be 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 will be our affiliate for purposes of the 1940 Act and we will generally be 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 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.



21







Risks Related to our Target Investments



The capital structures of our Target
Investments may have significant leverage, which may increase our exposure to adverse economic factors.



Our Target Investments
may have capital structures with significant leverage. To the extent our Target Investments are levered, such leverage may increase
our exposure to adverse economic factors such as rising interest rates, downturns in the general economy or deterioration of the
condition of the Target Investments or its sector in its particular industry.



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. 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.



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 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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability,
resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in
turn, on us; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | 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. 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.



22







Finally, little public
information generally exists about private companies and these companies may not have third-party debt ratings or audited financial
statements. 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.



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:



| | • | Potential Fiscal Cliff.  If the U.S. economy slides back into a recession due to failed fiscal cliff negotiations,
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 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 around 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 recently issued a new round
of quantitative easing, helping to spur liquidity in the capital markets. This has helped keep interest rates near an all-time
low in the U.S. Eventually, as the economy recovers, the Federal Reserve may begin monetary tightening, causing an increase of
interest rates that may drive down bond prices.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Risks Related to Our Continuous Offering
and Our Shares



This is a speculative investment.



Our business objectives
should be considered highly speculative, and there are no assurances that the Manager will satisfy those objectives. No assurances
can be given that the Manager will realize a substantial return, if any, on its investment purchases, or that you will not lose
your entire investment in us.



There is no market for the shares of
our common stock nor do we expect a market to develop in the foreseeable future, which adversely affects the liquidity and price
of our shares.



There is no market
for the shares of our common stock and no market for our shares is expected to develop in the foreseeable future. Shareholders
therefore have no access to information about prior market history on which to base their investment decision. As a result, shareholders
may be unable to sell their shares unless a market can be established and sustained.



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,
and the value of your investment in us may be reduced in the event our assets under-perform.



Our continuous offering
is being made on a best efforts basis, whereby KBR Capital Markets, LLC and any selected dealers who enter into agreements with
KBR Capital Markets, LLC are only required to use their best efforts to sell our shares and have no firm commitment or obligation
to purchase any of our shares. 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.



23







Investors will not know the purchase
price per share at the time they submit their subscription agreements and could receive fewer shares than anticipated if our board
of directors determines to increase the offering price to comply with the requirement that we avoid selling our shares below net
asset value per share.



The purchase price
at which shareholders purchase shares of common stock will be determined at 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 shares. As a result,
in the event of an increase to our net asset value per share, an investors purchase price may be higher than the prior closing
price per share, and therefore shareholders may receive a smaller number of shares than if shareholders had subscribed at the prior
closing price.



Investors will not know the purchase
price per share at the time they submit their subscription agreements and could pay a premium for their shares of common stock
if our board of directors, or delegated committee, does not decrease the offering price in the event of a decline to our net asset
value per share.



The purchase price
at which shareholders purchase shares will be determined at each semi-monthly closing date to ensure that the sales price is equal
to or greater than the net asset value of our shares, after deducting selling commissions and dealer manager fees. In the event
of a decrease to our net asset value per share, shareholders could pay a premium for their shares of common stock if our board
of directors, or delegated committee, does not decrease the offering price.



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. Within four years following the completion of our public offering or any subsequent follow-on offering,
our board of directors is required to recommend that we pursue a liquidity event for our shareholders. However, there can be no
assurance that we will 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.



Prior to the completion
of a liquidity event, our tender offer program may provide 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.



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.



We are not obligated to complete a liquidity
event by a specified date; therefore, it will be difficult for an investor to sell his or her shares.



Within four years following
the completion of our public offering or any subsequent follow-on offering, our board of directors is required to recommend that
we pursue a liquidity event for our shareholders. 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. We expect that the liquidity event recommended by our board of directors will be completed within twelve
months following the recommendation by our board of directors. We do not know at this time what circumstances will exist in the
future and therefore we do not know what factors our board of directors will consider in determining what form of liquidity event
to pursue. There may be economic of other factors that negatively impact our ability to complete a liquidity event within this
timeframe or at all. As a result, it may be difficult for investors to sell their shares.



Our ability to successfully conduct
our continuous offering is dependent, in part, on the ability of KBR Capital Markets, LLC to successfully establish, operate and
maintain a network of broker-dealers.



The success of our
public offering, and correspondingly our ability to implement our business strategy, is dependent upon the ability of KBR Capital
Markets, LLC to establish and maintain a network of licensed securities broker-dealers and other agents to sell our shares. If
KBR Capital Markets, LLC fails to perform, we may not be able to raise adequate proceeds through our public offering to implement
our investment strategy. If we are unsuccessful in implementing our investment strategy, shareholders could lose all or a
part of their investment.



24







Because KBR Capital Markets, LLC is
one of our affiliates, shareholders will not have the benefit of an independent due diligence review of us, which is customarily
performed in firm commitment underwritten offerings; the absence of an independent due diligence review increases the risks as
a shareholder.



The dealer manager,
KBR Capital Markets, LLC is one of our affiliates. As a result, its due diligence review and investigation of us and our prospectus
cannot be considered to be an independent review. Therefore, shareholders do not have the benefit of an independent review
and investigation of our offering of the type normally performed by an unaffiliated, independent underwriter in a firm commitment
underwritten public securities offering.



Beginning with the first calendar quarter
following the one-year anniversary of the date we met our minimum offering requirement, we intend to offer to repurchase shareholders
shares on a quarterly basis. However, we are not required to make repurchases and there can be no assurance we will do so. 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.



Beginning with the
first calendar quarter following the one-year anniversary of the date we met our minimum offering requirement, we intend to commence
tender offers to allow shareholders to tender their shares on a quarterly basis at a price equal to the net asset value per share
on 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 5.0% 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.



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.



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 Company. 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.



25







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.



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.



If we do not qualify as a “publicly
offered regulated investment company,” as defined in the Code, shareholders will be taxed as though they received a distribution
of some of our expenses.



A “publicly offered
regulated investment company” is a RIC whose shares are either (i) continuously offered pursuant to a public offering, (ii)
regularly traded on an established securities market or (iii) held by at least 500 persons at all times during the taxable year.
If we are not a publicly offered RIC for any period, a non-corporate stockholder’s allocable portion of our affected expenses,
including our management fees, will be treated as an additional distribution to the stockholder and will be deductible by such
stockholder only to the extent permitted under the limitations described below. For non-corporate stockholders, including individuals,
trusts, and estates, significant limitations generally apply to the deductibility of certain expenses of a non-publicly offered
RIC, including advisory fees. In particular, these expenses, referred to as miscellaneous itemized deductions, are deductible to
an individual only to the extent they exceed 2% of such a stockholder’s adjusted gross income, and are not deductible for
alternative minimum tax purposes.



26







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.



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 255 Shoreline Drive,
Suite 428, Redwood City, California 94065. We believe that our current office facilities are adequate for our business as we intend
to conduct it.



ITEM 3. LEGAL PROCEEDINGS



Neither we nor our
Manager are currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened
against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings
relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings
cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition
or results of operations.



ITEM 4. MINE SAFETY DISCLOSURES



Not applicable.



27







Part II



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



Our authorized stock
consists of 250.0 million shares of stock, par value $0.001 per share, of which 200.0 million shares are classified as common stock
and 50.0 million 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 are currently selling
our shares on a continuous basis at a price of $10.00 per share; however, to the extent that our net asset value per share 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 net asset value per share. In connection with each semi-monthly 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.



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.



Set forth below is
a chart describing the classes of our securities outstanding as of December 31, 2012:



|Title of Class                           |  | Amount Authorized |             |  | Amount Issued | 
|---------------------------------------- |  | ----------------- | ----------- |  | ------------- | 
|Common Stock, par value $0.001 per share |  | $                 | 200,000,000 |  |               | 



As of December 31,
2012, gross proceeds from the sale of common stock were $9.5 million, including stock issued pursuant to the distribution reinvestment
plan (“DRIP”) and the purchase made by our Manager for our initial capitalization. As of December 31, 2012, we had
263 record holders of our common stock.



Distributions



We declared monthly
and paid semi-monthly distributions to stockholders since July 10, 2012 when we commenced operations. Our board of director’s
intend to continue to authorize and declare distributions monthly and we intend to pay distributions on a semi-monthly basis to
our shareholders. Any distributions to our shareholders will be declared out of assets legally available for distribution. We expect
to continue making distributions 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 will review our accounts to determine
whether distributions to our shareholders are appropriate. 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. There can be no assurance that we will
be able to sustain distributions at any particular level. Our distributions may exceed our earnings, which we refer to as a return
of capital, especially during the period before we have invested substantially all of the proceeds. As a result, a portion of the
distributions we make may represent a return of capital for tax purposes.



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 ending on
October 31 of the calendar year (unless an election is made by us to use our taxable year) and (iii) any ordinary income and net
capital gains for preceding years that were not distributed during such years and on which we paid no federal income tax.



We have adopted an
“opt-in” DRIP pursuant to which you may elect to have the full amount of your cash distributions reinvested in additional
shares of our common stock.



