UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549








Form 10-K








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



For the fiscal year ended
December 31, 2016



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



For the transition period
from             to



Commission File No. 0-54615








VII Peaks Co-Optivist Income BDC II,
Inc.

(Exact name of Registrant as specified
in its charter)








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



4 Orinda Way, Suite 125-A

Orinda, CA 94563

(Address of principal executive offices)



(855) 889-1778

(Registrant’s telephone number,
including area code)



Not applicable

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








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

Common Stock, par value

None

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

Common Stock, par value

$0.001 per share



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



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



Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days: Yes ̈
Nox



Indicate
by check mark whether the registrant has submitted electronically 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). Yesx
No ̈



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



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



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



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



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



There is no established market for the
Registrant's shares of common stock. As of June 30, 2016, the last business day of the registrant's most recently completed second
fiscal quarter, the aggregate market value of the registrant's equity held by non-affiliates of the registrant was approximately
$32,180,186 based on net asset value per share of the registrant's common stock on such date.



The number of shares of the Registrant’s
common stock, par value $0.001 per share, outstanding as of June 2, 2017 was 6,397,027.



Documents Incorporated
by Reference



None.










Forward Looking Statements



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



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



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

| | • | our
ability to successfully employ our Co-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
| | - | --------------------------------------------------------------------------------------------------------------

| | • | the
risks, uncertainties and other factors we identify in “Risk Factors” and elsewhere in this annual report.
| | - | -------------------------------------------------------------------------------------------------------------



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



In light of these risks,
uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. These forward-looking statements
are made as of the date of this prospectus. We undertake no obligation to publicly update or revise any forward-looking statements
after the date of this prospectus, whether as a result of new information, future events or otherwise, except as required by law.



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



2







VII PEAKS CO-OPTIVIST INCOME BDC II, INC.

FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 2016



TABLE OF CONTENTS



|                                                                                                                     | Page
|-------------------------------------------------------------------------------------------------------------------- | ----
|PART I                                                                                                               |     
|                                                                                                                     |     
|Item 1. Business                                                                                                     | 4   
|Item 1A. Risk Factors                                                                                                | 19  
|Item 1B. Unresolved Staff Comments                                                                                   | 37  
|Item 2. Properties                                                                                                   | 37  
|Item 3. Legal Proceedings                                                                                            | 37  
|Item 4. Mine Safety Disclosures                                                                                      | 37  
|PART II                                                                                                              |     
|                                                                                                                     |     
|Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 38  
|Item 6. Selected Financial Data                                                                                      | 40  
|Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations                        | 42  
|Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                                  | 55  
|Item 8. Financial Statements and Supplementary Data                                                                  | 56  
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         | 57  
|Item 9A. Controls and Procedures                                                                                     | 57  
|Item 9B. Other Information                                                                                           | 58  
|PART III                                                                                                             |     
|                                                                                                                     |     
|Item 10. Directors, Executive Officers and Corporate Governance                                                      | 59  
|Item 11. Executive Compensation                                                                                      | 64  
|Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters              | 66  
|Item 13. Certain Relationships and Related Transactions, and Director Independence                                   | 67  
|Item 14. Principal Accountant Fees and Services                                                                      | 69  
|PART IV                                                                                                              |     
|                                                                                                                     |     
|Item 15. Exhibits and Financial Statement Schedules                                                                  | 70  
|Item 16. Form 10-K Summary                                                                                           | 71  
|Signatures                                                                                                           | 72  



3







PART I



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



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



ITEM 1. BUSINESS



General



We are a specialty finance
company incorporated in Maryland on August 3, 2011. We are an externally managed, non-diversified closed-end management investment
company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended,
or (the “1940 Act”).



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



On August 9, 2011, we filed
a registration statement on Form N-2 to sell up to 75,000,000 shares of common stock, $0.001 par value per share, at an initial
public offering price of $10.00 per share. The registration statement was declared effective by the SEC on March 1, 2012. We achieved
the minimum offering requirement on July 10, 2012 and commenced operations on such date. As of December 31, 2016, we issued 6.3
million shares of common stock for gross proceeds of $62.6 million, including $4.7 million under our distribution reinvestment
plan (“DRIP”).



We invest primarily in
discounted corporate debt, senior secured term loan and equity-linked debt securities of public and private companies that trade
on the secondary loan market for institutional investors and provide distributions to investors. The debt is generally high-yield
and non-investment grade. At the same time, we actively work with the target company’s management to restructure the underlying
securities and improve the liquidity position of the target company’s balance sheet. We employ a proprietary “Co-Optivist”TM
approach (“cooperative activism”, Co-OptivistTM is a registered trademark of VII Peaks Capital, LLC, or
(“VII Peaks” or the “Manager”), and is being used with their permission) in executing our investment strategy,
which entails proactively engaging the target company management on average 24 months prior to a redemption event (typically a
put or maturity event) to create an opportunity for growth in the investments. We also make opportunistic debt and preferred equity
investments in private companies.



Our investment objectives
are to generate current income and capital appreciation. We meet our investment objectives by: (i) realizing income and capital
appreciation through the acquisition, management and orderly liquidation of corporate debt securities, (ii) making distributions
of available distributable cash to our shareholders, and (iii) preserving the capital investments of our shareholders. There
can be no assurance that any of these objectives be achieved.



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



Our proprietary “Co-Optivist”TM
approach entails investment in the corporate debt and equity-linked debt securities of target companies, or Target Investments,
in conjunction with proactively engaging the target companies’ management. We acquire Target Investments whose debt securities
trade on the over-the-counter market for institutional loans at a discount to their par redemption value, and will be subject to
a “redemption event” within (on average) 24 months. We also invest directly in debt of private companies. We define
a “redemption event” as a maturity event or a put event (where investors in the target companies’ 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 companies’ management to effect and/or participate in a restructuring
or exchange of the invested securities for new securities.



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



4







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



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



Conversion to Closed End Interval Fund



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



Changes to Investment
Advisory Agreement



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



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



Conversion to Interval
Fund



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



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



5







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



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



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



Fundamental Investment
Policies and Restrictions



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



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



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



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



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



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



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



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



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



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



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



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





6







Our Manager



Our investment activities
are managed by our Manager who is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, or
(the “Advisers Act”). Our Manager is responsible for sourcing potential investments, conducting research on prospective
investments, analyzing investment opportunities, structuring our investments, and monitoring our investments and portfolio companies
on an ongoing basis. Our Manager is led by Gurpreet (Gurprit) S. Chandhoke, who also serves as our Chief Executive Officer, and
Stephen F. Shea. They are supported by the Manager’s team of employees, including investment professionals who have extensive
experience in underwriting and issuing debt products that include high-yield, bank debt and convertible debt and have acted as
financial advisers to private equity funds, venture capital firms and corporations in mergers and acquisitions, recapitalization
and corporate finance transactions, and have served as principal investors in private equity and leveraged buyout transactions.



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



Our Affiliates



Our Manager is owned and
managed by Gurpreet (Gurprit) S. Chandhoke, our Chief Executive Officer, and Stephen F. Shea. Founded in April 2009 with principal
offices in Orinda, California, our Manager is an investment management firm that currently serves as a sub-advisor to a number
of separate managed accounts managed by large global financial institutions and other private funds.



Our Manager also manages
VII Peaks Co-Optivist B Fund I, LLC, VII Peaks Co-Optivist R Fund I, LLC and VII Peaks Co-Optivist B Fund II, LLC, private funds
that were formed to conduct private placements of securities and which have substantially similar investment objectives as the
Fund. As of December 31, 2016, VII Peaks Co-Optivist B Fund I, LLC, VII Peaks Co-Optivist R Fund I, LLC and VII Peaks Co-Optivist
B Fund II, LLC had aggregate net assets of $2.5 million.



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



Market Opportunity



In the upcoming years,
we believe many companies will face maturities and redemptions on significant amounts of outstanding debt and will have to find
ways to refinance those obligations. See below a chart compiled from S&P for Investment grade and speculative grade USD Bonds
maturing from 2016 to 2034. The chart shows approximately $6.9 trillion of U.S. based investment and speculative grade bonds to
mature between 2016 and 2034.







7







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



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



Potential Competitive
Strengths



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



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



| | • | Investment
Hold Period.   We will not actively trade in and out of positions. Rather, we hold our investments for an average
of 12 – 18 months. During this hold period we anticipate working co-operatively with target company management
and other debt holders on a debt restructuring or exchange.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Investment
Criteria and Strategy



Secondary Market
Debt Securities



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



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



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



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



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



8







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



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



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



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



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



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



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



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



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



9







Below is a summary of our
investment and approval process:





Originated Investment Positions



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



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



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



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



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



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



10







Investment Exit Strategy



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



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



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







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, or a committee thereof, 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, or a committee thereof, deems worthy and relevant, including independent third-party valuation firms, if applicable.



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



11







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, or a committee thereof. 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, or a committee thereof; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| | • | our
Board of Directors, or a committee thereof, 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 may take
into account in fair value pricing our investments include, as relevant: available current market data, including relevant and
applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection
provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make
payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial
ratios of peer companies that are public, M&A comparables, the principal market and enterprise values, among other factors.



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



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



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



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



Level 3: Unobservable inputs for
the asset or liability.



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



12







Determinations in Connection With Offerings



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



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



| | • | our
management’s assessment of whether any material change in the net asset value has occurred (including through the realization
of net gains 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.



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



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



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



13







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



We have elected to be treated
as a RIC under Subchapter M of the Code effective for our taxable year ended December 31, 2016, and to annually qualify as a RIC
thereafter. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income that we distribute
to our stockholders from our tax earnings and profits. To qualify as a RIC, we must, among other things, meet certain source-of-income
and asset diversification requirements (as described below). In addition, in order to obtain RIC tax treatment, we must distribute
to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally
our net ordinary income plus the excess, if any, of realized net short-term capital gain over realized net long-term capital loss,
or the Annual Distribution Requirement. Even if we qualify as a RIC, we generally will be subject to corporate-level U.S. federal
income tax on our undistributed taxable income and could be subject to U.S. federal excise, state, local and foreign taxes.



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



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



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



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



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



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



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



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



Management Services and
Responsibilities



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



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



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



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



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



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



14







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



Administration Agreement



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



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



License Agreements



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



Certain Relationship and Related Party Transactions



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



Competing Programs



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



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



15







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



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



Compensation Arrangements



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



Regulation



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



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



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



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



Qualifying Assets



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



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



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



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



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



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



16







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



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



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



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



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



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



Managerial Assistance to Portfolio Companies



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



Temporary Investments



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



Senior Securities



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



Code of Ethics



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



17







Compliance Policies and Procedures



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



Proxy Voting Policies and Procedures



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



Introduction



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



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



Proxy Policies



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



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



Proxy Voting Records



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



Chief Compliance
Officer

VII Peaks Co-Optivist
Income BDC II, Inc.

Pine Grove Financial
Center

4 Orinda Way,
Bldg. A, Suite 125A

Orinda, CA 94563



18







Available Information



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



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





ITEM 1A. RISK FACTORS



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



Risks Related to Our Business and Structure



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



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



We face competition for investment opportunities.



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



We face competition for assets to manage.



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



19







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



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



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



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



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



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



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



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



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



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



20







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. These conditions may reoccur for a prolonged period of time again or materially
worsen in the future, including as a result of the U.S. government spending cuts that took effect March 1, 2013, the government
shutdown in October 2013, or any further spending cuts or shutdowns.



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



The tightening of the US monetary policy through the increase
in Fed interest rate, which has been anticipated for several months, finally began in December 2015. The increase in the Fed rate
can have a negative effect on our investments by making it harder and more expensive to refinance capital structures or even obtain
financing.



The tightening of US monetary
policy through increases in the Fed interest rate happened for the first time in nine years in December of 2015. The Fed made projections
to raise the rate four times in 2016 but only increased the rate once in December 2016. Per the Fed’s statement, interest
rates will rise at a slow (.25%) but steady pace and are expected to raise three or four times in 2017. Fed officials suggest that
policy makers may raise rates so long as gauges of U.S. inflation and economic growth improve. However, due to the strengthening
dollar at the beginning of 2017, the Fed has indicated that it may potentially hold off raising rates due to geopolitical and economic
risks of too strong of a dollar. There can be no guarantee the Fed will raise rates at the pace they proposed nor can there be
any assurance that the Fed will make sound decisions as to when to raise rates. The increase in the Fed rate can have a negative
effect on our investments by making it harder and more expensive to refinance capital structures or even obtain financing. Default
rates in the US high yield market currently stand around 4.2% at the end of February according to Fitch Ratings. The ratings company
forecasts that by mid-year 2017 the measure will drop below 3% and hit a low of 2% during the summer months before rebounding to
settle at 3% to end the year. The average yield on a U.S. junk bond is now around 6.1%, according to Bank of America Merrill Lynch
indexes, below the mean of the last 10 years.



High volatility in both bond and equity markets as well as
slowing global growth could have a material effect on the companies we invest in.



Global equity and debt
markets continued its erratic behavior with extreme volatility in the final quarter of the 2016 and start of 2017. In December
of 2015, the Fed raised the central bank interest rate for the first time in nine years, and again in December of 2016. For
the second time in three months, on March 15th, the Federal Reserve increased its benchmark interest rate a quarter point amid
rising confidence that the economy is poised for more robust growth. In terms of global debt, some estimates calculate there
is over $9 trillion in negative-yielding debt as of December 29, 2016. The Bank of Japan kept its rates in negative territory but
raised its economic growth forecast to 1.5% from 1.3% in January 2017. The current US high yield default rate stands around 4.2%
at the end of February and is expected to fall below 3% by May 2017 according to Fitch ratings. This is fueled by the fact that
many large defaults will be over a year old as well as a decrease in overall defaults since January 2017. The S&P 500 Index
rally is due in part to the high correlation to the election of Trump, the promise of U.S. jobs to come, and the recent rally of
bank stocks. However, the rising rate credit environment and weak global economic growth, is creating a highly volatile global
economic landscape. This could have a material adverse effect on the financial markets and economic conditions in the United States
and the rest of the world. It could also limit our ability and the ability of our portfolio companies to obtain financing; it can
also have an adverse material effect on the valuation of our portfolio companies. Consequently, the continued uncertainty in the
general economic environment, as well in specific economies of several individual geographic markets in which our portfolio companies
operate, could adversely affect our business, financial condition and results of operations.



21







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



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



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



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



Any unrealized losses we experience on our portfolio may be
an indication of future realized losses, which could reduce our income available for distribution.



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



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



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



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.



22







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. Our management is required to report on our internal control over financial reporting pursuant to Section 404 of the
Sarbanes-Oxley Act and rules and regulations of the SEC thereunder. We are required to review on an annual basis our internal control
over financial reporting, and on a quarterly and annual basis, to evaluate and disclose changes in our internal control over financial
reporting.



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



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



We 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.



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.



23







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



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



Risks Related to our Manager



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



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



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



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



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



Further, our Manager’s
officers are involved in other ventures, some of which may compete with us for investment opportunities and may be incentivized
to offer investment opportunities to such other ventures rather than to us which would make it more difficult to achieve our investment
objectives.



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



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



Any incentive fee payable
by us that relates to our net investment income may be computed and paid on income that may include interest that has been accrued,
but not yet received, including original issue discount, which may arise if we receive warrants in connection with the origination
of a loan or possibly in other circumstances, or contractual payment-in-kind, or (“PIK”), interest, which represents
contractual interest added to the loan balance and due at the end of the loan term. To the extent we do not distribute accrued
PIK interest, the deferral of PIK interest has the simultaneous effects of increasing the assets under management and increasing
the base management fee at a compounding rate, while generating investment income and increasing the incentive fee at a compounding
rate. In addition, the deferral of PIK interest would also increase the loan-to-value ratio at a compounding rate if the issuer’s
assets do not increase in value, and investments with a deferred interest feature, such as PIK interest, may represent a higher
credit risk than loans on which interest must be paid in full in cash on a regular basis.



24







For federal income tax
purposes, we are required to recognize taxable income in some circumstances in which we do not receive a corresponding payment
in cash (such as deferred interest that is accrued as original issue discount or PIK interest) and to make distributions with respect
to such income to maintain our status as a RIC. Under such circumstances, we may have difficulty meeting the annual distribution
requirement necessary to obtain and maintain RIC tax treatment under the Code. This difficulty in making the required distribution
may be amplified to the extent that we are required to pay an incentive fee with respect to such accrued income. As a result, we
may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or
equity capital, or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we
may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.



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



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



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



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



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



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



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



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



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



The compensation we pay
to our Manager was not entered into on an arm’s-length basis with an unaffiliated third party. As a result, the form and
amount of such compensation may be less favorable to us than they might have been had they been entered into through arm’s-length
transactions with an unaffiliated third party. However, we believe that the terms of the base management fee that we pay our Manager
is generally more favorable to us than what most or all other externally-managed business development company’s pay their
manager, and the terms of the incentive fee on income and capital gains are roughly the same as what other externally-managed business
development company’s pay their manager.



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



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



25







Risks Related to Business Development Companies



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



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



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



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



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



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



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



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



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



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



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



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



26







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



The net proceeds from the
sale of common stock will be used for our investment opportunities, operating expenses and for payment of various fees and expenses
such as base management fees, incentive fees and other expenses. Any working capital reserves we maintain may not be sufficient
for investment purposes, and we may require debt or equity financing to operate. Accordingly, in the event that we develop a need
for additional capital in the future for investments or for any other reason, these sources of funding may not be available to
us. Consequently, if we cannot obtain debt or equity financing on acceptable terms, our ability to acquire investments and to expand
our operations will be adversely affected. As a result, we would be less able to create and maintain a broad portfolio of investments
and achieve our investment objective, which may negatively impact our results of operations and reduce our ability to make distributions
to our shareholders.



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



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



Risks Related to our Target Investments



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



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



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



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



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



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



27







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



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



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



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



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



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



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



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



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



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



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



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



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



28







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



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



We do not expect to control our portfolio
companies.



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



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



We are subject to financial
market risks, including changes in interest rates. We expect our portfolio to be predominantly composed of fixed-rate high-yield
and equity-linked corporate debt securities, but we may also purchase senior secured corporate debt securities which may have
variable interest rates. We currently anticipate that the portion of our portfolio composed of variable rate corporate debt securities,
if any, will not exceed 20%, but we may increase that to 33% of our aggregate portfolio at the time of any purchase depending
on market opportunities. 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.



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



Borrowings, also known
as leverage, magnify the potential for gain or loss on invested equity capital. To the extent we use leverage to partially finance
our investments, you will experience increased risks associated with investing in our securities. We may borrow from banks and
other lenders, and may issue debt securities or enter into other types of borrowing arrangements in the future. Our loan agreements
may contain financial and operating covenants that could restrict our business activities. Breach of any of those covenants could
cause a default under those instruments. Such a default, if not cured or waived, could have a material adverse effect on us. If
the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase
more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause
net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income
in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without
the leverage, while any decrease in our income would cause our net investment income to decline more sharply than it would have
had we not borrowed. Such a decline could negatively affect our ability to make distributions to our stockholders. Leverage is
generally considered a speculative investment technique. At December 31, 2016, we had a leverage of $6.4 million which represents
almost 19% of our net assets.



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
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



29







| | • | 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 often 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.



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.



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



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



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



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



An investment strategy focused primarily
on privately held companies presents certain challenges, including the lack of available information about these companies.



Our investments are primarily in privately-held
companies. Investments in private companies pose significantly greater risks than investments in public companies. First, private
companies have reduced access to the capital markets, resulting in diminished capital resources and the ability to withstand financial
distress. As a result, these companies, which may present greater credit risk than public companies, may be unable to meet their
obligations under their debt securities that we hold. Second, the investments themselves often may be less liquid. The securities
of many of the companies in which we invest 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. In addition, such securities may
be subject to legal and other restrictions on resale.



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



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



30







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



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



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



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



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



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



| | • | Monetary
Tightening and Rising Interest Rates.   The U.S. Federal Reserve has recently halted the quantitative easing
program, after injection of $4.5 trillion over the last five years. The program was introduced to steer the world’s largest
economy through the financial crisis. It aided in keeping interest rates near an all-time low in the U.S. The long term unintended
consequences remain concerning, including excessive risk-taking.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Revenue from our investments may not be guaranteed
..



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



We may be subject to litigation claims
from Relativity.



On July 30, 2015, Relativity
Media, LLC (“Relativity”) filed a voluntary Chapter 11 case in the United States Bankruptcy Court for the Southern
District of New York (the “Bankruptcy Court”). We own 855,079 shares of Series E Preferred Stock of Relativity. In
October 2015, Relativity filed an adversary proceeding against our Manager in the Bankruptcy Court alleging that our Manager breached
a commitment to provide $30 million of financing as part of a proposed reorganization of Relativity. We were not named as a defendant
in the adversary proceeding. However, on October 20, 2015, Relativity sought and obtained from the Bankruptcy Court an ex parte
temporary restraining order, or TRO, that bars our Manager and “its agents, servants, officers, employees and attorneys,
and all persons in active concert or participation with them from transferring, assigning, encumbering, or taking any other action
with respect to any and all funds” in our US Bank and Wells Fargo accounts. Neither we nor our Manager were provided with
prior notice of the hearing on the TRO or was present at the hearing. The two accounts affected by the TRO contained substantially
all of our assets at the time. The TRO was dissolved pursuant to a Stipulation and Agreed Order entered by the Bankruptcy Court
on October 28, 2015, pursuant to which the parties agreed to engage in negotiations to resolve their dispute. The negotiations
did not result in a settlement.



Our Manager reached a
settlement with Relativity in 2016 which is subject to Bankruptcy Court approval. However, the motion to approve the
settlement was withdrawn on January 23, 2017. Relativity’s confirmed plan provides that Relativity’s claims
against VII Peaks will be assigned to a trust established for its creditors under its plan of reorganization if they are
not settled. However, on February 8, 2017, the principal secured lender to Relativity and Relativity’s co-manager filed
a joint motion to convert Relativity’s case to Chapter 7 liquidation, citing an inability by Relativity to raise
capital for its operations and significant defaults on its debts. A hearing on the conversion motion is currently scheduled
for May 17, 2017. Given the uncertainty surrounding Relativity, it is not clear if the lawsuit against us and our Manager
will be pursued or dropped. In the event the creditors trust elects to continue the case, our Manager intends to defend
the case vigorously. Our Manager contends, among other things, that the parties never reached a binding agreement on the
terms of an investment and that Relativity has suffered no harm since it has obtained alternative financing to replace the
financing it contends that our Manager did not provide.



31







Risks Related to Our Continuous Offering and Our Shares



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



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



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



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



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



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



32







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



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



Since we have commenced
operations, we have implemented a policy of declaring monthly distributions at an annual distribution rate of 7.35% per annum of
our offering price. Our distributions have not been based on our investment performance. Prior to September 2013, our distributions
were supported by our Manager in the form of operating expense support payments to us, and a portion of our distributions constituted
a return of capital. Since September 2013, we have not had an expense support agreement with our Manager and as a result a greater
portion of our distributions have constituted a return of capital. We expect to continue paying distributions at the same distribution
rate, and that a substantial part of those distributions will constitute a return of capital for the foreseeable future. Furthermore,
our ability to generate net investment income sufficient to cover our monthly dividend has been hindered by the fact that we have
a number of portfolio investments that are on non-accrual status, and because we hold more equity investments that do not generate
regular interest or dividend income. Our distributions will continue to constitute a return of capital until our net investment
income is sufficient to support our distribution rate, which will probably not occur until our Manager enters into an expense support
agreement with us, our mix of interest and dividend paying assets increase, or our assets increase enough to lower our expense
ratio, which we do not expect to occur until we have significantly more net assets than we do at present.



Our continuous offering
is being made on a best efforts basis, whereby Arete and any selected dealers who enter into agreements with Arete 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. If we are
unable to increase our net assets to a level sufficient to make our distributions from investment income, we may have to reduce
our distribution rate. If we do not increase our net assets sufficiently, and do not decrease our distribution rate, a substantial
part of our distributions will continue to constitute a return of capital, which will decrease the net asset value per share of
our common stock. Furthermore, if the Reorganization is completed, our offering price will be determined each month based on the
Fund’s net asset value (“NAV”) per share, plus the sales load (as described below), as of the first business
day of each month. The NAV per share is computed by dividing the Fund’s NAV by the total number of shares outstanding
at the time the determination is made. A sales load, which includes selling commissions of 6% of the gross proceeds from sales
made by selected dealers, which includes 2% for dealer manager fees, will be paid or charged on sales of shares. The sales load
will be deducted from the proceeds paid to the Fund.



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



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



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



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



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



33







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



Our ability to successfully conduct our
continuous offering is dependent, in part, on the ability of Arete 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 Arete to establish
and maintain a network of licensed securities broker-dealers and other agents to sell our shares. If Arete 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.



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



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



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.



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



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



34







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



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



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



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



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



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



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



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



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



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



| | • | significant
volatility in the market price and trading volume of securities of business development companies or other companies in our sector,
which are not necessarily related to the operating performance of the companies;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | changes
in regulatory policies or tax guidelines, particularly with respect to RICs or business development companies;
| | - | ----------------------------------------------------------------------------------------------------------------------



| | • | loss
of RIC or business development company status;
| | - | ---------------------------------------------------



35







| | • | changes
in earnings or variations in operating results;
| | - | -------------------------------------------------------

| | • | changes
in the value of our portfolio of investments;
| | - | -----------------------------------------------------

| | • | changes
in accounting guidelines governing valuation of our investments;
| | - | ------------------------------------------------------------------------

| | • | any
shortfall in revenue or net income or any increase in losses from levels expected by investors;
| | - | ---------------------------------------------------------------------------------------------------

| | • | departure
of the Manager or certain of its respective key personnel;
| | - | --------------------------------------------------------------------

| | • | operating
performance of companies comparable to us;
| | - | ----------------------------------------------------

| | • | general
economic trends and other external factors; and
| | - | -------------------------------------------------------

| | • | loss
of a major funding source.
| | - | -------------------------------



Risks Related to Taxation



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



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



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



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



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



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



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



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



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



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



36







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



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



ITEM 1B. UNRESOLVED STAFF COMMENTS



Not applicable.



ITEM 2. PROPERTIES



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



ITEM 3. LEGAL PROCEEDINGS



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



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



On October 18, 2016,
Relativity filed a motion with the Bankruptcy Court to approve a revised settlement with our Manager under Bankruptcy Rule
9019. Under the settlement, Relativity would dismiss all claims against our Manager and the funds it manages in consideration
for the entry by Relativity into an Output Distribution Agreement with Divine Distribution, LLC, an affiliate of our Manager.
Under the Output Distribution Agreement, Relativity agreed to grant two US output distribution slots per year for five years
for films to be distributed by Relativity in exchange for a prescribed fee. The motion to approve the settlement agreement
was withdrawn on January 23, 2017, by mutual agreement between our Manager and Relativity. Relativity’s confirmed plan
provides that Relativity’s claims will be assigned to a trust established for its creditors under its plan of
reorganization if they are not settled. However, on February 8, 2017, the principal secured lender to Relativity
and Relativity’s co-manager filed a joint motion to convert Relativity’s case to Chapter 7 liquidation, citing
an inability by Relativity to raise capital for its operations and significant defaults on its debts. A hearing on
the conversion motion is currently scheduled for May 17, 2017. Given the uncertainty surrounding Relativity, it is not clear
if the lawsuit against us and our Manager will be pursued or dropped. In the event the creditors trust elects to continue
the case, our Manager intends to defend the case vigorously. Our Manager contends, among other things, that the parties
never reached a binding agreement on the terms of an investment and that Relativity has suffered no harm since it has
obtained alternative financing to replace the financing it contends that our Manager did not provide.