28











The following table reflects the distributions
per share paid or payable in cash or DRIP on our common stock to date (dollars in thousands except per share amounts) that was
declared through December 31, 2012:



|Payment Dates        |  | Net Investment Income |     |  | Realized Gain from Investments |   |   | Return of Capital |  |   | Per Share |  |  | Paid in Cash |      |  | DRIP |   |     | TOTAL | 
|-------------------- |  | --------------------- | --- |  | ------------------------------ | - | - | ----------------- |  | - | --------- |  |  | ------------ | ---- |  | ---- | - | --- | ----- | 
|2012                 |  |                       |     |  |                                |   |   |                   |  |   |           |  |  |              |      |  |      |   |     |       | 
|August 17, 2012      |  | $                     | 4   |  |                                | $ | - |                   |  | $ | -         |  |  | $            | 0.03 |  |      | $ | 3   |       | 
|August 31, 2012      |  |                       | 4   |  |                                |   | - |                   |  |   | -         |  |  |              | 0.03 |  |      |   | 3   |       | 
|September 14, 2012   |  |                       | 9   |  |                                |   | - |                   |  |   | -         |  |  |              | 0.03 |  |      |   | 6   |       | 
|September 28, 2012   |  |                       | 9   |  |                                |   | - |                   |  |   | -         |  |  |              | 0.03 |  |      |   | 6   |       | 
|October 15, 2012     |  |                       | 6   |  |                                |   | - |                   |  |   | 6         |  |  |              | 0.03 |  |      |   | 8   |       | 
|October 31, 2012     |  |                       | -   |  |                                |   | - |                   |  |   | 12        |  |  |              | 0.03 |  |      |   | 8   |       | 
|November 16, 2012    |  |                       | 17  |  |                                |   | - |                   |  |   | -         |  |  |              | 0.03 |  |      |   | 11  |       | 
|November 30, 2012    |  |                       | 17  |  |                                |   | - |                   |  |   | -         |  |  |              | 0.03 |  |      |   | 11  |       | 
|December 17, 2012    |  |                       | 22  |  |                                |   | - |                   |  |   | -         |  |  |              | 0.03 |  |      |   | 12  |       | 
|December 31, 2012    |  |                       | 23  |  |                                |   | - |                   |  |   | -         |  |  |              | 0.03 |  |      |   | 13  |       | 
|2013                 |  |                       |     |  |                                |   |   |                   |  |   |           |  |  |              |      |  |      |   |     |       | 
|January 17, 2013 (1) |  |                       | 35  |  |                                |   | - |                   |  |   | 57        |  |  |              | 0.11 |  |      |   | 57  |       | 
|January 31, 2013     |  |                       | -   |  |                                |   | - |                   |  |   | 29        |  |  |              | 0.03 |  |      |   | 18  |       | 
|                     |  | $                     | 146 |  |                                | $ | - |                   |  | $ | 104       |  |  |              |      |  |      | $ | 156 |       | 



| | (1) | Special Distribution
| | --- | --------------------



ITEM 6. SELECTED FINANCIAL DATA



The following selected financial data for
the year ended December 31, 2012 and for the period from August 3, 2011 (date of inception) to December 31, 2011 is derived from
our financial statements which have been audited by Burr Pilger Mayer, Inc., our independent registered public accounting firm
as stated in their report. 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):



|                                                                |  | For the Year Ended December 31, 2012 |       |   | For the Period from
August 3 (Date of
Inception) to
December 31, 2011 |  
|--------------------------------------------------------------- |  | ------------------------------------ | ----- | - | --------------------------------------------------------------------- | -
|Statement of operations data:                                   |  |                                      |       |   |                                                                       |  
|Total investment income                                         |  | $                                    | 146   |   |                                                                       | $
|Operating expenses                                              |  |                                      |       |   |                                                                       |  
|Total expenses                                                  |  |                                      | 520   |   |                                                                       |  
|Less: Expense waivers and reimbursements                        |  |                                      | (524  | ) |                                                                       |  
|Net expenses                                                    |  |                                      | (4    | ) |                                                                       |  
|Net investment income (loss)                                    |  |                                      | 150   |   |                                                                       |  
|Realized and unrealized gain (loss)                             |  |                                      | (119  | ) |                                                                       |  
|Net increase (decrease) in net assets resulting from operations |  | $                                    | 31    |   |                                                                       | $
|Per share data - basic and diluted:                             |  |                                      |       |   |                                                                       |  
|Net investment income (loss)                                    |  | $                                    | 0.61  |   |                                                                       | $
|Net realized and unrealized gain (loss) on investments          |  | $                                    | (0.48 | ) |                                                                       | $
|Net increase (decrease) in net assets resulting from operations |  | $                                    | 0.13  |   |                                                                       | $
|Distributions declared                                          |  | $                                    | (1.02 | ) |                                                                       | $
|Balance sheet data:                                             |  |                                      |       |   |                                                                       |  
|Investments at fair value                                       |  | $                                    | 5,823 |   |                                                                       | $
|Investments – Money Market                                      |  | $                                    | 1,304 |   |                                                                       | $
|Total assets                                                    |  | $                                    | 8,548 |   |                                                                       | $
|Total liabilities                                               |  | $                                    | 212   |   |                                                                       | $
|Total net assets                                                |  | $                                    | 8,336 |   |                                                                       | $
|Other data:                                                     |  |                                      |       |   |                                                                       |  
|Total return                                                    |  |                                      | 10.98 | % |                                                                       |  
|Number of portfolio company investments at period end           |  |                                      | 22    |   |                                                                       |  
|Total portfolio investments for the period                      |  | $                                    | 7,166 |   |                                                                       | $
|Investment sales and prepayments for the period                 |  |                                      | 1,250 |   |                                                                       |  



29







ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION



The following discussion
should be read in conjunction with the accompanying financial statements of VII Peaks-KBR Co-Optivist Income BDC II, Inc., and
the notes thereto. As used herein, the terms “we,” “our” and “us” refer to VII Peaks-KBR Co-Optivist
Income BDC II, Inc., a Maryland corporation and, as required by context to VII Peaks-KBR Advisor II, 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 and equity-linked debt securities of public and private companies whose securities trade on the secondary loan market
for institutional investors and provide distributions to investors. At the same time, we actively work with the Target Investment’s
management to restructure the underlying securities and improve the liquidity position of the Target Investment’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, and is being used with their permission) in executing
our investment strategy, which entails proactively engaging the Target Investment management on average 24 months prior to a redemption
event (typically a put or maturity event) to create an opportunity for growth in the investments. Our strategy is not dependent
on restructuring to generate distributions.



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 stockholders.



We make investments
in Target Investments 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 $0.25 million.
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 Investment. We invest in debt and equity-linked debt of Target Investments with a minimum enterprise
value of $200.0 million and whose debt and equity-linked debt is actively traded in the secondary loan market. We expect our portfolio
to be predominantly composed of fixed-rate high-yield and equity-linked corporate debt securities. However, we may also purchase
senior secured corporate debt securities which may have variable interest rates. We currently anticipate that the portion of our
portfolio composed of variable rate corporate debt securities, if any, will not exceed 20%, but we may increase that to 33% of
our aggregate portfolio at the time of any purchase depending on market opportunities.



We offer our stockholders
the ability to receive distributions as well as the potential capital appreciation resulting from the restructuring of the debt
of our Target Investments. To the extent we have distributable income available we anticipate declaring and paying distributions
on a semi-monthly basis. We declared and paid distributions beginning in August 2012 at $0.03063 per share each (an annualized
rate of 7.35% based on our initial public offering price of $10.00 per share) to stockholders. On December 27, 2012, for shareholders
of record on December 27, 2012, and a payable date of January 17, 2013, the board of directors authorized a special distribution
of $0.07664 per share, together with the routine distribution of $0.03063 per share for a total one time annualized return of 8.11%.



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. Our
investment committee currently consists of Mr. Chandhoke, our chief executive officer, Mr. Shea and Mr. Shah, who also serves on
our board of directors as well.



Critical Accounting Policies



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



Valuation of Portfolio Investments



We 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 board
of directors. 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.



30







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



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



| | · | preliminary valuation conclusions are then documented and discussed with the members of our board of directors; and
| | - | -------------------------------------------------------------------------------------------------------------------



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



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



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



31







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



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



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



Level 3:  Unobservable
inputs for the asset or liability.



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



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



Expense Reimbursement



We have entered into
an expense reimbursement agreement with our Manager under which the Manager agreed to reimburse us for certain U.S. GAAP compliant
expenses recognized on our quarterly financial statements. In 2013, the expenses reimbursement agreement was modified to exclude
management fees and incentive fees payable to the Manager effective as of January 1, 2013. We recognize a receivable on our books
for the amount due from the Manager under the expense reimbursement agreement, and the Manager recognizes a liability on its books
in the same amount. The expense reimbursement agreement allows the Manager and us to offset the related receivables from and payables
to each other resulting in a net receivable, or payable position. The expense reimbursement agreement expires on the earlier
of August 3, 2014 or the start of the quarter in which the Fund reaches $75 million in net assets. Amounts reimbursed by the Manager
under the expense reimbursement agreement are not subject to recoupment by the Manager at a later date.



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



We measure net realized
gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis 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 will reflect 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 registered investment company (“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.



32







Organization and Offering Expenses



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



Federal Income Taxes



We have elected to
be treated for federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay
corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our shareholders from our tax
earnings and profits. To obtain and maintain our RIC tax treatment, we must meet, among other things, specified source-of-income
and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term
capital gains in excess of realized net long-term capital losses, if any.



Portfolio and Investment Activity



For the year ended December 31, 2012, we
made $7.2 million of investments in new portfolio companies and had $1.2 million in aggregate amount of exits and repayments, resulting
in net investments of $6.0 million for the period. We had no investments as of December 31, 2011.