ITEM 4. MINE SAFETY DISCLOSURES



Not applicable.



37







PART II



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



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



We last sold our shares
in our continuous offering at a price of $8.75 per share; however, we have not sold shares in our continuous offering since April
30, 2015. In connection with each closing on the sale of shares of our common stock pursuant to our prospectus, as amended or supplemented,
which relates to our public offering of common stock on a continuous basis, our Board of Directors or a committee thereof is required
to make the determination that we are not selling shares of our common stock at a price per share, after deduction of selling commissions
and dealer manager fees, that is below our then current net asset value per share within 48 hours of the time that we price our
shares. Closings are typically monthly. For the year ended December 31, 2014, we had two price reductions of our offering price.
On August 8, 2014, the Pricing Committee of our Board of Directors decreased the share price for new investments from $10.15 to
$10.00 per share, and on November 18, 2014, the Pricing Committee of our Board of Directors decreased the share price for new investments
from $10.00 to $9.75 per share. For the year ended December 31, 2015, we had one price reduction. On November 24, 2015, the Board
of Directors of the Fund and the Pricing Committee of the Board made a final decision to approve a price reduction from $9.75 to
$9.25 per share effective for the Funds next closing date and next declared distribution date. For the year ended December 31,
2016, we had one price reduction. On May 23, 2016, the Board of Directors of the Fund and the Pricing Committee of the Board made
a final decision to approve a price reduction from $9.25 to $8.75 per share.



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



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



Set forth below is a chart
describing the classes of our securities outstanding as of December 31, 2016:



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



During the three months
ending December 31, 2016, we issued 36,897.85 shares of common stock for consideration of $306,713 under our dividend reinvestment
program. As of December 31, 2016, we had 1,530 record holders of our common stock.



Distributions



Subject to our Board of
Director’s discretion and applicable legal restrictions, we have historically declared and paid ordinary cash distributions
at a rate equal to 7.35% of our latest offering price per share. Since the distribution paid to shareholders on September 30, 2015,
with a record date of August 30, 2015, we have paid distributions monthly. Prior to the September 30, 2015, we paid distributions
on a semi-monthly basis. We changed to paying distributions monthly in order to reduce costs. Any distributions to our shareholders
will be declared out of assets legally available for distribution. We may fund our cash distributions to shareholders from any
sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains
proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, and dividends or other distributions paid
to us on account of preferred and common equity investments in portfolio companies. We have not established limits on the amount
of funds we may use from available sources to make distributions.



38







Based upon our current
level of operations, we estimate that about 85.3% of our distributions will constitute a return of capital. Our distributions historically
have not been based on our investment performance. Prior to September 2013, our distributions were supported by our Manager in
the form of operating expense support payments to us, and a portion of our distributions constituted a return of capital. Since
September 2013, we have not had an expense support agreement with our Manager and as a result a greater portion of our distributions
have constituted a return of capital. A return of capital generally is a return of your investment rather than a return of
earnings or gains derived from our investment activities constitutes the return of capital previously paid to us for shares of
our common stock.



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



|Period                                 |  | Per Share |          |  | Net  Investment  Income |  |    | Realized  Gain From  Investments |  |  | Return  of  Capital |  
|-------------------------------------- |  | --------- | -------- |  | ----------------------- |  | -- | -------------------------------- |  |  | ------------------- | -
|July 12, 2012 - September 30, 2012     |  | $         | 0.183750 |  |                         |  | 64 | %                                |  |  | —                   | %
|October 1, 2012 - December 31, 2012*   |  |           | 0.260750 |  |                         |  | 59 | %                                |  |  | —                   | %
|January 1, 2013 - March 31, 2013*      |  |           | 0.262586 |  |                         |  | 67 | %                                |  |  | 13                  | %
|April 1, 2013 - June 30, 2013          |  |           | 0.186504 |  |                         |  | 77 | %                                |  |  | 14                  | %
|July 1, 2013 - September 30, 2013      |  |           | 0.186504 |  |                         |  | 51 | %                                |  |  | 10                  | %
|October 1, 2013 - December 31, 2013    |  |           | 0.186504 |  |                         |  | 4  | %                                |  |  | 47                  | %
|January 1, 2014 - March 31, 2014       |  |           | 0.186504 |  |                         |  | 27 | %                                |  |  | 13                  | %
|April 1, 2014 - June 30, 2014          |  |           | 0.186504 |  |                         |  | 49 | %                                |  |  | —                   | %
|July 1, 2014 - September 30, 2014      |  |           | 0.184668 |  |                         |  | 17 | %                                |  |  | 3                   | %
|October 1, 2014 - December 31, 2014    |  |           | 0.181467 |  |                         |  | 15 | %                                |  |  | 6                   | %
|January 1, 2015 - March 31, 2015       |  |           | 0.179154 |  |                         |  | 15 | %                                |  |  | 5                   | %
|April 1, 2015 - June 30, 2015          |  |           | 0.179154 |  |                         |  | 63 | %                                |  |  | 15                  | %
|July 1, 2015 - September 30, 2015      |  |           | 0.209015 |  |                         |  | 19 | %                                |  |  | 11                  | %
|October 1, 2015 - December 31, 2015 ** |  |           | 0.170315 |  |                         |  | —  | %                                |  |  | 6                   | %
|January 1, 2016 – March 31, 2016 ***   |  |           | 0.169969 |  |                         |  | 1  | %                                |  |  | —                   | %
|April 1, 2016 – June 30, 2016****      |  |           | 0.107188 |  |                         |  | —  | %                                |  |  | —                   | %
|July 1, 2016 – September 30, 2016***** |  |           | 0.214372 |  |                         |  | 23 | %                                |  |  | —                   | %
|October 1, 2016 – December 31, 2016    |  |           | 0.107186 |  |                         |  | 24 | %                                |  |  | 11                  | %



* Includes a special distribution
of $0.077 per share.



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



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



**** For the
period from April 1, 2016 to June 30, 2016, the Fund had a net investment loss of approximately $4 thousand and a realized
loss from investments of approximately $12.6 million. These amounts are reflected on the source of distributions table below
in the distributions from paid in capital amount. The allocation of the distributions between net investment income and
return of capital are different than previously reported as a result of the correction of an accounting error. For further
detail, please see Item 9A Controls and Procedures.



***** For the period
from July 1, 2016 to September 30, 2016, the Fund had a realized loss from investments of approximately $0.04 million. That amount
is reflected on the source of distributions table below in the distributions from paid in capital amount. The allocation of the
distributions between net investment income and return of capital are different than previously reported as a result of the correction
of an accounting error. For further
detail, please see Item 9A Controls and Procedures.



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



39







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



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



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



The following table reflects
the sources of the cash distributions on a tax basis that the Fund has paid on its common stock (dollars in thousands) during the
fiscal years ended December 31, 2016, 2015 and 2014:



|Source of Distributions:                 |  | Year ended
December 31, 2016 |       |  | Year ended
December 31,
    2015 |  |       | Year ended
December 31, 2014 | 
|---------------------------------------- |  | ---------------------------- | ----- |  | -------------------------------- |  | ----- | ---------------------------- | 
|Distributions from net investment income |  | $                            | 473   |  |                                  |  | 12.6  | %                            | 
|Distributions from realized gains        |  |                              | 78    |  |                                  |  | 2.1   | %                            | 
|Distributions from paid in capital       |  |                              | 3,195 |  |                                  |  | 85.3  | %                            | 
|Total                                    |  | $                            | 3,746 |  |                                  |  | 100.0 | %                            | 



Distribution Reinvestment Plan



We have adopted an “opt-in”
distribution reinvestment plan (“DRIP”) pursuant to which shareholders may elect to have the full amount of their cash
distributions reinvested in additional shares of our common stock. If they 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. Shareholders distribution amount will purchase shares at 95% of the price that the shares
are offered pursuant to our effective registration statement for our continuous public offering. Shares issued pursuant to our
distribution reinvestment plan will have the same voting rights as our shares of common stock offered pursuant to our prospectus.



ITEM 6. SELECTED FINANCIAL DATA



The following
selected financial data as of and for the year ended December 31, 2016 is derived from our financial statements, which has
been audited by OUM & Co. LLP, our independent registered public accounting firm as stated in their report. The selected
financial data as of and for the years ended December 31, 2015, 2014, 2013, and 2012 was derived from our
financial statements, which was audited by BPM LLP. The data should be read in conjunction with our financial
statements and related notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” included elsewhere in this report (dollars in thousands except share and per share data):



40









|                                                                |  | As of and 
for the 
Year Ended December 31, 2016 |        |   | As of and 
for the 
Year Ended December 31, 2015 |   |         | As of and 
for the 
Year Ended December 31, 2014 |  |   | As of and 
for the 
Year Ended December 31, 2013 |    |  | As of and 
for the 
Year Ended December 31, 2012 |       
|--------------------------------------------------------------- |  | ------------------------------------------------ | ------ | - | ------------------------------------------------ | - | ------- | ------------------------------------------------ |  | - | ------------------------------------------------ | -- |  | ------------------------------------------------ | ------
|Statement of operations data:                                   |  |                                                  |        |   |                                                  |   |         |                                                  |  |   |                                                  |    |  |                                                  |       
|Total investment income                                         |  | $                                                | 3,120  |   |                                                  | $ | 3,512   |                                                  |  | $ | 3,260                                            |    |  | $                                                | 1,659 
|Operating expenses                                              |  |                                                  |        |   |                                                  |   |         |                                                  |  |   |                                                  |    |  |                                                  |       
|Total expenses                                                  |  |                                                  | 2,651  |   |                                                  |   | 2,682   |                                                  |  |   | 2,441                                            |    |  |                                                  | 1,637 
|Less: Expense waivers and reimbursements                        |  |                                                  | -      |   |                                                  |   | -       |                                                  |  |   | -                                                |    |  |                                                  | (776  
|Net expenses (income)                                           |  |                                                  | 2,651  |   |                                                  |   | 2,682   |                                                  |  |   | 2,441                                            |    |  |                                                  | 861   
|Net investment income                                           |  |                                                  | 469    |   |                                                  |   | 830     |                                                  |  |   | 819                                              |    |  |                                                  | 798   
|Realized and unrealized gain (loss), net                        |  |                                                  | 7,145  |   |                                                  |   | (14,189 | )                                                |  |   | (6,093                                           | )  |  |                                                  | (101  
|Net increase (decrease) in net assets resulting from operations |  | $                                                | 7,614  |   |                                                  | $ | (13,359 | )                                                |  | $ | (5,274                                           | )  |  | $                                                | 697   
|Per share data - basic and diluted:                             |  |                                                  |        |   |                                                  |   |         |                                                  |  |   |                                                  |    |  |                                                  |       
|Net investment income                                           |  | $                                                | 0.07   |   |                                                  | $ | 0.14    |                                                  |  | $ | 0.19                                             |    |  | $                                                | 0.37  
|Net realized and unrealized gain (loss) on investments          |  | $                                                | 1.15   |   |                                                  | $ | (2.34   | )                                                |  | $ | (1.42                                            | )  |  | $                                                | (0.05 
|Net increase (decrease) in net assets resulting from operations |  | $                                                | 1.22   |   |                                                  | $ | (2.20   | )                                                |  | $ | (1.23                                            | )  |  | $                                                | 0.32  
|Distributions declared                                          |  | $                                                | (0.60  | ) |                                                  | $ | (0.74   | )                                                |  | $ | (0.73                                            | )  |  | $                                                | (0.79 
|Balance sheet data:                                             |  |                                                  |        |   |                                                  |   |         |                                                  |  |   |                                                  |    |  |                                                  |       
|Investments at fair value                                       |  | $                                                | 40,345 |   |                                                  | $ | 26,722  |                                                  |  | $ | 37,428                                           |    |  | $                                                | 23,154
|Investments in money market funds – at fair value               |  | $                                                | 157    |   |                                                  | $ | 6,210   |                                                  |  | $ | 3,104                                            |    |  | $                                                | 1,644 
|Total assets                                                    |  | $                                                | 41,219 |   |                                                  | $ | 33,689  |                                                  |  | $ | 42,381                                           |    |  | $                                                | 27,764
|Total liabilities                                               |  | $                                                | 7,537  |   |                                                  | $ | 5,199   |                                                  |  | $ | 1,693                                            |    |  | $                                                | 340   
|Total net assets                                                |  | $                                                | 33,682 |   |                                                  | $ | 28,490  |                                                  |  | $ | 40,688                                           |    |  | $                                                | 27,424
|                                                                |  |                                                  |        |   |                                                  |   |         |                                                  |  |   |                                                  |    |  |                                                  |       
|Other data:                                                     |  |                                                  |        |   |                                                  |   |         |                                                  |  |   |                                                  |    |  |                                                  |       
|Total return                                                    |  |                                                  | 23.62  | % |                                                  |   | (31.96  | )%                                               |  |   | (8.88                                            | )% |  |                                                  | 7.72  
|Number of portfolio company investments at period end           |  |                                                  | 29     |   |                                                  |   | 33      |                                                  |  |   | 45                                               |    |  |                                                  | 39    
|Total portfolio investments for the year                        |  | $                                                | 36,545 |   |                                                  | $ | 23,245  |                                                  |  | $ | 31,308                                           |    |  | $                                                | 27,685
|Investment sales and prepayments for the year                   |  | $                                                | 30,593 |   |                                                  | $ | 19,688  |                                                  |  | $ | 11,765                                           |    |  | $                                                | 10,314





41







ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS



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



Overview



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



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



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



Summary of Significant Accounting Policies



Basis of Presentation



The financial statements
of the Fund included herein were prepared in conformity with accounting principles generally accepted in the United States of America
("U.S. GAAP") and with the instructions to Form 10-K and Articles 6 or 10 of Regulation
S-X. Accordingly, and include all of the information and footnotes required by U.S. GAAP for complete financial statements. In
the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments
and accruals, necessary for a fair presentation of the results for the period. The Fund is a single reportable segment.



Use of Estimates in the Preparation of
Financial Statements



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



Investments - Money Market



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



Investment Classification



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



42









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.





Organizational and Offering Costs



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



U.S. Federal Income Taxes



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



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



Valuation of Portfolio Investments



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



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



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



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



| | Level 3: | Unobservable inputs for the asset or liability.
| | -------- | -----------------------------------------------



The investment portfolio
is recorded on a trade date basis. We determine the net asset value of our investment portfolio each quarter. Securities that are
publicly-traded are valued at the reported closing price on the valuation date. Twenty of the forty-seven investments were valued
using the closing market price at year end December 31, 2016.



43







The following table presents
investments that were not valued using the closing market price, as of December 31, 2016:



|Portfolio Company                                       |  | Asset Type                      |  | Investment  Coupon Rate |       |   | Maturity Date
|------------------------------------------------------- |  | ------------------------------- |  | ----------------------- | ----- | - | -------------
|Ansgar Media, LLC - Class B Units                       |  | Equity – Preferred Stock        |  |                         | -     |   |              
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Aspire Holdings (1)                                     |  | Equity – Common Stock           |  |                         | -     |   |              
|Aspect Software, Inc. (2)                               |  | Equity – Common Stock           |  |                         | -     |   |              
|Claire’s Stores, Inc. Term Loan. (3)                    |  | Senior Secured First Lien Debt  |  |                         | 9.00  | % |              
|CLSIP, LLC Term Loan (3)                                |  | Senior Secured First Lien Debt  |  |                         | 9.00  | % |              
|Claire’s (Gibraltar) Holdings Limited Term Loan (3)     |  | Senior Unsecured Debt           |  |                         | 9.00  | % |              
|Colt Defense, LLC (4)                                   |  | Senior Unsecured Debt           |  |                         | 8.00  | % |              
|Education Management, LLC                               |  | Equity – Common Stock           |  |                         | -     |   |              
|Education Management, LLC                               |  | Warrant                         |  |                         | -     |   |              
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|GeoCommerce, Inc.                                       |  | Warrant                         |  |                         | -     |   |              
|Logan’s Roadhouse, Inc. (5)                             |  | Senior Secured Second Lien Debt |  |                         | 10.75 | % |              
|Logan’s Roadhouse, Inc. PIK Exit Facility Term Loan (5) |  | Senior Secured Second Lien Debt |  |                         | 9.50  | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Warrant                         |  |                         | -     |   |              
|Nuverra Environmental Solutions, Inc.                   |  | Senior Secured Second Lien Debt |  |                         | 12.50 | % |              
|Nuverra Environmental Solutions, Inc.                   |  | Warrant                         |  |                         | -     |   |              



| | (1) | Converted
from exchange of 12.00% Endeavour International Corp, senior secured first lien debt.
| | --- | -----------------------------------------------------------------------------------------------

| | (2) | The
original 10.63% senior secured second lien notes due on May 15, 2017 defaulted. As part of Aspect’s bankruptcy and planned
reorganization process, the Fund participated in a rights offering to purchase a new 3.00% PIK senior unsecured convertible note
maturing on May 23, 2023 in an effort to facilitate recovery of its previous investment in the senior secured lien notes in Aspect.
On November 25, 3.00% PIK senior unsecured convertible notes were exchanged out for mandatory conversion to shares of common stock
of Aspect Software Parent, Inc. at a rate of 1/30 i.e. one common share per $30.00 in principal amount of notes outstanding.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | On
September 20, 2016, all of 10.50% senior subordinated notes and 8.88% senior secured second lien notes were exchanged for 9.00%
of Claire’s Stores, Inc. Term Loan, CLSIP Term Loans and of Claire’s Gibralter Term Loans.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | On
January 19, 2016, there was a mandatory exchange offer to exchange all of the 8.75% senior unsecured notes to 8.00% PIK third
lien notes.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | The
company filed for bankruptcy in Delaware on August 8, 2016, and is in the final stages of restructuring. The Fund participated
in DIP financing as part of company’s restructuring process during bankruptcy and has received PIK Second Lien Exit Facility
T/L in exchange. The Fund also participated in Equity exchange which is still in process and is expected to complete soon.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



44







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



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



Revenue Recognition



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



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



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



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



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



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



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



45







Payment-in-Kind Interest



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



Portfolio and Investment Activity



During the year ended December 31, 2016, we
made $36.5 million of investments in new and existing portfolio companies and had $30.6 million in aggregate amount of exits, maturities
and repayments, resulting in net investments of $5.9 million for the year. During the year ended December 31, 2015, we made $23.2
million of investments in new and existing portfolio companies and had $19.7 million in aggregate amount of exits, maturities and
repayments, resulting in net repayments of $3.5 million for the year. During the year ended December 31, 2014, we made $31.3 million of investments in new and existing portfolio companies and had $11.8 million in aggregate amount of exits and repayments, resulting in net investments of $19.5 million for the year.



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



As of December 31, 2015, we have invested an aggregate of approximately
$54.4 million in 42 investment positions in 33 portfolio companies. At December 31, 2015, the fair value of our investment positions
was $33.5 million (including money market investments and the accrued interest and dividends of $0.5 million). As of such date,
our estimated gross annual portfolio yield was 7.6% and gross annual portfolio yield to maturity was 7.6% (excluding equity investments
and non-accrual investments) based on the purchase price of our investments. The average duration of our debt portfolio was approximately
1.8 years. During the year ended December 31, 2015, we exited 12 portfolio companies in full and 4 partially for aggregate sales
proceeds of $19.7 million. As of December, 2015, we had one portfolio investment in default of payment of its par value at maturity
date, Suntech Power Holdings Company, with a fair value of $250 which represented a negligible amount of our total portfolio. As
of December 31, 2015, in addition to the investment in maturity date default, seven additional debt investments had not paid coupon
interest as due beyond the thirty day grace period. These investments are Colt Defense LLC, 8.75%, November 15, 2017; Caesars Entertainment
Corp, 11.25%, June 1, 2017; Caesars Entertainment Corp, 10.75%, February 1, 2016; Endeavour International Corp., 12%, March 1,
2018; Endeavour International Corp., 12%, June 1, 2018; QuickSilver Resources, Inc., 7.13%, April 1, 2016; and Saratoga Resources,
Inc., 12.50% July 1, 2016. Interest on these investments was accrued through the date that the last coupon payment was received.
There are six equity investments which are non-income producing as of December 31, 2015. These six are Affinion Group, common stock;
Ansgar Media, LLC, membership interests; Education Management, LLC, common stock and warrant; NII Holdings, Inc., common stock;
and Relativity Media LLC, preferred stock.



The following table presents
three debt investments that had not paid coupon interest as due beyond the thirty-day grace period, as of December 31, 2016. Interest
on these investments was accrued through the date that the last coupon payment was received:



|Portfolio Company           |  | Asset Type                      |  | Investment  Coupon Rate |       |   | Maturity Date
|--------------------------- |  | ------------------------------- |  | ----------------------- | ----- | - | -------------
|Logan's Roadhouse, Inc. (1) |  | Senior Secured Second Lien Debt |  |                         | 10.75 | % |              
|Saratoga Resources, Inc.    |  | Senior Secured Second Lien Debt |  |                         | 12.50 | % |              
|UCI International, Inc.     |  | Senior Unsecured Debt           |  |                         | 8.63  | % |              



| | (1) | The
company filed for bankruptcy in Delaware on August 8, 2016 and is in the final stages of restructuring. The Fund participated
in DIP financing as part of company’s restructuring process during bankruptcy and has received PIK Second Lien Exit Facility
T/L in exchange. The Fund also participated in Equity exchange which is still in process and is expected to complete soon.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table presents
ten equity investments that are non-income producing, as of December 31, 2016:



|PortfolioCompany                          |  | AssetType               
|----------------------------------------- |  | ------------------------
|Affinion Group, Inc.(2)                   |  | Equity – Common Stock   
|Ansgar Media, LLC - Class B Units         |  | Equity – Preferred Stock
|Aspect Software, Inc. (3)                 |  | Equity – Common Stock   
|Aspire Holdings (1)                       |  | Equity – Common Stock   
|Education Management, LLC                 |  | Equity – Common Stock   
|Education Management, LLC (4)             |  | Warrant                 
|GeoCommerce, Inc.                         |  | Warrant                 
|NII Holdings, Inc.(5)                     |  | Equity – Common Stock   
|Nima, LLC                                 |  | Warrant                 
|Nuverra Environmental Solutions, Inc. (6) |  | Warrant                 



| | (1) | Converted
from exchange of 12.00% Endeavour International Corp First Lien Bonds.
| | --- | --------------------------------------------------------------------------------

| | (2) | Converted
from exchange of 3.00% PIK senior unsecured convertible notes.
| | --- | ------------------------------------------------------------------------

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

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

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

| | (6) | Received
early exchange fees in form of warrants for participating in the exchange offer.
| | --- | -----------------------------------------------------------------------------------------



46







The following table presents
four investments that were completely written off during the year ended December 31, 2016:



|Portfolio Company                     |  | Investment Type                 |  | Investment Coupon Rate |       |   | Maturity Date
|------------------------------------- |  | ------------------------------- |  | ---------------------- | ----- | - | -------------
|Aspect Software, Inc.                 |  | Senior Secured Second Lien Debt |  |                        | 10.63 | % |              
|Suntech Power Holdings Company, Ltd.  |  | Senior Unsecured Debt           |  |                        | 3.00  | % |              
|QuickSilver Resources, Inc.           |  | Senior Subordinated Debt        |  |                        | 7.13  | % |              
|Relativity Media, LLC - Class E Units |  | Equity – Preferred Stock        |  |                        | -     |   |              



Aspect Software, Inc. filed
for bankruptcy and hence defaulted on their 10.63% notes. As part of restructuring program, the company offered its noteholders
to participate in the rights offering, which in turn would convert to equity. The 10.63% notes were hence written off completely.
There is no scope of recovery on the Suntech Power Holdings Company, Ltd and Quicksilver Resources, Inc., hence these two have
also been written off. Relativity Media, LLC, the entity in which we made our original investment, was dissolved as part of the
Relativity Media reorganization process during the year ended December 31, 2016. The investment was removed from the Schedule of
Investments and the loss of $10.4 million was realized.



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



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



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



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



The following table shows
the weighted average yield of our portfolio composition based on fair value at December 31, 2015:



|                                |  | At December 31, 2015          |      
|------------------------------- |  | ----------------------------- | -----
|                                |  | Percentage of Total Portfolio |      
|Investments – Money Market      |  |                               | 18.9 
|U.S. Government Securities      |  |                               | 15.0 
|Senior Secured First Lien Debt  |  |                               | 27.4 
|Senior Secured Second Lien Debt |  |                               | 5.4  
|Senior Unsecured Debt           |  |                               | 19.0 
|Senior Subordinated Debt        |  |                               | 4.5  
|Equity Securities               |  |                               | 9.8  
|Total                           |  |                               | 100.0



* 7.6% yield is on non-defaulted,
non-equity positions and excludes money market investments.



As of December 31, 2015,
our non-defaulted, non-equity portfolio had a yield to maturity of 7.6%, and an average duration of 1.80 years.



47







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



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



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



|                                          |  | At December 31, 2015      |       
|----------------------------------------- |  | ------------------------- | ------
|                                          |  | Investments at Fair Value |       
|Investments – Money Market                |  | $                         | 6,210 
|U.S. Government Securities                |  |                           | 4,946 
|Media: Broadcasting & Subscription        |  |                           | 4,641 
|Metals & Mining                           |  |                           | 2,137 
|Media: Advertising, Printing & Publishing |  |                           | 2,116 
|Retail                                    |  |                           | 1,969 
|Aerospace and Defense                     |  |                           | 1,734 
|Telecommunications                        |  |                           | 1,640 
|Energy: Oil & Gas                         |  |                           | 1,593 
|Automobile                                |  |                           | 1,578 
|Services: Consumer                        |  |                           | 1,476 
|Healthcare & Pharmaceuticals              |  |                           | 1,139 
|Hotel, Gaming & Leisure                   |  |                           | 765   
|Beverage, Food & Tobacco                  |  |                           | 531   
|Environmental Industries                  |  |                           | 457   
|Total                                     |  | $                         | 32,932



Our fair value of total
investments was $40.5 million as of December 31, 2016 as compared to $32.9 million as of December 31, 2015. The increase in the
fair value of our investments was attributable to three factors: 1) new investments in senior secured notes of Geocommerce, Inc.
and Nima, LLC granted us with in-the-money warrants, which increased the value of our investments significantly. 2) increased
investments in Ansgar Media, LLC and an increase in the valuation estimate of Ansgar Media, LLC equity based on recent financial
projections provided by the company and 3) for the year 2016, the high yield market returned 17.49%, the third best year over
the past 20, surpassed only by 2003 (when the markets recovered from the WorldCom fraud) and 2009 (when the U.S. economy emerged
from the Great Recession).