33







The following table presents our portfolio
composition based on fair value at December 31, 2012. We had $201,000 of investments I money market funds as of December 31, 2011.



|                                |  | At December 31, 2012           |      
|------------------------------- |  | ------------------------------ | -----
|                                |  | Percentage of Total
 Portfolio |      
|Investments – Money Market      |  |                                | 18.3 
|Senior Secured First Lien Debt  |  |                                | 11.5 
|Senior Secured Second Lien Debt |  |                                | 12.1 
|Senior Unsecured Debt           |  |                                | 43.7 
|Senior Subordinated Debt        |  |                                | 14.5 
|Total                           |  |                                | 100.0



As of December 31, 2012, our investment
portfolio had a yield to maturity of 12.17%.



The following table shows the portfolio
composition by industry grouping at fair value at December 31, 2012 (dollars in thousands). All of our investments at December
31, 2011 consisted of $201,000 invested in money market funds.



|                                          |  | At December 31, 2012      |      
|----------------------------------------- |  | ------------------------- | -----
|                                          |  | Investments at Fair Value |      
|Investments – Money Market                |  | $                         | 1,304
|Healthcare & Pharmaceuticals              |  |                           | 830  
|High Tech Industries                      |  |                           | 771  
|Beverage, Food & Tobacco                  |  |                           | 769  
|Telecommunications                        |  |                           | 764  
|Retail                                    |  |                           | 564  
|Services: Consumer                        |  |                           | 541  
|Consumer Goods: Non-durable               |  |                           | 415  
|Consumer Goods: Durable                   |  |                           | 401  
|Services: Business                        |  |                           | 365  
|Banking, Finance, Insurance & Real Estate |  |                           | 358  
|Environmental Industries                  |  |                           | 45   
|Total                                     |  | $                         | 7,127



Results of Operations



Operating results for the year ended December
31, 2012 and for the period from August 3, 2011 (date of inception) to December 31, 2011 are as follows (dollars in thousands):



|                                                                |  | For the Year Ended December 31, |      |   | For the Period from August 3, 2011 (Date of Inception) to December 31, |  
|--------------------------------------------------------------- |  | ------------------------------- | ---- | - | ---------------------------------------------------------------------- | -
|                                                                |  | 2012 (Restated)                 |      |   | 2011 (Restated)                                                        |  
|Total investment income                                         |  | $                               | 146  |   |                                                                        | $
|Total expenses, net                                             |  |                                 | (4   | ) |                                                                        |  
|Net investment income (loss)                                    |  |                                 | 150  |   |                                                                        |  
|Net unrealized depreciation                                     |  |                                 | (119 | ) |                                                                        |  
|Net increase (decrease) in net assets resulting from operations |  | $                               | 31   |   |                                                                        | $



34







Revenues



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



Expenses



The composition of our operating expenses
for the year ended December 31, 2012 and for the period from August 3, 2011 (date of inception) to December 31, 2011 was as follows
(dollars in thousands):



|                                                       |  | For the Year Ended December 31, |      |   | For the Period from August 3, 2011 (Date of Inception) to December 31, |  
|------------------------------------------------------ |  | ------------------------------- | ---- | - | ---------------------------------------------------------------------- | -
|                                                       |  | 2012 (Restated)                 |      |   | 2011 (Restated)                                                        |  
|Professional fees                                      |  | $                               | 119  |   |                                                                        | $
|Director fees                                          |  |                                 | 31   |   |                                                                        |  
|Insurance                                              |  |                                 | 49   |   |                                                                        |  
|Management fees                                        |  |                                 | 61   |   |                                                                        |  
|General and administrative                             |  |                                 | 118  |   |                                                                        |  
|Organizational and offering expenses                   |  |                                 | 142  |   |                                                                        |  
|Operating expenses before expense reimbursements       |  |                                 | 520  |   |                                                                        |  
|Expense reimbursement                                  |  |                                 | (524 | ) |                                                                        |  
|Total operating expenses net of expense reimbursements |  | $                               | (4   | ) |                                                                        | $



Net Realized Gains or Losses from Investments



For the year ended
December 31, 2012, we had $1.2 million of principal repayments, resulting in $0.0002 million of realized gains. For the period
from August 3, 2011 (date of inception) to December 31, 2011, we held no investments.



Net Change in Unrealized Appreciation or Depreciation
on Investments



For the year ended
December 31, 2012, we had $0.1 million of unrealized depreciation. For the period from August 3, 2011 (date of inception) to December
31, 2011, we held no investments.



Changes in Net Assets from Operations



For the year ended
December 31, 2012, we recorded a net increase in net assets resulting from operations of $0.03 million. Based on 246,231 weighted
average common shares outstanding for the year ended December 31, 2012, our per share net increase and decrease in net assets resulting
from operations was $0.13.



Liquidity and Capital Resources



We generate cash primarily
from the net proceeds of our ongoing continuous public offering and from cash flows from fees, interest and dividends earned from
our investments as well as principal repayments and proceeds from sales of our investments. On July 10, 2012, we satisfied our
minimum offering requirement of raising gross offering proceeds in excess of $1.0 million from persons who are not affiliated with
us or our Manager, and commenced operations. As of December 31, 2012, we issued 1 million shares of common stock for gross proceeds
of $9.5 million. We currently sell our shares on a continuous basis at a current offering price of $10.00; however, to the extent
that our net asset value per share increases, we will sell at a price necessary to ensure that our shares are not sold at a price,
after deduction of selling commissions and dealer manager fees, that is below our net asset value per share.



35







Prior to investing
in debt securities, we invest the net proceeds from our continuous offering primarily in money market funds that invest in U.S.
government securities and high-quality debt instruments maturing in one year or less from the time of investment. As of December
31, 2012, we had $1.3 million invested in money market investments pending investment in debt instruments.



For the year ended
December 31, 2012, we experienced a net increase in money market investments of $1.1 million. For the year ended December 31, 2012,
approximately $7.5 million was generated from our financing activities, which primarily consisted of $7.6 million in net offering
proceeds received, offset by $82,000 in distributions. We used approximately $0.7 million of cash in our operating activities primarily
as a result of increases in receivables for interest, and due from related party totaling $1.7 million. Also, we received proceeds
from the sale of, repayment of and principal payments on portfolio debt investments of $1.3 million, offset by the purchase of
new portfolio debt investments of $7.2 million.



We do not expect to
borrow funds during the following twelve months to make investments. In the future, however, if the market for debt financing presents
attractively priced debt financing opportunities, or if our board of directors determines that leveraging our portfolio would be
in our best interests and the best interests of our shareholders, we may decide to borrow funds to make investments. We do not
currently anticipate issuing any preferred shares.



Distributions



We offer our stockholders
the ability to receive distributions as well as the potential capital appreciation resulting from the restructuring of the debt
of our Target Investments. To the extent we have distributable income available we declare and pay distributions on a semi-monthly
basis. We began paying distributions in August 2012, and have made semi-monthly distributions since such time at $0.03063 per share
each (an annualized rate of 7.35% based on our initial public offering price of $10.00 per share) to stockholders.



On December 27, 2012,
we authorized and declared a special cash distribution equal to $0.077 per share, to be paid to stockholders of record at the close
of business on December 27, 2012, payable on January 17, 2013. This special distribution is in addition to the current annualized
distribution of 7.35% per share, based on a $10.00 share price. The current and one-time special distributions total an annualized
return of 8.114%.



Any distributions
to our shareholders are declared out of assets legally available for distribution. We expect to continue making distributions unless
our results of operations, our general financial condition, general economic conditions, or other factors prohibit us from doing
so. 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 distributions (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.
Our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from
our continuous offering. As a result, a portion of the distributions we make may 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.



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 will be required on their part to do so. There will be no selling commissions, dealer manager fees or other
sales charges to shareholders if, they elect to participate in the DRIP. We will pay the plan administrator’s fees under
the plan. Shareholders distribution amount will purchase shares at 95% of the price that the shares are offered pursuant to the
effective registration statement of the public offering. Shares issued pursuant to our DRIP will have the same voting rights as
our shares of common stock offered pursuant to our prospectus.



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 beginning with the taxable year ended December 31,
2012. 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.



36







Related-Party Transactions and Agreements



We have entered into
agreements with the Manager and the Dealer Manager, whereby we pay certain fees and reimbursements to these entities. These include
payments to the Dealer Manager for selling commissions and the Dealer Manager fee and payments to our Manager for reimbursement
of organization and offering costs. In addition, we make payments for certain services that include, but are not limited to, the
identification, execution, and management of our investments and also the management of our day-to-day operations provided to us
by our Manager, pursuant to various agreements that we have entered into. See Note 5 to the financial statements included elsewhere
in this quarterly 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.



37







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.



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 and KBR may also be involved
in other ventures, some of which may compete with us for investment opportunities.



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.



Contractual Obligations



We have entered into
agreements with the Manager and the Dealer Manager, whereby we pay certain fees and reimbursements to these entities. These include
payments to the Dealer Manager for selling commissions and the Dealer Manager fee and payments to our Manager for reimbursement
of organization and offering costs. In addition, we make payments for certain services that include, but are not limited to, the
identification, execution, and management of our investments and also the management of our day-to-day operations provided to us
by our Manager, pursuant to various agreements that we have entered into. See Note 5 to the financial statements included elsewhere
in this quarterly report on Form 10-K for additional information regarding such contractual obligations.



38







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. During the periods covered by this report, we did not engage in interest rate hedging activities. We
would not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and
thus we are not exposed to foreign currency fluctuations.