Discussion and Analysis of Results of Operations



Results of Operations



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



48







Operating results for the years ended December
31, 2016, 2015 and 2014 were as follows (dollars in thousands):



|                                                                |  | For the Year Ended December 31, 2016 |         |   | For the Year Ended December 31, 2015 |   |         | For the Year Ended December 31, 2014 | 
|--------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ------------------------------------ | - | ------- | ------------------------------------ | 
|Total investment income                                         |  | $                                    | 3,120   |   |                                      | $ | 3,512   |                                      | 
|Total operating expenses                                        |  |                                      | 2,651   |   |                                      |   | 2,682   |                                      | 
|Net investment income                                           |  |                                      | 469     |   |                                      |   | 830     |                                      | 
|Net realized gain (loss) from investments                       |  |                                      | (13,263 | ) |                                      |   | 425     |                                      | 
|Net unrealized appreciation (depreciation) on investments       |  |                                      | 20,408  |   |                                      |   | (14,614 | )                                    | 
|Net increase (decrease) in net assets resulting from operations |  | $                                    | 7,614   |   |                                      | $ | (13,359 | )                                    | 



Revenues



We generated investment
income of $3.1 million for the year ended December 31, 2016, as compared to $3.5 million for the year ended December 31, 2015,
and $3.3 million for the year ended December 31, 2014. Interest revenue was $3.0 million for the year ended December 31, 2016,
as compared to $2.9 million for the year ended December 31, 2015, and $3.2 million for the year ended December 31, 2014. The increase
in interest revenue in 2016 as compared to 2015 was attributable to higher yield earned on investments in senior secured notes
of Ansgar, GeoCommerce and Nima, partially offset by an increase in debt investments placed on non-accrual status and restructuring
of certain debt investments into equity investments. Fee income was $0.1 million for the year ended December 31, 2016, as compared
to $0.6 million and zero for the years ended December 31, 2015 and 2014, respectively. The decrease in fee income in 2016 as compared
to 2015 was attributable to a 5% origination fee that was earned and immediately accrued on our investment in Relativity Media,
LLC in 2015. The fee income earned on investments in 2016 was lower and is being amortized over the term of the loan instead of
realized upon receipt.



Interest from debt investments
is in the form of interest and fees earned on senior secured loans, senior secured notes, subordinated debt, senior unsecured debt
and collateralized securities in our debt portfolio. Our debt portfolio constituted approximately 75.7% of investment portfolio
at December 31, 2016 (excluding money market investments). The level of interest income we receive is directly related to the balance
of collectible income producing investments multiplied by the coupon rate of our investments, offset by debt investments held in
non-accrual status. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our
investment portfolio increases. The average balance of the debt portfolio during the year ended December 31, 2016 was higher than
the year ended December 31, 2015, which was attributable to – 1) new investments in senior secured notes of Geocommerce,
Inc. and Nima, LLC and increased investments in senior secured notes of Ansgar Media, LLC; and 2) increased investments in US Treasury
Bills to keep up with the collateral requirements of the priority credit line. At December 31, 2016, the weighted average coupon
yield of our debt investments was 8.6%, as compared to 7.6% at December 31, 2015, and 10.0% at December 31, 2014. For the year
ended December 31, 2016, the average net assets were $31.8 million, as compared to $39.2 million for the year ended December 31,
2015, and $36.7 million for the year ended December 31, 2014.



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 years ended December 31, 2016, 2015 and 2014 was as follows (dollars in thousands):



|                                                                                   |  | For the Year Ended December 31, 2016 |       |  | For the Year Ended December 31, 2015 |   |       | For the Year Ended December 31, 2014 | 
|---------------------------------------------------------------------------------- |  | ------------------------------------ | ----- |  | ------------------------------------ | - | ----- | ------------------------------------ | 
|                                                                                   |  |                                      |       |  |                                      |   |       |                                      | 
|Professional fees                                                                  |  | $                                    | 800   |  |                                      | $ | 521   |                                      | 
|Director fees                                                                      |  |                                      | 37    |  |                                      |   | 50    |                                      | 
|Insurance                                                                          |  |                                      | 114   |  |                                      |   | 96    |                                      | 
|Interest expense                                                                   |  |                                      | 206   |  |                                      |   | 33    |                                      | 
|Management fees – related parties                                                  |  |                                      | 640   |  |                                      |   | 784   |                                      | 
|Administrative services – related parties                                          |  |                                      | 228   |  |                                      |   | 216   |                                      | 
|General and administrative (includes CFO salary and related party travel expenses) |  |                                      | 489   |  |                                      |   | 721   |                                      | 
|Transfer agent fees                                                                |  |                                      | 137   |  |                                      |   | 165   |                                      | 
|Offering expense                                                                   |  |                                      | -     |  |                                      |   | 96    |                                      | 
|Total operating expenses                                                           |  | $                                    | 2,651 |  |                                      | $ | 2,682 |                                      | 



49









For the years ended
December 31, 2016, 2015 and 2014, our operating expenses were $2.7 million, $2.7 million and $2.4 million, respectively.
Included within general and administrative expenses for the years ended December 31, 2016, 2015 and 2014, were $0.1 million,
$0.1 million and $0.1 million respectively for the cost of our chief financial officer’s salary reimbursed to the
Manager. Also included within general and administrative expenses for the years ended December 31, 2016, 2015 and 2014 were
$0.04 million, $0.1 million and $0.2 million, respectively, for related party travel expenses reimbursed to the Manager.





The slight decrease in
expenses for the year ended December 31, 2016 as compared to December 31, 2015 was primarily due to reduced offering expenses
as a result of the fact that the Fund has not raised new capital since April 30, 2015 as our registration statement has not been
declared effective by the SEC, reduced management fees as our net assets have decreased, reduced general and administrative expenses,
offset by increases in professional fees attributable to litigation relating to our investment in Relativity Media, LLC.



Management fees for the
years ended December 31, 2016, 2015 and 2014 remain at 2% of the net asset value. The offering costs are consistent at 1.5% of
the gross closing proceeds for the years ended December 31, 2016, 2015 and 2014. However, since the Fund has not been open to new
investments, there has not been any offering costs expense since June 30, 2015.



Net Investment Income



Our net investment income
totaled $0.5 million, $0.8 million and $0.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. Our net
investment income was attributable to investment income less operating expenses for the period. For the year ended December 31,
2016, total investment income was $3.1 million, which included $0.1 million of non-recurring fees.



The decrease in net investment
income for the year ended December 31, 2016 as compared to the year ended December 31, 2015 was primarily due to two factors:
1) decrease in fee income in 2016 as compared to 2015 because in 2015 the 5.0% origination fee was earned and immediately accrued
on our investment in Relativity Media, LLC. The fee income earned on investments in 2016 was lower and is being amortized over
the term of the loan instead of realized upon receipt and 2) although general and administrative expenses were lower in 2016;
the decrease was offset by substantial increase in legal expenses due to the lawsuits related to Relativity Media, LLC. For the
years ended December 31, 2016, 2015 and 2014, total operating expenses were $2.7 million, $2.7 million and $2.4 million, respectively.



Net Realized Gains or Losses from Investments



For the years ended December
31, 2016, 2015 and 2014, we had $30.6 million, $19.7 million and $11.8 million of sales, maturities, write-offs and principal repayments,
resulting in $(13.3) million, $0.4 million and $0.2 million of realized gains (losses), respectively.



Net Change in Unrealized Appreciation or Depreciation on Investments



For the years ended December
31, 2016, 2015 and 2014, we experienced $20.4 million, $(14.6) million and $(6.3) million of unrealized appreciation (depreciation),
respectively. The increase in unrealized appreciation during fiscal 2016 was due to four main factors.



First, despite
the negative trends and volatility early in the year, the high-yield index has swiftly recovered. For the year 2016, the high yield
market returned 17.49%, the third best year over the past 20, surpassed only by 2003 (when the markets recovered from the WorldCom
fraud) and 2009 (when the U.S. economy emerged from the Great Recession). Much of this was due to the recovery in oil prices and
an insatiable demand for yield. With oil prices comfortably above $50 at year end following the OPEC production agreement, many
energy issuers have addressed their liquidity concerns by either raising capital in the financial markets or by restructuring their
balance sheets. This should limit the amount of defaults from energy issuers going forward. From a demand standpoint, high yield
investors were especially attracted to the asset class in 2016 when more than $12 trillion of global debt (roughly 25% of the outstanding
supply) yielded less than 0%.



Second, the Fund invested
in senior secured first lien notes of two companies – GeoCommerce, Inc. and Nima, LLC, which provided the Fund with in-the-money
warrants amounting to just over $2.8 million of unrealized appreciation.



Third, an increase in the
equity value of Ansgar Media, LLC based on recently provided financial projections of the company.



Fourth, an unrealized depreciation
of $10.4 million from our investment in Relativity Media, LLC was reclassified as a realized loss.



50









The unrealized appreciation
in fiscal year 2016 has been partially offset by substantial increase in net realized loss mainly due to writing off four of our
investments completely, including a $10.4 million loss on our investment in Relativity Media, LLC Series E preferred stock. Some
portion of unrealized depreciation in fiscal year 2015 was because we encountered greater than average declines in certain positions
that were caused by conditions unique to the company or industry. We had a number of positions that either initiated a restructuring
of their indebtedness (either in Chapter 11 bankruptcy or prepackaged bankruptcy) or announced that they were considering a restructuring.
Such announcements generally reduce liquidity in the secondary market creating greater mispricing in underlying bonds. Until the
bankruptcy or other restructuring process is complete, it becomes difficult to ascertain whether some of these positions will result
in a loss of principal or full recovery of principal given their position in the capital structure of the issuer and the underlying
asset values. Generally, we expect much higher recoveries or full payment for senior secured first lien type bonds, as compared
to senior secured second lien or unsecured bonds for defaulted bonds.



Changes in Net Assets from Operations



For
the years ended December 31, 2016, 2015 and 2014, we recorded a net increase (decrease) in net assets resulting from operations
of $7.6 million, $(13.4) million and $(5.3) million, respectively. For the years ended December 31, 2016, 2015 and 2014, this increase
(decrease) is mainly due to net unrealized appreciation (depreciation) of $20.4 million, $(14.6) million and $(6.3) million, respectively,
and net investment income of $0.5 million, $0.8 million and $0.8 million, respectively, partially offset by net realized gain (loss)
from investments of $(13.3) million, $0.4 million and $0.2 million, respectively, on our portfolio investments. The increase in 2016 is largely due to a strong rally in high yield markets because of increases in the market price of oil, easing concerns about global economic growth, a continued search for yield and the completion of restructuring plans by a few of our bond investment companies. Overall, the portfolio experienced a market value increase, with an increase in net unrealized appreciation on investments
of $20.4 million for the year ended December 31, 2016. Based on 6,256,208, 6,077,127 and 4,281,647 weighted average common shares
outstanding for the years ended December 31, 2016, 2015 and 2014, respectively, our per share net increase (decrease) in net assets
resulting from operations was $1.22, $(2.20) and $(1.23), respectively.



Liquidity and Capital Resources



On August 4, 2015, we entered
an agreement with Wells Fargo Advisors, LLC for obtaining a revolving line of credit. The amount we can borrow is based upon the
value of cash deposited in an account at Wells Fargo Advisors, LLC and the treasury notes that Wells Fargo purchases, which serve
as collateral for the loan. On August 27, 2015, we initially drew down $2.0 million. As of December 31, 2016 and December 31, 2015,
the outstanding balance under this credit line was $6.4 million and $4.5 million, respectively. The interest rate on the outstanding
balance is a negotiated rate based on our assets under management with Wells Fargo Advisors, LLC and is currently 3.25%. The term
of the line of credit is indefinite and may be terminated by us or Wells Fargo Advisors, LLC at any time.



On September 10, 2015,
we entered an agreement with the Morgan Stanley Private Bank, N.A. The amount we can borrow is based upon the value of cash deposited
in an account at Morgan Stanley Private Bank, N.A., which serve as collateral for the loan. The maximum amount which we may borrow
under the line of credit is $1.8 million. The line was paid off during the second quarter and the account was closed as of June
30, 2016.



We generate cash primarily
from cash flows from fees, interest and dividends earned from
our investments as well as principal repayments and proceeds from sales of our investments. On July 10, 2012, we satisfied our
minimum offering requirement of raising gross offering proceeds in excess of $1.0 million from persons who are not affiliated with
us or our Manager, and commenced operations. As of December 31, 2016, we had issued 6.3 million shares of common stock, including
0.5 million shares under our distribution reinvestment plan (“DRIP”) less 0.3 million shares redeemed under our tender
offer. As of December 31, 2016, we had received gross proceeds from our continuous offering of total $62.6 million, including $4.7
million under our DRIP less $2.9 million paid to redeem shares in our quarterly tenders.





51







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



For the year ended December
31, 2016, we experienced a net decrease in money market investments of $6.1 million. For the year ended December 31, 2016, approximately
$0.9 million was used for our financing activities, which primarily consisted of $11.7 million repayments of the priority credit
line and $2.8 million in distributions, partially offset by $13.5 million received through the priority credit line. We generated
approximately $0.9 million of cash provided by our operating activities mainly as the result of the receipt of proceeds from the
sale of, repayment of and principal payments on portfolio debt investments of $30.6 million, partially offset by the purchase of
new portfolio debt investments of $36.5 million.