Assuming that our current
balance sheet was to remain constant and no actions were taken to alter our existing interest rate sensitivity, a 100 basis point
move in interest rates up or down from their December 31, 2012 levels, would increase or decrease our net income by $0.06 million
annually. The effect of a 100 basis point increase or decrease in interest rates from their December 31, 2012 levels would result
in an increase or decrease in net asset value of $0.06 million or 0.73%.



39







ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



Index to Financial Statements



|                                                                                                                                                         | Page
|-------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                                                         |     
|Report of Independent Registered Public Accounting Firm                                                                                                  | F-2 
|Statements of Assets and Liabilities as of December 31, 2012 and 2011                                                                                    | F-3 
|Statements of Operations for the Year Ended December 31, 2012 and for the Period from August 3, 2011 (Date of Inception) to December 31, 2011            | F-4 
|Statements of Changes in Net Assets for the Year Ended December 31, 2012 and for the Period from August 3, 2011 (Date of Inception) to December 31, 2011 | F-5 
|Statements of Cash Flows for the Year Ended December 31, 2012 and for the Period from August 3, 2011 (Date of Inception) to December 31, 2011            | F-6 
|Schedule of Investments as of December 31, 2012                                                                                                          | F-7 
|Notes to Financial Statements                                                                                                                            | F-8 



F-1







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

VII Peaks-KBR Co-Optivist Income BDC II, Inc.



We have audited the accompanying statements
of assets and liabilities of VII Peaks-KBR Co-Optivist Income BDC II, Inc. (the Fund) as of December 31, 2012 and 2011, including
the schedule of investments as of December 31, 2012, and the related statements of operations, changes in net assets and cash flows
for the year ended December 31, 2012 and for the period from August 3, 2011 (date of inception) to December 31, 2011. These financial
statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.



We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, 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. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2012, by correspondence with the custodian and brokers. We believe that our audits provide
a reasonable basis for our opinion.



As described in Note 2 and 3 to the financial
statements, the Company is restating its financial statements in order to comply with the terms of the investment advisory agreement
between the Company and its investment adviser.



In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial position of VII Peaks-KBR Co-Optivist Income BDC II,
Inc. as of December 31, 2012 and 2011, and the results of its operations, changes in its net assets and its cash flows for the
year ended December 31, 2012 and for the period from August 3, 2011 (date of inception) to December 31, 2011, in conformity with
accounting principles generally accepted in the United States of America.



/s/ Burr Pilger Mayer, Inc.



San Francisco, California

July 24, 2013



F-2







VII PEAKS-KBR CO-OPTIVIST INCOME BDC
II, INC.



STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share and per share
data)



|                                                                                                                                 |  | As of                       |      
|-------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | -----
|                                                                                                                                 |  | December 31, 2012(Restated) |      
|                                                                                                                                 |  |                             |      
|ASSETS                                                                                                                           |  |                             |      
|                                                                                                                                 |  |                             |      
|Investments, at fair value (amortized cost of $5,942 and $0)                                                                     |  | $                           | 5,823
|Investments, money market                                                                                                        |  |                             | 1,304
|Interest receivable                                                                                                              |  |                             | 132  
|Prepaid expenses                                                                                                                 |  |                             | 5    
|Due from related party                                                                                                           |  |                             | 555  
|Receivable for common stock purchased                                                                                            |  |                             | 729  
|Total assets                                                                                                                     |  | $                           | 8,548
|                                                                                                                                 |  |                             |      
|LIABILITIES                                                                                                                      |  |                             |      
|Management and incentive fee payable                                                                                             |  | $                           | 21   
|Accounts payable and accrued liabilities                                                                                         |  |                             | 71   
|Stockholder distributions payable                                                                                                |  |                             | 120  
|Total liabilities                                                                                                                |  |                             | 212  
|                                                                                                                                 |  |                             |      
|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; 950,733 and 22,333 shares issued and outstanding, respectively |  |                             | 1    
|Paid-in capital in excess of par value                                                                                           |  |                             | 8,558
|Accumulated distribution in excess of net investment income                                                                      |  |                             | (104 
|Net unrealized depreciation on investments                                                                                       |  |                             | (119 
|Total net assets                                                                                                                 |  |                             | 8,336
|Total liabilities and net assets                                                                                                 |  | $                           | 8,548
|                                                                                                                                 |  |                             |      
|Net asset value per share                                                                                                        |  | $                           | 8.77 



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



F-3







VII PEAKS-KBR CO-OPTIVIST INCOME BDC
II, INC.



STATEMENTS OF OPERATIONS

(in thousands, except share and per share
data)



|                                                                |  | For the Year Ended December 31, |         |   | For the Period from August  3 (Date of Inception) to December 31, |  
|--------------------------------------------------------------- |  | ------------------------------- | ------- | - | ----------------------------------------------------------------- | -
|                                                                |  | 2012                            |         |   | 2011                                                              |  
|                                                                |  |                                 |         |   |                                                                   |  
|Investment income:                                              |  |                                 |         |   |                                                                   |  
|Interest from investments                                       |  | $                               | 146     |   |                                                                   | $
|Total investment income                                         |  |                                 | 146     |   |                                                                   |  
|                                                                |  |                                 |         |   |                                                                   |  
|Operating expenses:                                             |  |                                 |         |   |                                                                   |  
|Professional fees                                               |  |                                 | 119     |   |                                                                   |  
|Directors fees                                                  |  |                                 | 31      |   |                                                                   |  
|Insurance                                                       |  |                                 | 49      |   |                                                                   |  
|Management fees                                                 |  |                                 | 61      |   |                                                                   |  
|General and administrative                                      |  |                                 | 118     |   |                                                                   |  
|Organizational and offering expense                             |  |                                 | 142     |   |                                                                   |  
|Expenses before expense reimbursements                          |  |                                 | 520     |   |                                                                   |  
|Expense reimbursement                                           |  |                                 | (524    | ) |                                                                   |  
|Total expenses net of expense reimbursements                    |  |                                 | (4      | ) |                                                                   |  
|                                                                |  |                                 |         |   |                                                                   |  
|Net investment income (loss)                                    |  |                                 | 150     |   |                                                                   |  
|                                                                |  |                                 |         |   |                                                                   |  
|Realized and unrealized gain (loss) on investments:             |  |                                 |         |   |                                                                   |  
|Net unrealized depreciation on investments                      |  |                                 | (119    | ) |                                                                   |  
|Net realized and unrealized loss on investments                 |  |                                 | (119    | ) |                                                                   |  
|                                                                |  |                                 |         |   |                                                                   |  
|Net increase (decrease) in net assets resulting from operations |  | $                               | 31      |   |                                                                   | $
|                                                                |  |                                 |         |   |                                                                   |  
|Per share information - basic and diluted:                      |  |                                 |         |   |                                                                   |  
|Net investment income (loss)                                    |  | $                               | 0.61    |   |                                                                   | $
|Net increase (decrease) in net assets resulting from operations |  | $                               | 0.13    |   |                                                                   | $
|Weighted average common shares outstanding                      |  |                                 | 246,231 |   |                                                                   |  



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



F-4







VII PEAKS-KBR 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, 2012 (Restated) |         |   | For the Period from August 3, 2011(Date of
 Inception) to December 31, 2011 (Restated) |  
|----------------------------------------------------------- |  | ----------------------------------------------- | ------- | - | -------------------------------------------------------------------------------------- | -
|                                                            |  |                                                 |         |   |                                                                                        |  
|Operations:                                                 |  |                                                 |         |   |                                                                                        |  
|Net investment income (loss)                                |  | $                                               | 150     |   |                                                                                        | $
|Net unrealized depreciation on investments                  |  |                                                 | (119    | ) |                                                                                        |  
|Net increase (decrease) in net assets from operations       |  |                                                 | 31      |   |                                                                                        |  
|Stockholder distributions:                                  |  |                                                 |         |   |                                                                                        |  
|Distributions from net investment income                    |  |                                                 | (150    | ) |                                                                                        |  
|Distributions from paid in capital                          |  |                                                 | (100    | ) |                                                                                        |  
|Net decrease in net assets from stockholder distributions   |  |                                                 | (250    | ) |                                                                                        |  
|Capital share transactions:                                 |  |                                                 |         |   |                                                                                        |  
|Issuance of common stock, net of issuance costs             |  |                                                 | 8,358   |   |                                                                                        |  
|Net increase in net assets from capital share transactions  |  |                                                 | 8,358   |   |                                                                                        |  
|                                                            |  |                                                 |         |   |                                                                                        |  
|Total increase in net assets                                |  |                                                 | 8,139   |   |                                                                                        |  
|Net assets at beginning of period                           |  |                                                 | 197     |   |                                                                                        |  
|Net assets at end of period                                 |  | $                                               | 8,336   |   |                                                                                        | $
|                                                            |  |                                                 |         |   |                                                                                        |  
|Net asset value per common share                            |  | $                                               | 8.77    |   |                                                                                        | $
|Common shares outstanding at end of period                  |  |                                                 | 950,733 |   |                                                                                        |  
|                                                            |  |                                                 |         |   |                                                                                        |  
|Accumulated distribution in excess of net investment income |  | $                                               | (104    | ) |                                                                                        | $



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



F-5







VII PEAKS-KBR CO-OPTIVIST INCOME BDC
II, INC.



STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                                         |  | For the Year Ended December 31, 2012 (Restated) |        |   | For the Period from
August 3, 2011 (Date of
Inception)
to December 31, 2011
(Restated) |  
|------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------- | ------ | - | -------------------------------------------------------------------------------------- | -
|                                                                                                                         |  |                                                 |        |   |                                                                                        |  
|Operating activities:                                                                                                    |  |                                                 |        |   |                                                                                        |  
|Net increase (decrease) in net assets from operations                                                                    |  | $                                               | 31     |   |                                                                                        | $
|Adjustments to reconcile net increase (decrease) in net assets from operations to net cash used in operating activities: |  |                                                 |        |   |                                                                                        |  
|Net accretion of discount on investments                                                                                 |  |                                                 | (26    | ) |                                                                                        |  
|Repayments of investments                                                                                                |  |                                                 | 1,250  |   |                                                                                        |  
|Purchase of investments                                                                                                  |  |                                                 | (7,166 | ) |                                                                                        |  
|Purchase of investments – money market                                                                                   |  |                                                 | (1,103 | ) |                                                                                        |  
|Net unrealized depreciation on investments                                                                               |  |                                                 | 119    |   |                                                                                        |  
|(Increase) decrease in operating assets:                                                                                 |  |                                                 |        |   |                                                                                        |  
|Interest receivable                                                                                                      |  |                                                 | (132   | ) |                                                                                        |  
|Prepaid expenses                                                                                                         |  |                                                 | (5     | ) |                                                                                        |  
|Due from related party                                                                                                   |  |                                                 | (555   | ) |                                                                                        |  
|                                                                                                                         |  |                                                 |        |   |                                                                                        |  
|Increase (decrease) in operating liabilities:                                                                            |  |                                                 |        |   |                                                                                        |  
|Management and incentive fees payable                                                                                    |  |                                                 | 21     |   |                                                                                        |  
|Accounts payable and accrued liabilities                                                                                 |  |                                                 | 67     |   |                                                                                        |  
|Net cash used in operating activities                                                                                    |  |                                                 | (7,499 | ) |                                                                                        |  
|                                                                                                                         |  |                                                 |        |   |                                                                                        |  
|Financing activities:                                                                                                    |  |                                                 |        |   |                                                                                        |  
|Proceeds from issuance of shares of common stock, net                                                                    |  |                                                 | 7,581  |   |                                                                                        |  
|Stockholder distributions                                                                                                |  |                                                 | (82    | ) |                                                                                        |  
|Net cash provided by financing activities                                                                                |  |                                                 | (7,499 | ) |                                                                                        |  
|                                                                                                                         |  |                                                 |        |   |                                                                                        |  
|Net increase in cash                                                                                                     |  |                                                 | -      |   |                                                                                        |  
|Cash, beginning of period                                                                                                |  |                                                 | -      |   |                                                                                        |  
|Cash, end of period                                                                                                      |  | $                                               | -      |   |                                                                                        | $
|                                                                                                                         |  |                                                 |        |   |                                                                                        |  
|Supplemental non-cash information:                                                                                       |  |                                                 |        |   |                                                                                        |  
|DRIP distribution payable                                                                                                |  | $                                               | 46     |   |                                                                                        | $
|Cash distribution payable                                                                                                |  | $                                               | 74     |   |                                                                                        | $
|DRIP distribution paid                                                                                                   |  | $                                               | 49     |   |                                                                                        | $



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



F-6







VII PEAKS-KBR CO-OPTIVIST INCOME BDC
II, INC.



SCHEDULE OF INVESTMENTS

(dollars in thousands)



|Portfolio
    Company (a)                     |  | Industry                                  |  | Principal
    /
    Number of 
    Shares |       |  | Amortized
     Cost |   |       | Market
     Value  Book |  |   | %
    of Net  Assets |  |  | Current
    Rate |       |   | Maturity
|--------------------------------------------- |  | ----------------------------------------- |  | ----------------------------------------- | ----- |  | ------------------- | - | ----- | ----------------------- |  | - | -------------------- |  |  | ---------------- | ----- | - | --------
|                                              |  |                                           |  |                                           |       |  |                     |   |       |                         |  |   |                      |  |  |                  |       |   |         
|Apria Healthcare Group, Inc.                  |  | Healthcare & Pharmaceuticals              |  |                                           | 150   |  |                     | $ | 155   |                         |  | $ | 155                  |  |  |                  | 1.89  | % |         
|GSX Worldwide, Inc.                           |  | Services: Business                        |  |                                           | 350   |  |                     |   | 364   |                         |  |   | 365                  |  |  |                  | 4.46  | % |         
|Rotech Healthcare, Inc.                       |  | Healthcare & Pharmaceuticals              |  |                                           | 300   |  |                     |   | 300   |                         |  |   | 299                  |  |  |                  | 3.65  | % |         
|Total Senior Secured First
    Lien Debt (b)  |  |                                           |  |                                           | 800   |  |                     |   | 819   |                         |  |   | 819                  |  |  |                  | 10.01 | % |         
|                                              |  |                                           |  |                                           |       |  |                     |   |       |                         |  |   |                      |  |  |                  |       |   |         
|Apria Healthcare Group, Inc.                  |  | Healthcare & Pharmaceuticals              |  |                                           | 150   |  |                     |   | 149   |                         |  |   | 148                  |  |  |                  | 1.81  | % |         
|Aspect Software, Inc.                         |  | Telecommunications                        |  |                                           | 400   |  |                     |   | 409   |                         |  |   | 362                  |  |  |                  | 4.42  | % |         
|Logan's Roadhouse, Inc.                       |  | Beverage, Food & Tobacco                  |  |                                           | 375   |  |                     |   | 353   |                         |  |   | 348                  |  |  |                  | 4.25  | % |         
|Total Senior Secured Second
    Lien Debt (b) |  |                                           |  |                                           | 925   |  |                     |   | 911   |                         |  |   | 858                  |  |  |                  | 10.48 | % |         
|                                              |  |                                           |  |                                           |       |  |                     |   |       |                         |  |   |                      |  |  |                  |       |   |         
|Alliance HealthCare Services, Inc.            |  | Healthcare & Pharmaceuticals              |  |                                           | 250   |  |                     |   | 217   |                         |  |   | 228                  |  |  |                  | 2.79  | % |         
|Alliance One International, Inc.              |  | Beverage, Food & Tobacco                  |  |                                           | 400   |  |                     |   | 418   |                         |  |   | 421                  |  |  |                  | 5.14  | % |         
|Avaya, Inc.                                   |  | Telecommunications                        |  |                                           | 225   |  |                     |   | 198   |                         |  |   | 200                  |  |  |                  | 2.44  | % |         
|Avaya, Inc.                                   |  | Telecommunications                        |  |                                           | 225   |  |                     |   | 198   |                         |  |   | 201                  |  |  |                  | 2.46  | % |         
|Bon-ton Department Stores, Inc.               |  | Retail                                    |  |                                           | 350   |  |                     |   | 351   |                         |  |   | 347                  |  |  |                  | 4.24  | % |         
|Claire's Stores, Inc.                         |  | Retail                                    |  |                                           | 235   |  |                     |   | 219   |                         |  |   | 217                  |  |  |                  | 2.65  | % |         
|Education Management LLC                      |  | Services: Consumer                        |  |                                           | 400   |  |                     |   | 343   |                         |  |   | 321                  |  |  |                  | 3.92  | % |         
|First Data Corp.                              |  | Banking, Finance, Insurance & Real Estate |  |                                           | 175   |  |                     |   | 181   |                         |  |   | 179                  |  |  |                  | 2.19  | % |         
|First Data Corp.                              |  | Banking, Finance, Insurance & Real Estate |  |                                           | 175   |  |                     |   | 180   |                         |  |   | 179                  |  |  |                  | 2.19  | % |         
|Seitel, Inc.                                  |  | High Tech Industries                      |  |                                           | 350   |  |                     |   | 355   |                         |  |   | 351                  |  |  |                  | 4.29  | % |         
|Suntech Power Holdings Company, Ltd. (c)      |  | Environmental Industries                  |  |                                           | 100   |  |                     |   | 91    |                         |  |   | 46                   |  |  |                  | 0.56  | % |         
|Travelport LLC                                |  | Services: Consumer                        |  |                                           | 250   |  |                     |   | 216   |                         |  |   | 220                  |  |  |                  | 2.69  | % |         
|YCC Holdings LLC                              |  | Consumer goods: Non-durable               |  |                                           | 200   |  |                     |   | 207   |                         |  |   | 206                  |  |  |                  | 2.53  | % |         
|Total Senior Unsecured Debt
    (b)           |  |                                           |  |                                           | 3,335 |  |                     |   | 3,174 |                         |  |   | 3,116                |  |  |                  | 38.09 | % |         
|                                              |  |                                           |  |                                           |       |  |                     |   |       |                         |  |   |                      |  |  |                  |       |   |         
|Sealy Mattress Co.                            |  | Consumer goods: Durable                   |  |                                           | 400   |  |                     |   | 404   |                         |  |   | 401                  |  |  |                  | 4.90  | % |         
|Serena Software, Inc.                         |  | High Tech Industries                      |  |                                           | 410   |  |                     |   | 424   |                         |  |   | 420                  |  |  |                  | 5.13  | % |         
|The Yankee Candle Company, Inc.               |  | Consumer goods: Non-durable               |  |                                           | 200   |  |                     |   | 210   |                         |  |   | 209                  |  |  |                  | 2.55  | % |         
|Total Senior Subordinated
    Debt (b)        |  |                                           |  |                                           | 1,010 |  |                     |   | 1,038 |                         |  |   | 1,030                |  |  |                  | 12.59 | % |         
|                                              |  |                                           |  |                                           |       |  |                     |   |       |                         |  |   |                      |  |  |                  |       |   |         
|U.S. Bank Money Market 5 –
    CT             |  | Investments - Money Market                |  |                                           | 1,304 |  |                     |   | 1,304 |                         |  |   | 1,304                |  |  |                  | 15.93 | % |         
|Total Investments - Money
    Market (b)      |  |                                           |  |                                           | 1,304 |  |                     |   | 1,304 |                         |  |   | 1,304                |  |  |                  | 15.93 | % |         
|                                              |  |                                           |  |                                           |       |  |                     |   |       |                         |  |   |                      |  |  |                  |       |   |         
|                                              |  |                                           |  |                                           | 7,374 |  |                     | $ | 7,246 |                         |  | $ | 7,127                |  |  |                  | 87.10 | % |         



| | (a) | All of our investments are issued by eligible U.S. portfolio companies, as defined in the Investment Company Act of 1940, except
for Alliance One International, Inc., Education Management LLC and Suntech Power Holdings Company, Ltd.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Percentages are based on net assets of $8,336 as of December 31, 2012.
| | --- | ----------------------------------------------------------------------

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



| | (d) | The issuer has the
option of paying interest in additional notes, in which event the interest rate is 11%.
| | --- | ----------------------------------------------------------------------------------------------------------



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



F-7







VII PEAKS-KBR
CO-OPTIVIST INCOME BDC II, INC.



NOTES TO FINANCIAL STATEMENTS

December 31, 2012



Note 1.  Nature of Operations



VII Peaks-KBR Co-Optivist
Income BDC II, Inc. (the “Fund”), 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 (the “1940 Act”). The Fund has elected to be treated for federal income
tax purposes as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as
amended (the “Code”). The Fund intends to invest in discounted corporate debt and equity-linked debt securities of
public and private companies whose securities trade on the secondary loan market for institutional investors.



On August 9, 2011,
the Fund filed a registration statement on Form N-2 to sell up to 75.0 million shares of common stock at an initial public offering
price of $10.00 per share. The registration statement was declared effective by the Securities Exchange Commission (the “SEC”)
on March 1, 2012. The Fund was to commence operations when it raised gross offering proceeds of over $1.0 million, all of which
was from persons who were not affiliated with the Fund or VII Peaks-KBR BDC Advisor II, LLC (the “Manager”). 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 the Fund’s subscribers, pending release to the Fund. The Fund achieved the minimum
offering requirement on July 10, 2012 and commenced operations on such date. As of December 31, 2012, the Fund issued 1.0 million
shares of common stock for gross proceeds of $9.5 million.



Note 2.  Summary of Significant
Accounting Policies



Basis of Presentation



The accompanying financial
statements of the Fund have been prepared in conformity with accounting principles generally accepted in the United States of America
("GAAP") and pursuant to the requirements for reporting on Form 10-K.



Use of Estimates in the Preparation
of Financial Statements



The preparation of
the accompanying financial statements in conformity with 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.



F-8







Note 2.  Summary of Significant
Accounting Policies (continued)



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



U.S. Federal Income Taxes



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



New Accounting Pronouncements



In September 2011,
the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income (Topic 220): Presentation
of Comprehensive Income,” that will require a company to present components of net income and other comprehensive income
in one continuous statement or in two separate, but consecutive statements. There are no changes to the components that are recognized
in net income or other comprehensive income under current GAAP. This guidance is effective for fiscal years and interim periods
within those fiscal years, beginning after December 15, 2011. ASU 2011-05 did not have a material effect on the Fund’s financial
statements.



In May 2011, the FASB
issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and
IFRSs (“ASU 2011-04”), which amends GAAP to conform it with fair value measurement and disclosure requirements in International
Financial Reporting Standards (“IFRS”). The amendments in ASU 2011-04 change the wording used to describe the requirements
in GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in ASU 2011-04 are
to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. As such,
the Fund has adopted this ASU and there were no material impacts on its financial position or results of operations.



Revenue Recognition



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



Expense Reimbursement Agreement



Separate from the investment
advisory agreement described under “Organizational and Offering Costs,” the Manager has agreed to reimburse the Fund
for certain operating expenses. Such reimbursed amounts are not subject to recoupment. See “Note 5 – Related Party
Transactions.



Note 3. Restatement of previously issued
financial statements.



As discussed in Note
2, during the second quarter of fiscal 2013, the Fund determined that it was necessary to restate its financial statements for
organization and offering expenses in order to comply with the terms of the investment advisory agreement between the Fund and
the Manager. Previously, the Fund expensed all organization costs as they were incurred by the Manager. Previously, the Fund capitalized
all offering expenses incurred prior to the date of commencement of operations (July 12, 2012) as deferred offering costs and amortized
that amount over 12 months from the date of commencement of operations, and expensed all offering costs incurred by the Manager
after the commencement of operations as they were incurred by the Manager. However, because the Fund is only obligated to reimburse
the Manager to the extent of 1.5% of gross offering proceeds, the Fund is restating its financial statements to reflect the expense
and obligation to the Manager only as they are payable to the Manager at 1.5% of offering proceeds. The following table summarizes
the effects of the restatement on the specific items presented in the Company’s historical financial statements previously
included in the Annual Report (in thousands, except per share data).





F-9







|                                                                |  | December 31, 2012      |        |   | December 31, 2011 |  
|--------------------------------------------------------------- |  | ---------------------- | ------ | - | ----------------- | -
|Statement of Assets and Liabilities                             |  | As previously
reported |        |   | As restated       |  
|                                                                |  |                        |        |   |                   |  
|Due from related party                                          |  | $                      | 107    |   |                   | $
|Deferred offering costs                                         |  |                        | 449    |   |                   |  
|Total assets                                                    |  |                        | 8,549  |   |                   |  
|Due to related party                                            |  |                        | -      |   |                   |  
|Cumulative net investment income (loss), net of distributions   |  |                        | (104   | ) |                   |  
|Total net assets                                                |  | $                      | 8,337  |   |                   | $
|                                                                |  |                        |        |   |                   |  
|Statement of Operations                                         |  |                        |        |   |                   |  
|                                                                |  |                        |        |   |                   |  
|Incentive fees                                                  |  | $                      | 41     |   |                   | $
|General and administrative                                      |  |                        | 118    |   |                   |  
|Organizational and offering expenses                            |  |                        | 894    |   |                   |  
|Expense before expense reimbursement                            |  |                        | 1,313  |   |                   |  
|Waiver of incentive fee                                         |  |                        | (41    | ) |                   |  
|Expense reimbursement                                           |  |                        | (1,377 | ) |                   |  
|Total expenses net of expense reimbursements                    |  |                        | (105   | ) |                   |  
|Net investment income (loss)                                    |  |                        | 251    |   |                   |  
|Net increase (decrease) in net assets resulting from operations |  | $                      | 132    |   |                   | $
|                                                                |  |                        |        |   |                   |  
|Per share information - basic and diluted                       |  |                        |        |   |                   |  
|Net investment income                                           |  | $                      | 1.02   |   |                   | $
|Net increase (decrease) in net assets resulting from operations |  | $                      | 0.54   |   |                   | $



Note 4. Valuation of Portfolio Investments



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



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



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



| | • | preliminary valuation conclusions are then documented and discussed with the members of the board of directors; and
| | - | -------------------------------------------------------------------------------------------------------------------



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



F-10







Note 4. Valuation of Portfolio Investments (continued)



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.



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



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



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



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.



The following table presents fair value
measurements of investments, by major class, as of December 31, 2012 according to the fair value hierarchy (dollars in thousands).
There were no investments as of December 31, 2011.



|                                |  | Level 1 |       |  | Level 2 |   |       | Total | 
|------------------------------- |  | ------- | ----- |  | ------- | - | ----- | ----- | 
|Investments – Money Market      |  | $       | 1,304 |  |         | $ | —     |       | 
|Senior Secured First Lien Debt  |  |         | —     |  |         |   | 819   |       | 
|Senior Secured Second Lien Debt |  |         | —     |  |         |   | 859   |       | 
|Senior Unsecured Debt           |  |         | —     |  |         |   | 3,115 |       | 
|Senior Subordinated Debt        |  |         | —     |  |         |   | 1,030 |       | 
|Total                           |  | $       | 1,304 |  |         | $ | 5,823 |       | 



The composition of the Fund’s investments
as of December 31, 2012, at amortized cost and fair value were as follows (dollars in thousands). There were no investments as
of December 31, 2011.



|                                |  | Investments at Amortized Cost |       |  | Investments at Fair Value |   |       | Fair Value Percentage of Total Portfolio | 
|------------------------------- |  | ----------------------------- | ----- |  | ------------------------- | - | ----- | ---------------------------------------- | 
|Investments – Money Market      |  | $                             | 1,304 |  |                           | $ | 1,304 |                                          | 
|Senior Secured First Lien Debt  |  |                               | 819   |  |                           |   | 819   |                                          | 
|Senior Secured Second Lien Debt |  |                               | 911   |  |                           |   | 859   |                                          | 
|Senior Unsecured Debt           |  |                               | 3,174 |  |                           |   | 3,115 |                                          | 
|Senior Subordinated Debt        |  |                               | 1,038 |  |                           |   | 1,030 |                                          | 
|Total                           |  | $                             | 7,246 |  |                           | $ | 7,127 |                                          | 



F-11







Note 5.  Related Party Transactions



The Fund is managed
by the Manager. The Manager is wholly-owned by VII Peaks-KBR, LLC which is a joint venture between VII Peaks Capital, LLC (“VII
Peaks”), and KBR Capital Advisors, LLC (“KBR”).



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. 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 year ended December 31, 2012, the Fund incurred $0.06
million in base management fees.