Distributions



Subject to our Board of
Director’s discretion and applicable legal restrictions, we have historically declared and paid ordinary cash distributions
at a rate equal to 7.35% of our latest offering price per share. Since the distribution paid to shareholders on September 30, 2015,
with a record date of August 30, 2015, we have paid distributions monthly. Prior to the September 30, 2015, we paid distributions
on a semi-monthly basis. We changed to paying distributions monthly in order to reduce costs. Any distributions to our shareholders
will be declared out of assets legally available for distribution. We may fund our cash distributions to shareholders from any
sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains
proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, and dividends or other distributions paid
to us on account of preferred and common equity investments in portfolio companies. We have not established limits on the amount
of funds we may use from available sources to make distributions.



Based upon our current
level of operations, we estimate that about 85.3% of our distributions will constitute a return of capital. Our distributions historically
have not been based on our investment performance. Prior to September 2013, our distributions were supported by our Manager in
the form of operating expense support payments to us, and a portion of our distributions constituted a return of capital. Since
September 2013, we have not had an expense support agreement with our Manager and as a result a greater portion of our distributions
have constituted a return of capital. A return of capital generally is a return of your investment rather than a return of
earnings or gains derived from our investment activities constitutes the return of capital previously paid to us for shares of
our common stock.



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



|Period                                 |  | Per Share |          |  | Net  Investment  Income |  |    | Realized  Gain From  Investments |  |  | Return  of  Capital |  
|-------------------------------------- |  | --------- | -------- |  | ----------------------- |  | -- | -------------------------------- |  |  | ------------------- | -
|July 12, 2012 - September 30, 2012     |  | $         | 0.183750 |  |                         |  | 64 | %                                |  |  | —                   | %
|October 1, 2012 - December 31, 2012*   |  |           | 0.260750 |  |                         |  | 59 | %                                |  |  | —                   | %
|January 1, 2013 - March 31, 2013*      |  |           | 0.262586 |  |                         |  | 67 | %                                |  |  | 13                  | %
|April 1, 2013 - June 30, 2013          |  |           | 0.186504 |  |                         |  | 77 | %                                |  |  | 14                  | %
|July 1, 2013 - September 30, 2013      |  |           | 0.186504 |  |                         |  | 51 | %                                |  |  | 10                  | %
|October 1, 2013 - December 31, 2013    |  |           | 0.186504 |  |                         |  | 4  | %                                |  |  | 47                  | %
|January 1, 2014 - March 31, 2014       |  |           | 0.186504 |  |                         |  | 27 | %                                |  |  | 13                  | %
|April 1, 2014 - June 30, 2014          |  |           | 0.186504 |  |                         |  | 49 | %                                |  |  | —                   | %
|July 1, 2014 - September 30, 2014      |  |           | 0.184668 |  |                         |  | 17 | %                                |  |  | 3                   | %
|October 1, 2014 - December 31, 2014    |  |           | 0.181467 |  |                         |  | 15 | %                                |  |  | 6                   | %
|January 1, 2015 - March 31, 2015       |  |           | 0.179154 |  |                         |  | 15 | %                                |  |  | 5                   | %
|April 1, 2015 - June 30, 2015          |  |           | 0.179154 |  |                         |  | 63 | %                                |  |  | 15                  | %
|July 1, 2015 - September 30, 2015      |  |           | 0.209015 |  |                         |  | 19 | %                                |  |  | 11                  | %
|October 1, 2015 - December 31, 2015 ** |  |           | 0.170315 |  |                         |  | —  | %                                |  |  | 6                   | %
|January 1, 2016 – March 31, 2016 ***   |  |           | 0.169969 |  |                         |  | 1  | %                                |  |  | —                   | %
|April 1, 2016 – June 30, 2016****      |  |           | 0.107188 |  |                         |  | —  | %                                |  |  | —                   | %
|July 1, 2016 – September 30, 2016***** |  |           | 0.214372 |  |                         |  | 23 | %                                |  |  | —                   | %
|October 1, 2016 – December 31, 2016    |  |           | 0.107186 |  |                         |  | 24 | %                                |  |  | 11                  | %



* Includes a special distribution
of $0.077 per share.



52







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



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



**** For the period
from April 1, 2016 to June 30, 2016, the Fund had a net investment loss of approximately $4 thousand and a realized loss from investments
of approximately $12.6 million. These amounts are reflected on the source of distributions table below in the distributions from
paid in capital amount. The allocation of the distributions between net investment income and return of capital are different than
previously reported as a result of the correction of an accounting error. For further
detail, please see Item 9A Controls and Procedures.



***** For the period
from July 1, 2016 to September 30, 2016, the Fund had a realized loss from investments of approximately $0.04 million. That amount
is reflected on the source of distributions table below in the distributions from paid in capital amount. The allocation of the
distributions between net investment income and return of capital are different than previously reported as a result of the correction
of an accounting error. For further
detail, please see Item 9A Controls and Procedures.



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



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



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



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



The following table reflects
the sources of the cash distributions on a tax basis that the Fund has paid on its common stock (dollars in thousands) during the
fiscal years ended December 31, 2016, 2015 and 2014:



|Source of Distributions:                 |  | Year ended December 31, 2016 |       |  | Year ended December 31, 2015 |  |       | Year ended December 31, 2014 | 
|---------------------------------------- |  | ---------------------------- | ----- |  | ---------------------------- |  | ----- | ---------------------------- | 
|Distributions from net investment income |  | $                            | 473   |  |                              |  | 12.6  | %                            | 
|Distributions from realized gains        |  |                              | 78    |  |                              |  | 2.1   |                              | 
|Distributions from paid in capital       |  |                              | 3,195 |  |                              |  | 85.3  |                              | 
|Total                                    |  | $                            | 3,746 |  |                              |  | 100.0 | %                            | 



53







Distribution Reinvestment Plan



We have adopted an “opt-in”
DRIP pursuant to which shareholders may elect to have the full amount of their cash distributions reinvested in additional shares
of our common stock. If shareholders wish to receive their distribution in cash, no action is required on their part to do so.
If shareholders elect to participate in the DRIP program, they are not charged selling commissions, dealer manager fees or other
sales charges for the purchase of DRIP shares. The purchase price of the DRIP shares is 95% of the current offering price of the
shares at the time of the distribution. Shares issued pursuant to our DRIP will have the same voting rights as our shares of common
stock offered pursuant to our prospectus.



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



| |      |  | Offering Expenses |   |     | Distribution 
from
    
Net Investment Income excluding offering costs |  |   | % Distribution from Net Investment Income excluding  offering costs |  |  | % Distributions from Realized Gains excluding offering costs |     |   | % Distributions from Paid In Capital  excluding  offering costs | 
| | ---- |  | ----------------- | - | --- | ---------------------------------------------------------------------- |  | - | ------------------------------------------------------------------- |  |  | ------------------------------------------------------------ | --- | - | --------------------------------------------------------------- | 
| | 2016 |  |                   | $ | —   |                                                                        |  | $ | 473                                                                 |  |  |                                                              | 13  | % |                                                                 | 
| | 2015 |  |                   | $ | 96  |                                                                        |  | $ | 926                                                                 |  |  |                                                              | 21  | % |                                                                 | 
| | 2014 |  |                   | $ | 352 |                                                                        |  | $ | 1,171                                                               |  |  |                                                              | 37  | % |                                                                 | 
| | 2013 |  |                   | $ | 322 |                                                                        |  | $ | 1,120                                                               |  |  |                                                              | 66  | % |                                                                 | 
| | 2012 |  |                   | $ | 142 |                                                                        |  | $ | 292                                                                 |  |  |                                                              | 100 | % |                                                                 | 



Election as a RIC



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



Related-Party Transactions and Agreements



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



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



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



54







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



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



Due from related party
consists of $67,000 of true up for management fees from writing down certain portfolio investments at the end of a quarter in prior
quarters, $67,000 in Blue Sky state filing fees paid by the Fund instead of our Manager, $13,000 in allocation of the Directors
and Officers insurance policy costs to our Manager, and $90,000 in expenses related to legal and other operational costs allocated
to our Manager instead of the Fund.



Off-Balance Sheet Arrangements



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



ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



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



Assuming that our current
financial condition were to remain constant and no actions were taken to alter our existing interest rate sensitivity, a 100 basis
point move in interest rates up or down from their December 31, 2016 levels would result in an increase or decrease in net asset
value of $0.5 million or 1.6%.

55







ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA



Index to Financial Statements



|                                                                                         | Page
|---------------------------------------------------------------------------------------- | ----
|                                                                                         |     
|Report of Independent Registered Public Accounting Firm                                  | F-1 
|Report of Previous Independent Registered Public Accounting Firm                         | F-2 
|Statements of Assets and Liabilities as of December 31, 2016 and 2015                    | F-3 
|Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014            | F-4 
|Statements of Changes in Net Assets for the Years Ended December 31, 2016, 2015 and 2014 | F-5 
|Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014            | F-6 
|Schedules of Investments as of December 31, 2016 and 2015                                | F-7 
|Notes to Financial Statements                                                            | F-9 



56







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM





The Board of Directors and Stockholders of

VII Peaks Co-Optivist Income BDC II, Inc.



We have audited the accompanying statement
of assets and liabilities of VII Peaks Co-Optivist Income BDC II, Inc. (“Fund”), including the schedule of investments,
as of December 31, 2016, and the related statements of operations, changes in net assets, and cash flows for the year then
ended. 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 audit.



We conducted our audit 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 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 audit 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, 2016, by correspondence with
the custodian and management of the portfolio companies, or by other auditing procedures where replies were not received.
We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the
financial statements referred to above present fairly, in all material respects, the financial position of VII Peaks
Co-Optivist Income BDC II, Inc. as of December 31, 2016, and the results of its operations, changes in its net assets and
its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of
America.







/s/ OUM & Co. LLP



San Francisco, California



June 2, 2017



F-1







REPORT OF PREVIOUS
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM









To the Board of Directors and Stockholders
of
VII Peaks Co-Optivist Income BDC II, Inc.



We have audited the accompanying
statement of assets and liabilities of VII Peaks Co-Optivist Income BDC II, Inc. (the “Fund”), including the schedule
of investments, as of December 31, 2015, and the related statements of operations, changes in net assets and cash flows for each
of the years in the two-year period ended December 31, 2015. 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 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, 2015, by correspondence with the custodian. We believe that our audits provide a reasonable
basis for our opinion.



In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial position of VII Peaks Co-Optivist Income BDC
II, Inc. as of December 31, 2015, and the results of its operations, changes in its net assets and its cash flows for each of the
years in the two-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United
States of America.



/s/ BPM LLP



San Francisco, California
April 14, 2016





F-2







VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share and per share
data)



|                                                                                                                                                                                                                                                          |  | As of             |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------
|                                                                                                                                                                                                                                                          |  | December 31, 2016 |        
|                                                                                                                                                                                                                                                          |  |                   |        
|ASSETS                                                                                                                                                                                                                                                    |  |                   |        
|                                                                                                                                                                                                                                                          |  |                   |        
|Investments, at fair value                                                                                                                                                                                                                                |  |                   |        
|Non-controlled/non-affiliate investments (cost of $35,575 and $46,210, respectively)                                                                                                                                                                      |  | $                 | 30,977 
|Affiliate investments (cost of $5,850 and $2,000, respectively)                                                                                                                                                                                           |  |                   | 9,368  
|Investments, money market at fair value (cost of $157 and $6,210, respectively)                                                                                                                                                                           |  |                   | 157    
|Total investments, at fair value                                                                                                                                                                                                                          |  |                   | 40,502 
|Interest receivable                                                                                                                                                                                                                                       |  |                   | 402    
|Prepaid expenses                                                                                                                                                                                                                                          |  |                   | 76     
|Origination fee receivable                                                                                                                                                                                                                                |  |                   | -      
|Due from related party, net                                                                                                                                                                                                                               |  |                   | 239    
|Total assets                                                                                                                                                                                                                                              |  | $                 | 41,219 
|                                                                                                                                                                                                                                                          |  |                   |        
|LIABILITIES                                                                                                                                                                                                                                               |  |                   |        
|Priority credit line -Wells Fargo                                                                                                                                                                                                                         |  | $                 | 6,366  
|Interest payable                                                                                                                                                                                                                                          |  |                   | 3      
|Deferred loan fee                                                                                                                                                                                                                                         |  |                   | 268    
|Prepaid interest from investments (includes prepaid interest of $333 from Nima, LLC, $258 from GeoCommerce, Inc. and $188 from Ansgar Media, LLC)                                                                                                         |  |                   | 779    
|Accounts payable and accrued liabilities                                                                                                                                                                                                                  |  |                   | 121    
|Stockholder distributions payable                                                                                                                                                                                                                         |  |                   | -      
|Total liabilities                                                                                                                                                                                                                                         |  |                   | 7,537  
|                                                                                                                                                                                                                                                          |  |                   |        
|NET ASSETS                                                                                                                                                                                                                                                |  |                   |        
|Preferred stock, par value, $.001 per share, 50,000,000
    authorized; none issued and outstanding                                                                                                                                                       |  | $                 | -      
|Common stock, par value, $.001 per share, 200,000,000
    authorized; 6,639,019 and 6,482,927 shares issued as of December 31, 2016 and 2015, respectively and 6,337,606 and 6,181,515
    outstanding as of December 31, 2016 and 2015,     respectively |  |                   | 7      
|Paid-in capital in excess of par value                                                                                                                                                                                                                    |  |                   | 60,184 
|Treasury stock at cost, 301,413 and 301,413 shares, respectively                                                                                                                                                                                          |  |                   | (2,891 
|Accumulated distribution in excess of net investment income and net realized gain (loss) on investments                                                                                                                                                   |  |                   | (22,538
|Net unrealized depreciation on investments                                                                                                                                                                                                                |  |                   | (1,080 
|Total net assets                                                                                                                                                                                                                                          |  |                   | 33,682 
|Total liabilities and net assets                                                                                                                                                                                                                          |  | $                 | 41,219 
|                                                                                                                                                                                                                                                          |  |                   |        
|Net asset value per share                                                                                                                                                                                                                                 |  | $                 | 5.31   