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 year ended December 31, 2012, the Fund did not incur any incentive fees related
to net investment income or capital gains.



Under US 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 will pay 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.



During the year ended
December 31, 2012 and for the period from August 4, 2011 (inception) through December 31, 2011, the Manager incurred organizational
and offering costs of $975,000 and $454,000, respectively. Of the total $1,429,000 organizational and offering costs incurred from
inception through December 31, 2012, $142,000 was reimbursed to the Manager during the year ended December 31, 2012. 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. The unreimbursed amount will be eligible for reimbursement to the extent the Fund receives subscriptions until March
1, 2014, which is the currently scheduled date that the offering period ends, unless it is extended. 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.



From time to time,
the Fund has paid directly certain expenses that were classified as organization or offering expenses that should have been borne
by the Manager and for which the Manager is obligated to reimburse the Fund. As of December 31, 2012, the unreimbursed amount of
organization and offering expenses was $31,000 which amount is included in “Due from related party” on the Fund’s
balance sheet as of that date.



F-12







Expense Reimbursement
Agreement



On November 9, 2012,
the Fund entered into an expense reimbursement agreement with the Manager, under which the Manager agreed to reimburse the Fund
for all U.S. GAAP compliant expenses 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 recognizes a receivable on its books for
the amount due from the Manager under the expense reimbursement agreement, and the Manager recognizes a liability on its books
in the same amount. The expense reimbursement agreement allows the Manager and the Fund to offset the receivable in favor of the
Fund created under the expense reimbursement agreement against the contingent payable owed by the Fund to the Manager under the
investment advisory agreement, resulting in a net receivable or payable position. As of December 31, 2012, the Manager was indebted
to the Fund for $524,000 of expense reimbursements under the expense reimbursement agreement.



The expense reimbursement
agreement expires on the earlier of August 3, 2014 or the start of the quarter in which the Fund reaches $75 million in net assets.
Amounts reimbursed by the Manager under the expense reimbursement agreement are not subject to recoupment by the Manager at a later
date.



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. The Manager is reimbursed amounts based on allocable portion
of overhead costs under this agreement. For the year ended December 31, 2012, the Fund reimbursed the Manager for $24,000 in administration
expenses under the administration agreement.



Dealer Manager Agreement



KBR Capital Markets,
LLC (the “Dealer Manager”) is an affiliate of KBR, and is a licensed broker-dealer registered with the Financial Industry
Regulatory Authority (“FINRA”) and serves as the Dealer Manager for the Fund’s public offering of shares of common
stock. The Dealer Manager receives selling commissions of 7% of gross offering proceeds, all of which is expected to be re-allowed
to selected dealers, and a dealer manager fee of up to 3% of gross offering proceeds, all or a portion of which may be re-allowed
to selected dealers.



Purchase of Shares



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 price of $10.00 per share, net of selling commission and
dealer manager fees.



Note 6.  Common Stock



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.



On July 10, 2012, the Fund had raised sufficient
proceeds to break escrow on its IPO and through December 31, 2012, the Fund has sold 1.0 million shares of common stock for gross
proceeds of $9.5 million including the purchases made by the Manager.



F-13







Note 7.  Earnings Per Share



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



The following information sets forth the
computation of the weighted average basic and diluted net increase (decrease) in net assets per share from operations for the year
ended December 31, 2012 and for the period from August 3, 2011 (date of inception) to December 31, 2011 (dollars in thousands except
share and per share amounts).



|                                                                          |  | For the Year Ended December 31, |         |  | For the Period
from August 3,
2011 (Date of
Inception) to
December 31, |  
|------------------------------------------------------------------------- |  | ------------------------------- | ------- |  | ---------------------------------------------------------------------- | -
|                                                                          |  | 2012 (Restated)                 |         |  | 2011 (Restated)                                                        |  
|Basic and diluted                                                         |  |                                 |         |  |                                                                        |  
|Net increase (decrease) in net assets resulting from operations           |  | $                               | 31      |  |                                                                        | $
|Weighted average common shares outstanding                                |  |                                 | 246,231 |  |                                                                        |  
|Net increase (decrease) in net assets resulting from operations per share |  | $                               | 0.13    |  |                                                                        | $



The Fund had no potentially
dilutive securities as of December 31, 2012 or December 31, 2011, resulting in the same number of shares for basic and diluted.



Note 8.  Distributions



The Fund has declared and paid distributions
to stockholders on a semi-monthly basis since it commenced operations. From time to time, the Fund may also pay interim distributions
at the discretion of its board of directors. The Fund may fund its distributions to stockholders from any sources of funds available
to it, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of
assets and non-capital gains proceeds from the sale of assets. The Fund’s distributions may exceed its earnings, especially
during the period before the Fund has substantially invested the proceeds from its IPO. As a result, a portion of the distributions
may represent a return of capital for tax purposes. As of December 31, 2012, the Fund has accrued $0.1 million in stockholder distributions
that were unpaid. All amounts declared in December 2012 and paid in January 2013 have been accrued in the December 31, 2012 financial
statements.



The following table reflects the distributions
per share paid or payable in cash or with the distribution reinvestment plan (“DRIP”) on the Fund’s common stock
to date (dollars in thousands except per share amounts) that was declared through December 31, 2012:



|Payment Dates        |  | Net Investment Income |     |  | Realized Gain from Investments |   |   | Return of  Capital |  |   | Per Share |  |  | Paid in Cash |      |  | DRIP |   |     | TOTAL | 
|-------------------- |  | --------------------- | --- |  | ------------------------------ | - | - | ------------------ |  | - | --------- |  |  | ------------ | ---- |  | ---- | - | --- | ----- | 
|2012                 |  |                       |     |  |                                |   |   |                    |  |   |           |  |  |              |      |  |      |   |     |       | 
|August 17, 2012      |  | $                     | 4   |  |                                | $ | - |                    |  | $ | -         |  |  | $            | 0.03 |  |      | $ | 3   |       | 
|August 31, 2012      |  |                       | 4   |  |                                |   | - |                    |  |   | -         |  |  |              | 0.03 |  |      |   | 3   |       | 
|September 14, 2012   |  |                       | 9   |  |                                |   | - |                    |  |   | -         |  |  |              | 0.03 |  |      |   | 6   |       | 
|September 28, 2012   |  |                       | 9   |  |                                |   | - |                    |  |   | -         |  |  |              | 0.03 |  |      |   | 6   |       | 
|October 15, 2012     |  |                       | 6   |  |                                |   | - |                    |  |   | 6         |  |  |              | 0.03 |  |      |   | 8   |       | 
|October 31, 2012     |  |                       | -   |  |                                |   | - |                    |  |   | 12        |  |  |              | 0.03 |  |      |   | 8   |       | 
|November 16, 2012    |  |                       | 17  |  |                                |   | - |                    |  |   | -         |  |  |              | 0.03 |  |      |   | 11  |       | 
|November 30, 2012    |  |                       | 17  |  |                                |   | - |                    |  |   | -         |  |  |              | 0.03 |  |      |   | 11  |       | 
|December 17, 2012    |  |                       | 22  |  |                                |   | - |                    |  |   | -         |  |  |              | 0.03 |  |      |   | 12  |       | 
|December 31, 2012    |  |                       | 23  |  |                                |   | - |                    |  |   | -         |  |  |              | 0.03 |  |      |   | 13  |       | 
|2013                 |  |                       |     |  |                                |   |   |                    |  |   |           |  |  |              |      |  |      |   |     |       | 
|January 17, 2013 (1) |  |                       | 35  |  |                                |   | - |                    |  |   | 57        |  |  |              | 0.11 |  |      |   | 57  |       | 
|January 31, 2013     |  |                       | -   |  |                                |   | - |                    |  |   | 29        |  |  |              | 0.03 |  |      |   | 18  |       | 
|                     |  | $                     | 146 |  |                                | $ | - |                    |  | $ | 104       |  |  |              |      |  |      | $ | 156 |       | 



| | (1) | Special Distribution
| | --- | --------------------



The following table
reflects the sources of the cash distributions on a tax basis that the Company has declared on its common stock during the year
ended December 31, 2012:



|                                          |  | Year Ended December 31, 2012 |    
|----------------------------------------- |  | ---------------------------- | ---
|Source of Distribution                    |  | Distribution Amount          |    
|Net investment income                     |  |                              | 146
|Distributions on account of common equity |  |                              | 104
|Total                                     |  | $                            | 250



F-14







Note 9.  Financial Highlights



The following is a schedule of financial
highlights for the year ended December 31, 2012:



|                                                                     |  | For the Year Ended December 31, 2012 (Restated) |        
|-------------------------------------------------------------------- |  | ----------------------------------------------- | -------
|Per share data:                                                      |  |                                                 |        
|Net asset value, beginning of period                                 |  | $                                               | 8.82   
|                                                                     |  |                                                 |        
|Results of operations (1)                                            |  |                                                 |        
|Net investment income (loss)                                         |  |                                                 | 0.61   
|Net realized and unrealized loss on investments                      |  |                                                 | (0.48  
|Net increase (decrease) in net assets resulting from operations      |  |                                                 | 0.13   
|                                                                     |  |                                                 |        
|Stockholder distributions (2)                                        |  |                                                 |        
|Distributions from net investment income                             |  |                                                 | (0.59  
|Distributions from capital                                           |  |                                                 | (0.43  
|Net decrease in net assets resulting from stockholder distributions  |  |                                                 | (1.02  
|                                                                     |  |                                                 |        
|Capital share transactions                                           |  |                                                 |        
|Impact of issuance of common stock (3)                               |  |                                                 | 0.84   
|Net increase in net assets resulting from capital share transactions |  |                                                 | 0.84   
|Net asset value, end of period                                       |  | $                                               | 8.77   
|Shares outstanding at end of period                                  |  |                                                 | 950,733
|Total return (5)                                                     |  |                                                 | 10.98  
|Ratio/Supplemental data:                                             |  |                                                 |        
|Net assets, end of period (in thousands)                             |  | $                                               | 8,336  
|Average net assets (in thousands)                                    |  |                                                 | 5,831  
|Ratio of net investment income to average net assets (4)(7)          |  |                                                 | 5.14   
|Ratio of operating expenses to average net assets (4)(7)             |  |                                                 | -      
|Ratio of expenses reimbursed to average net assets (7)               |  |                                                 | (17.97 
|Portfolio turnover ratio (6)                                         |  |                                                 | 30.60  