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



F-3







VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



STATEMENTS OF OPERATIONS

(in thousands, except share and per share
data)



|                                                                                                                                                           |  | For the Year Ended |           |   | For the Year Ended |   |           | For the Year Ended | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ------------------ | - | --------- | ------------------ | 
|                                                                                                                                                           |  | December 31, 2016  |           |   | December 31, 2015  |   |           | December 31, 2014  | 
|                                                                                                                                                           |  |                    |           |   |                    |   |           |                    | 
|Investment income:                                                                                                                                         |  |                    |           |   |                    |   |           |                    | 
|Interest from investments                                                                                                                                  |  |                    |           |   |                    |   |           |                    | 
|Non-controlled/non-affiliate investments                                                                                                                   |  | $                  | 2,513     |   |                    | $ | 2,863     |                    | 
|Affiliate investments                                                                                                                                      |  |                    | 504       |   |                    |   | 80        |                    | 
|Interest from cash and cash equivalents                                                                                                                    |  |                    |           |   |                    |   |           |                    | 
|Non-controlled/non-affiliate investments                                                                                                                   |  |                    | -         |   |                    |   | 1         |                    | 
|Fee income                                                                                                                                                 |  |                    |           |   |                    |   |           |                    | 
|Non-controlled/non-affiliate investments                                                                                                                   |  |                    | 66        |   |                    |   | 545       |                    | 
|Affiliate investments                                                                                                                                      |  |                    | 37        |   |                    |   | 10        |                    | 
|Other income                                                                                                                                               |  |                    |           |   |                    |   |           |                    | 
|Non-controlled/non-affiliate investments                                                                                                                   |  |                    | -         |   |                    |   | 13        |                    | 
|Affiliate investments                                                                                                                                      |  |                    | -         |   |                    |   | -         |                    | 
|Total investment income                                                                                                                                    |  |                    | 3,120     |   |                    |   | 3,512     |                    | 
|                                                                                                                                                           |  |                    |           |   |                    |   |           |                    | 
|Operating expenses:                                                                                                                                        |  |                    |           |   |                    |   |           |                    | 
|Professional fees                                                                                                                                          |  |                    | 800       |   |                    |   | 521       |                    | 
|Directors fees                                                                                                                                             |  |                    | 37        |   |                    |   | 50        |                    | 
|Insurance                                                                                                                                                  |  |                    | 114       |   |                    |   | 96        |                    | 
|Interest expense                                                                                                                                           |  |                    | 206       |   |                    |   | 33        |                    | 
|Management fees - related parties                                                                                                                          |  |                    | 640       |   |                    |   | 784       |                    | 
|Administrative services - related parties                                                                                                                  |  |                    | 228       |   |                    |   | 216       |                    | 
|General and administrative (includes $124, $110 and $106 of CFO salary (accounting) and $42, $118 and $169 of related party travel expenses, respectively) |  |                    | 489       |   |                    |   | 721       |                    | 
|Transfer agent fees                                                                                                                                        |  |                    | 137       |   |                    |   | 165       |                    | 
|Offering expense                                                                                                                                           |  |                    | -         |   |                    |   | 96        |                    | 
|Total operating expenses                                                                                                                                   |  |                    | 2,651     |   |                    |   | 2,682     |                    | 
|                                                                                                                                                           |  |                    |           |   |                    |   |           |                    | 
|Net investment income                                                                                                                                      |  |                    | 469       |   |                    |   | 830       |                    | 
|                                                                                                                                                           |  |                    |           |   |                    |   |           |                    | 
|Realized and unrealized gain (loss) on investments:                                                                                                        |  |                    |           |   |                    |   |           |                    | 
|Net realized gain (loss) from investments                                                                                                                  |  |                    | (13,263   | ) |                    |   | 425       |                    | 
|Net unrealized appreciation (depreciation) on investments                                                                                                  |  |                    | 20,408    |   |                    |   | (14,614   | )                  | 
|Net realized and unrealized gain (loss) on investments                                                                                                     |  |                    | 7,145     |   |                    |   | (14,189   | )                  | 
|                                                                                                                                                           |  |                    |           |   |                    |   |           |                    | 
|Net increase (decrease) in net assets resulting from operations                                                                                            |  | $                  | 7,614     |   |                    | $ | (13,359   | )                  | 
|                                                                                                                                                           |  |                    |           |   |                    |   |           |                    | 
|Per share information - basic and diluted:                                                                                                                 |  |                    |           |   |                    |   |           |                    | 
|Net investment income                                                                                                                                      |  | $                  | 0.07      |   |                    | $ | 0.14      |                    | 
|Net increase (decrease) in net assets resulting from operations                                                                                            |  | $                  | 1.22      |   |                    | $ | (2.20     | )                  | 
|Weighted average common shares outstanding                                                                                                                 |  |                    | 6,256,208 |   |                    |   | 6,077,127 |                    | 



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



F-4







VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



STATEMENTS OF CHANGES IN NET ASSETS

(in thousands, except share and per share
data)



|                                                                                                        |  | For the Year Ended  December 31, 2016 |           |   | For the Year Ended  December 31, 2015 |   |           | For the Year Ended  December 31, 2014 | 
|------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | --------- | - | ------------------------------------- | - | --------- | ------------------------------------- | 
|                                                                                                        |  |                                       |           |   |                                       |   |           |                                       | 
|Operations:                                                                                             |  |                                       |           |   |                                       |   |           |                                       | 
|Net investment income                                                                                   |  | $                                     | 469       |   |                                       | $ | 830       |                                       | 
|Net realized gain (loss) from investments                                                               |  |                                       | (13,263   | ) |                                       |   | 425       |                                       | 
|Net unrealized appreciation (depreciation) on investments                                               |  |                                       | 20,408    |   |                                       |   | (14,614   | )                                     | 
|Net increase (decrease) in net assets from operations                                                   |  |                                       | 7,614     |   |                                       |   | (13,359   | )                                     | 
|Stockholder distributions:                                                                              |  |                                       |           |   |                                       |   |           |                                       | 
|Distributions from net investment income                                                                |  |                                       | (473      | ) |                                       |   | (830      | )                                     | 
|Distributions from net realized gain on investments                                                     |  |                                       | (78       | ) |                                       |   | (425      | )                                     | 
|Distributions from paid in capital                                                                      |  |                                       | (3,195    | ) |                                       |   | (3,235    | )                                     | 
|Net decrease in net assets from stockholder distributions                                               |  |                                       | (3,746    | ) |                                       |   | (4,490    | )                                     | 
|Capital share transactions:                                                                             |  |                                       |           |   |                                       |   |           |                                       | 
|Issuance of common stock, net of issuance costs                                                         |  |                                       | -         |   |                                       |   | 6,232     |                                       | 
|Reinvestment of stockholder distributions                                                               |  |                                       | 1,324     |   |                                       |   | 1,532     |                                       | 
|Total investment contributions transferred in-kind                                                      |  |                                       | -         |   |                                       |   | -         |                                       | 
|Treasury capital (redemptions)                                                                          |  |                                       | -         |   |                                       |   | (2,113    | )                                     | 
|Net increase in net assets from capital share transactions                                              |  |                                       | 1,324     |   |                                       |   | 5,651     |                                       | 
|                                                                                                        |  |                                       |           |   |                                       |   |           |                                       | 
|Total increase (decrease) in net assets                                                                 |  |                                       | 5,192     |   |                                       |   | (12,198   | )                                     | 
|Net assets at beginning of year                                                                         |  |                                       | 28,490    |   |                                       |   | 40,688    |                                       | 
|Net assets at end of year                                                                               |  | $                                     | 33,682    |   |                                       | $ | 28,490    |                                       | 
|                                                                                                        |  |                                       |           |   |                                       |   |           |                                       | 
|Net asset value per common share                                                                        |  | $                                     | 5.31      |   |                                       | $ | 4.61      |                                       | 
|Common shares outstanding at end of year                                                                |  |                                       | 6,337,606 |   |                                       |   | 6,181,515 |                                       | 
|                                                                                                        |  |                                       |           |   |                                       |   |           |                                       | 
|Accumulated distribution in excess of net investment income and net realized gain (loss) on investments |  | $                                     | (22,538   | ) |                                       | $ | (5,997    | )                                     | 



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



F-5







VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



STATEMENTS OF CASH FLOWS

(in thousands, except share and per share
data)



|                                                                                                                                       |  | For the Year Ended  December 31, 2016 |         |   | For the Year Ended  December 31, 2015 |   |         | For the Year Ended  December 31, 2014 | 
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------------------------- | - | ------- | ------------------------------------- | 
|                                                                                                                                       |  |                                       |         |   |                                       |   |         |                                       | 
|Operating activities:                                                                                                                  |  |                                       |         |   |                                       |   |         |                                       | 
|Net increase (decrease) in net assets from operations                                                                                  |  | $                                     | 7,614   |   |                                       | $ | (13,359 | )                                     | 
|Adjustments to reconcile net increase (decrease) in net assets from operations to net cash provided by (used in) operating activities: |  |                                       |         |   |                                       |   |         |                                       | 
|Paid-in-kind interest income                                                                                                           |  |                                       | (12     | ) |                                       |   | -       |                                       | 
|Net accretion of discounts and amortization of premiums                                                                                |  |                                       | (513    | ) |                                       |   | 74      |                                       | 
|Repayments of investments                                                                                                              |  |                                       | 30,593  |   |                                       |   | 19,688  |                                       | 
|Purchase of investments                                                                                                                |  |                                       | (36,545 | ) |                                       |   | (23,245 | )                                     | 
|Repayments of investments - money market                                                                                               |  |                                       | 37,314  |   |                                       |   | 44,215  |                                       | 
|Purchase of investments - money market                                                                                                 |  |                                       | (31,262 | ) |                                       |   | (47,319 | )                                     | 
|Net realized (gain) loss from investments                                                                                              |  |                                       | 13,263  |   |                                       |   | (425    | )                                     | 
|Net unrealized (appreciation) depreciation on investments                                                                              |  |                                       | (20,408 | ) |                                       |   | 14,614  |                                       | 
|Proceeds from loan fees received                                                                                                       |  |                                       | 310     |   |                                       |   | 60      |                                       | 
|Accretion of deferred loan fees                                                                                                        |  |                                       | (92     | ) |                                       |   | (10     | )                                     | 
|(Increase) decrease in operating assets:                                                                                               |  |                                       |         |   |                                       |   |         |                                       | 
|Interest receivable                                                                                                                    |  |                                       | 127     |   |                                       |   | 521     |                                       | 
|Prepaid expenses                                                                                                                       |  |                                       | (64     | ) |                                       |   | 6       |                                       | 
|Due from related party, net                                                                                                            |  |                                       | (86     | ) |                                       |   | 14      |                                       | 
|Origination fee receivable                                                                                                             |  |                                       | 63      |   |                                       |   | (63     | )                                     | 
|Receivable for common stock purchased                                                                                                  |  |                                       | -       |   |                                       |   | 614     |                                       | 
|Increase (decrease) in operating liabilities:                                                                                          |  |                                       |         |   |                                       |   |         |                                       | 
|Payable for unsettled trades                                                                                                           |  |                                       | -       |   |                                       |   | (1,340  | )                                     | 
|Management fees payable                                                                                                                |  |                                       | -       |   |                                       |   | (7      | )                                     | 
|Prepaid interest from investments                                                                                                      |  |                                       | 779     |   |                                       |   | -       |                                       | 
|Accounts payable and accrued liabilities                                                                                               |  |                                       | (146    | ) |                                       |   | 84      |                                       | 
|Interest payable                                                                                                                       |  |                                       | 2       |   |                                       |   | 1       |                                       | 
|Net cash provided by (used in) operating activities                                                                                    |  |                                       | 937     |   |                                       |   | (5,877  | )                                     | 
|                                                                                                                                       |  |                                       |         |   |                                       |   |         |                                       | 
|Financing activities:                                                                                                                  |  |                                       |         |   |                                       |   |         |                                       | 
|Proceeds from issuance of shares of common stock, net                                                                                  |  |                                       | -       |   |                                       |   | 6,232   |                                       | 
|Stockholder distributions                                                                                                              |  |                                       | (2,772  | ) |                                       |   | (2,773  | )                                     | 
|Treasury stock, net of redemption of common stock                                                                                      |  |                                       | -       |   |                                       |   | (2,113  | )                                     | 
|Borrowings - priority credit line                                                                                                      |  |                                       | 13,522  |   |                                       |   | 4,531   |                                       | 
|Repayments - priority credit line                                                                                                      |  |                                       | (11,687 | ) |                                       |   | -       |                                       | 
|Net cash provided by (used in) financing activities                                                                                    |  |                                       | (937    | ) |                                       |   | 5,877   |                                       | 
|                                                                                                                                       |  |                                       |         |   |                                       |   |         |                                       | 
|Net change in cash and cash equivalents                                                                                                |  |                                       | -       |   |                                       |   | -       |                                       | 
|Cash and cash equivalents, beginning of year                                                                                           |  |                                       | -       |   |                                       |   | -       |                                       | 
|Cash and cash equivalents, end of year                                                                                                 |  | $                                     | -       |   |                                       | $ | -       |                                       | 
|                                                                                                                                       |  |                                       |         |   |                                       |   |         |                                       | 
|Supplemental disclosure of non-cash information:                                                                                       |  |                                       |         |   |                                       |   |         |                                       | 
|Distribution reinvestment plan distribution payable                                                                                    |  | $                                     | -       |   |                                       | $ | 123     |                                       | 
|Cash distribution payable                                                                                                              |  | $                                     | -       |   |                                       | $ | 227     |                                       | 
|Distribution reinvestment plan distribution paid                                                                                       |  | $                                     | 1,324   |   |                                       | $ | 1,532   |                                       | 
|                                                                                                                                       |  |                                       |         |   |                                       |   |         |                                       | 
|Supplemental disclosure of cash flow information:                                                                                      |  |                                       |         |   |                                       |   |         |                                       | 
|Cash interest paid during the year                                                                                                     |  | $                                     | 204     |   |                                       | $ | 32      |                                       | 