_________________________

| | (1) | The per share was derived by using the weighted average shares outstanding during the period. Net investment income per share excluding the expense reimbursements equals ($1.52) for the year ended December 31, 2012. There was no expense reimbursement for the period from August 3, 2011 (date of inception) to December 31, 2011.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | (4) | The ratios are after giving effect to amounts reimbursed by the Manager under an expense reimbursement agreement. See “Note 5 – Related Party Transactions.”For the year ended December 31, 2012, excluding the expense reimbursement, the ratio of net investment income and operating expenses to average net assets would have been (12.83)% and 17.84%, respectively. For the period from August 3, 2011 (date of inception) to December 31, 2011, there was no expense reimbursement.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Total return is calculated assuming a purchase of shares at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the DRIP. The total return based on net asset value for the year ended December 31, 2012, includes the effect of the expense reimbursement which added 6.24% to the return received by shareholders. For the period from August 3, 2011 (date of inception) to December 31, 2011, there was no expense reimbursement.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | Portfolio turnover rate is calculated using the year-to-date sales over the average of the invested assets at fair value. Not annualized.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------



| | (7) | Ratios are annualized.
| | --- | ----------------------



F-15







Note 10.  Selected Quarterly Data (Unaudited)



The following is the quarterly results of
operations for the year ended December 31, 2012. 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, 2012 |        
|Investment income                                               |  | $                 | 114    
|Operating expenses                                              |  |                   |        
|Total Expenses                                                  |  |                   | 243    
|Less: Expense reimbursements                                    |  |                   | (242   
|Net expenses                                                    |  |                   | (1     
|Net investment income (loss)                                    |  |                   | 113    
|Realized and unrealized loss                                    |  |                   | (47    
|Net increase (decrease) in net assets resulting from operations |  | $                 | 66     
|Per share information - basic and diluted                       |  |                   |        
|Net investment income (loss)                                    |  | $                 | 0.16   
|Net increase (decrease) in net assets resulting from operations |  | $                 | 0.10   
|Weighted average shares outstanding                             |  |                   | 691,405



F-16







Note 11.  Subsequent Events



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



From January
1, 2013 to June 10, 2013, the Fund issued 1.0 million shares of common stock for gross proceeds of $10.4 million. On April 30,
2013, the Fund suspended its continuous offering pending approval of a post-effective amendment to its financial statements. With
the proceeds from the Fund’s continuous offering, the Fund purchased a total of eighty-two debt investments with an aggregate
face value of $14.8 million for $15.5 million in cash. The Fund had one debt investment fully called with a carrying value of $0.3
million and an aggregate redemption value of $0.3 million.



From January 1, 2013
to June 28, 2013, the Fund declared distributions of $0.386922 per share.



On February 6, 2013,
the Fund submitted its consent for its holdings in Education Management bonds to facilitate refinance of the 8.75% bonds at 100
cents. On March 6, 2013 the tender process for Education Management bonds was completed. The Fund received 44.416 cents in cash
and 55.584 cents in new 15% PIK Education Management bonds due July 1, 2018 for a total payment of 100 cents.



On February 7, 2013
the Fund submitted its consent for its holdings in Avaya bonds to facilitate refinance of the 9.75% and 10.125% bonds at 102.5
cents including cash consent payment of 2.5 cents.



On March 6, 2013, the
Fund submitted its consent for its holdings in Claire’s Stores bonds to facilitate repayment of the 9.25% bonds at 101.8
cents and 9.625% bonds at 101.875 cents including cash consent payment of 3.0 cents.



On March 18, 2013,
the Fund submitted its consent for its holdings in Travelport LLC bonds to facilitate refinance of the 9.875% bonds at 100 cents.
On April 15, 2013 the tender process for Travelport bonds was completed. The Fund received 42.50 cents in cash and 57.50 in new
13.875% Senior Unsecured Bonds due March 1, 2016 for a total payment of 100 cents.



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



None.



ITEM 9A. CONTROLS
AND PROCEDURES



Disclosure Controls
and Procedures



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
are 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 GAAP. Based on our management’s evaluation under the framework
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), management concluded that our internal controls over financial reporting were effective as of December 31, 2012.



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.



Change in Internal
Control Over Financial Reporting



No change occurred
in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the year
ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.



ITEM 9B. OTHER INFORMATION



None.



40







Part III



We will file a definitive
Proxy Statement for our 2013 Annual Meeting of Stockholders with the Securities and Exchange Commission (the “SEC”),
pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required
by Part III has been omitted under General Instruction 6(3) to Form 10-K. Only those sections of our definitive Proxy Statement
that specifically address the items set forth herein are incorporated by reference.



ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE



The information required by Item 10 is hereby
incorporated by reference from our definitive Proxy Statement relating to our 2013 Annual Meeting of Stockholders, to be filed
with the SEC within 120 days following the end of our fiscal year.



ITEM 11. EXECUTIVE COMPENSATION



The information required by Item 11 is hereby
incorporated by reference from our definitive Proxy Statement relating to our 2013 Annual Meeting of Stockholders, to be filed
with the SEC within 120 days following the end of our fiscal year.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND

RELATED STOCKHOLDER MATTERS



The information required by Item 12 is hereby
incorporated by reference from our definitive Proxy Statement relating to our 2013 Annual Meeting of Stockholders, to be filed
with the SEC within 120 days following the end of our fiscal year.



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



The information required by Item 13 is hereby
incorporated by reference from our definitive Proxy Statement relating to our 2013 Annual Meeting of Stockholders, to be filed
with the SEC within 120 days following the end of our fiscal year.



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES



The information required by Item 14 is hereby
incorporated by reference from our definitive Proxy Statement relating to our 2013 Annual Meeting of Stockholders, to be filed
with the SEC within 120 days following the end of our fiscal year.



41







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-2 
|Statements of Assets and Liabilities as of December 31, 2012 and 2011                                                                                    | F-3 
|Statements of Operations for the Year Ended December 31, 2012 and for the Period from August 3, 2011 (Date of Inception) to December 31, 2011            | F-4 
|Statements of Changes in Net Assets for the Year Ended December 31, 2012 and for the Period from August 3, 2011 (Date of Inception) to December 31, 2011 | F-5 
|Statements of Cash Flows for the Year Ended December 31, 2012 and for the Period from August 3, 2011 (Date of Inception) to December 31, 2011            | F-6 
|Schedule of Investments as of December 31, 2012                                                                                                          | F-7 
|Notes to Financial Statements                                                                                                                            | F-8 



| | 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, 2012 (and are numbered in accordance with Item 601 of Regulation S-K):



|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                            
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              |  |                                                                                                                                                                                                                                                                                                                    
|10.1          |  | Expense Reimbursement Agreement by and between VII Peaks-KBR Co-Optivist Income BDC II, Inc. and VII Peaks-KBR BDC Advisor II, LLC, dated as of November 9, 2012 (previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2012 and herein incorporated by reference).
|              |  |                                                                                                                                                                                                                                                                                                                    
|31.1*         |  | Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                               
|              |  |                                                                                                                                                                                                                                                                                                                    
|31.2*         |  | Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                               
|              |  |                                                                                                                                                                                                                                                                                                                    
|32.1*         |  | Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                               
|              |  |                                                                                                                                                                                                                                                                                                                    
|32.2*         |  | Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                               



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



42







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-KBR Co-Optivist Income BDC II, Inc.
|------------------- | ---------------------------------------------
|                    |                                              
|Date: July 25, 2013 | 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.



|Name                            |  | Title                                                              |  | Date         
|------------------------------- |  | ------------------------------------------------------------------ |  | -------------
|                                |  |                                                                    |  |              
|                                |  | Chairman of the Board of Directors,                                |  | July 25, 2013
|Gurpreet (Gurprit) S. Chandhoke |  | Chief Executive Officer and President(Principal Executive Officer) |  |              
|                                |  |                                                                    |  |              
|                                |  | Chief Financial Officer, Treasurer and Secretary                   |  | July 25, 2013
|Cecilia Shea                    |  | (Principal Financial Officer and Principal
 Accounting Officer)    |  |              
|                                |  |                                                                    |  |              
|*                               |  |                                                                    |  |              
|Bhavin Shah                     |  | Director                                                           |  | July 25, 2013
|                                |  |                                                                    |  |              
|*                               |  |                                                                    |  |              
|Jeya Kumar                      |  | Independent Director                                               |  | July 25, 2013
|                                |  |                                                                    |  |              
|*                               |  |                                                                    |  |              
|Amit Mahajan                    |  | Independent Director                                               |  | July 25, 2013
|                                |  |                                                                    |  |              
|*                               |  |                                                                    |  |              
|Robert Winspear                 |  | Independent Director                                               |  | July 25, 2013



43