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



F-6







VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



SCHEDULE OF INVESTMENTS

(dollars and shares in
thousands)



December 31, 2016





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



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

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

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

| | (d) | 2,500 Class B Units, which are not entitled to an allocation
of profits or losses until the earlier to occur of 9/30/2020 or a change of control of Ansgar Media, LLC.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

| | (i) | On December 6, 2016, the bankruptcy court entered an order
confirming the plan of reorganization of UCI International, LLC according to which the holders of senior unsecured notes will
receive new common stock at the rate of $21.94 per $1,000 par value of notes. The exchange is still in progress.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



F-7







VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



SCHEDULE OF INVESTMENTS

(dollars and shares in
thousands)



December 31, 2015



|Portfolio
    Company                                 |  | Industry                                      |  | Investment
    Coupon Rate,  Maturity Date |  | Principal
    / No. of  Shares |        | Amortized
    Cost |   | Fair
    Value |  | %
    of Net Assets |       
|----------------------------------------------------- |  | --------------------------------------------- |  | ------------------------------------------ |  | ------------------------------ | ------ | ------------------ | - | -------------- |  | ------------------- | ------
|Senior
    Secured First Lien Debt - 31.6% (b)        |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|American Media, Inc.                                  |  | Media: Advertising, Printing &
    Publishing |  | 11.50%, 12/15/2017                         |  | $                              | 1,320  |                    | $ | 1,363          |  | $                   | 1,300 
|Ansgar
    Media, LLC (f)                             |  | Media: Broadcasting & Subscription            |  | 12.00%, 9/8/2017                           |  |                                | 2,000  |                    |   | 2,000          |  |                     | 2,000 
|APX Group, Inc.                                       |  | Services: Consumer                            |  | 6.38%, 12/1/2019                           |  |                                | 825    |                    |   | 825            |  |                     | 796   
|Caesars
    Entertainment Operating Co., Inc. (a) (d) |  | Hotel, Gaming & Leisure                       |  | 11.25%, 6/1/2017                           |  |                                | 860    |                    |   | 751            |  |                     | 639   
|EarthLink Holdings Corp.                              |  | Telecommunications                            |  | 7.38%, 6/1/2020                            |  |                                | 40     |                    |   | 41             |  |                     | 41    
|Endeavour
    International Corp. (d)                 |  | Energy: Oil & Gas                             |  | 12.00%, 3/1/2018                           |  |                                | 525    |                    |   | 551            |  |                     | 525   
|Goodman Networks, Inc.                                |  | Telecommunications                            |  | 12.13%, 7/1/2018                           |  |                                | 800    |                    |   | 837            |  |                     | 216   
|Kratos Defense & Security Solutions, Inc.             |  | Aerospace and Defense                         |  | 7.00%, 5/15/2019                           |  |                                | 1,112  |                    |   | 981            |  |                     | 758   
|Ryerson Inc./Joseph T Ryerson & Son, Inc.             |  | Metals & Mining                               |  | 9.00%, 10/15/2017                          |  |                                | 1,315  |                    |   | 1,355          |  |                     | 1,018 
|Titan International, Inc.                             |  | Automobile                                    |  | 6.88%, 10/1/2020                           |  |                                | 1,500  |                    |   | 1,390          |  |                     | 1,095 
|Toys R Us Property Co
    II, LLC                     |  | Retail                                        |  | 8.50%, 12/1/2017                           |  |                                | 725    |                    |   | 732            |  |                     | 620   
|Sub
    Total Senior Secured First Lien Debt          |  |                                               |  |                                            |  | $                              | 11,022 |                    | $ | 10,826         |  | $                   | 9,008 
|                                                      |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|                                                      |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|Senior
    Secured Second Lien  Debt - 6.3% (b)       |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|Aspect Software, Inc.                                 |  | Telecommunications                            |  | 10.63%, 5/15/2017                          |  | $                              | 1,302  |                    | $ | 1,314          |  | $                   | 1,016 
|Claire's Stores, Inc.                                 |  | Retail                                        |  | 8.88%, 3/15/2019                           |  |                                | 825    |                    |   | 809            |  |                     | 190   
|Endeavour
    International Corp. (d)                 |  | Energy: Oil & Gas                             |  | 12.00%, 6/1/2018                           |  |                                | 725    |                    |   | 708            |  |                     | 8     
|Logan's Roadhouse, Inc.                               |  | Beverage, Food & Tobacco                      |  | 10.75%, 10/15/2017                         |  |                                | 770    |                    |   | 748            |  |                     | 531   
|Saratoga
    Resources, Inc. (d)                      |  | Energy: Oil & Gas                             |  | 12.50%, 7/1/2016                           |  |                                | 885    |                    |   | 912            |  |                     | 44    
|Sub
    Total Senior Secured Second Lien Debt         |  |                                               |  |                                            |  | $                              | 4,507  |                    | $ | 4,491          |  | $                   | 1,789 
|                                                      |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|                                                      |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|Senior
    Unsecured Debt - 22.0% (b)                 |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|APX Group, Inc.                                       |  | Services: Consumer                            |  | 8.75%, 12/1/2020                           |  | $                              | 575    |                    | $ | 556            |  | $                   | 472   
|Caesar's
    Entertainment Corp. (a) (d)              |  | Hotel, Gaming & Leisure                       |  | 10.75%, 2/1/2016                           |  |                                | 495    |                    |   | 451            |  |                     | 126   
|Clear Channel Communications                          |  | Media: Broadcasting & Subscription            |  | 10.00%, 1/15/2018                          |  |                                | 1,400  |                    |   | 1,354          |  |                     | 539   
|Colt
    Defense, LLC (d)                             |  | Aerospace and Defense                         |  | 8.75%, 11/15/2017                          |  |                                | 1,253  |                    |   | 1,029          |  |                     | 132   
|DynCorp International, Inc.                           |  | Aerospace and Defense                         |  | 10.38%, 7/1/2017                           |  |                                | 1,135  |                    |   | 1,143          |  |                     | 846   
|EarthLink Holdings Corp.                              |  | Telecommunications                            |  | 8.88%, 5/15/2019                           |  |                                | 279    |                    |   | 274            |  |                     | 284   
|Gymboree Corp.                                        |  | Retail                                        |  | 9.13%, 12/1/2018                           |  |                                | 810    |                    |   | 774            |  |                     | 182   
|Nuverra Environmental Solutions, Inc.                 |  | Environmental Industries                      |  | 9.88%, 4/15/2018                           |  |                                | 1,325  |                    |   | 1,351          |  |                     | 457   
|Ryerson Inc./Joseph T Ryerson & Son, Inc.             |  | Metals & Mining                               |  | 11.25%, 10/15/2018                         |  |                                | 1,500  |                    |   | 1,528          |  |                     | 1,117 
|Seitel, Inc.                                          |  | Energy: Oil & Gas                             |  | 9.50%, 4/15/2019                           |  |                                | 1,575  |                    |   | 1,574          |  |                     | 1,016 
|Suntech
    Power Holdings Company, Ltd. (a) (c) (d)  |  | Environmental Industries                      |  | 3.00%, 5/15/2013                           |  |                                | 100    |                    |   | 109            |  |                     | -     
|Toys R Us, Inc.                                       |  | Retail                                        |  | 10.38%, 8/15/2017                          |  |                                | 860    |                    |   | 820            |  |                     | 619   
|UCI International, Inc.                               |  | Automobile                                    |  | 8.63%, 2/15/2019                           |  |                                | 1,400  |                    |   | 1,367          |  |                     | 483   
|Sub
    Total Senior Unsecured Debt                   |  |                                               |  |                                            |  | $                              | 12,707 |                    | $ | 12,330         |  | $                   | 6,273 
|                                                      |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|Senior
    Subordinated Debt - 5.2% (b)               |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|Claire's Stores, Inc.                                 |  | Retail                                        |  | 10.50%, 6/1/2017                           |  | $                              | 715    |                    | $ | 713            |  | $                   | 357   
|DJO Finance, LLC                                      |  | Healthcare & Pharmaceuticals                  |  | 10.75%, 4/15/2020                          |  |                                | 1,265  |                    |   | 1,322          |  |                     | 1,139 
|QuickSilver
    Resources, Inc. (d)                   |  | Energy: Oil & Gas                             |  | 7.13%, 4/1/2016                            |  |                                | 890    |                    |   | 843            |  |                     | -     
|Sub
    Total Senior Subordinated Debt                |  |                                               |  |                                            |  | $                              | 2,870  |                    | $ | 2,878          |  | $                   | 1,496 
|                                                      |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|Equity
    Securities - 11.3% (b)                     |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|Affinion
    Group, Inc. (d)                          |  | Media: Advertising, Printing & Publishing     |  |                                            |  |                                | 13     |                    | $ | 689            |  | $                   | 816   
|Ansgar
    Media, LLC (d) (f)                         |  | Media: Broadcasting & Subscription            |  |                                            |  |                                | -      |                    |   | -              |  |                     | 2,102 
|Education
    Management, LLC (d)                     |  | Services: Consumer                            |  |                                            |  |                                | 2,530  |                    |   | 5              |  |                     | 177   
|NII
    Holdings, Inc.(a) (d)                         |  | Telecommunications                            |  |                                            |  |                                | 17     |                    |   | 768            |  |                     | 84    
|Total Common Stock                                    |  |                                               |  |                                            |  |                                |        |                    |   | 1,462          |  |                     | 3,179 
|                                                      |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|Relativity
    Media, LLC (d) (e)                     |  | Media: Broadcasting &
    Subscription        |  |                                            |  |                                | 855    |                    |   | 10,400         |  |                     | -     
|Total Preferred Stock                                 |  |                                               |  |                                            |  |                                |        |                    |   | 10,400         |  |                     | -     
|                                                      |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|Education
    Management LLC (d)                      |  | Services: Consumer                            |  |                                            |  |                                | 1,554  |                    |   | 876            |  |                     | 31    
|Total Warrants                                        |  |                                               |  |                                            |  |                                |        |                    |   | 876            |  |                     | 31    
|                                                      |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|Sub
    Total Equity Securities                       |  |                                               |  |                                            |  |                                |        |                    | $ | 12,738         |  | $                   | 3,210 
|                                                      |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|U.S.
    Government Securities -17.4% (b)             |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|U.S. Treasury Bill                                    |  |                                               |  | 0.18%, 4/28/2016                           |  | $                              | 4,950  |                    | $ | 4,947          |  | $                   | 4,946 
|Sub
    Total U.S. Government Securities              |  |                                               |  |                                            |  | $                              | 4,950  |                    | $ | 4,947          |  | $                   | 4,946 
|                                                      |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|Investments
    - Money Market - 21.8% (b)            |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|Investments - Morgan Stanley Money Market             |  |                                               |  | 0.01%                                      |  | $                              | 3,191  |                    | $ | 3,191          |  | $                   | 3,191 
|Investments - U.S. Bank Money Market                  |  |                                               |  | 0.02%                                      |  |                                | -      |                    |   | -              |  |                     | -     
|Investments - Wells Fargo
    Money Market            |  |                                               |  | 0.01%                                      |  |                                | 3,019  |                    |   | 3,019          |  |                     | 3,019 
|Sub
    Total Investments - Money Market              |  |                                               |  |                                            |  | $                              | 6,210  |                    | $ | 6,210          |  | $                   | 6,210 
|                                                      |  |                                               |  |                                            |  |                                |        |                    |   |                |  |                     |       
|TOTAL
    INVESTMENTS - 115.6% (b)                    |  |                                               |  |                                            |  |                                |        |                    | $ | 54,420         |  | $                   | 32,932



| | (a) | Represents a non-qualifying investment as defined under
Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying investments represent 2.6% of the Company's portfolio
at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Percentages are based on net assets of $28,490 as of December
31, 2015.
| | --- | -----------------------------------------------------------------------

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

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

| | (e) | The Class E Units are entitled to PIK dividends at the
rate of 12.5% per annum, payable in additional Class E Units. The PIK dividends accrue quarterly in advance on the first day of
each quarter, but are only issuable immediately prior to the mandatory redemption of the Class E Units, and are not issuable upon
a conversion of the Class E Units to other equity interests of the issuer. We stopped accruing dividends starting July 30, 2015
when Relativity Media, LLC and certain of its subsidiaries filed voluntarily petitions under Chapter 11 of the United States Bankruptcy
Code.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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



F-8







VII PEAKS CO-OPTIVIST INCOME BDC II, INC.



NOTES TO FINANCIAL STATEMENTS



December 31, 2016



Note 1.  Nature of Operations



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



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



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



Our proprietary “Co-Optivist”TM
approach entails investment in the corporate debt and equity-linked debt securities of target companies, or Target Investments,
in conjunction with proactively engaging the target companies’ management. We acquire Target Investments whose debt securities
trade on the over-the-counter market for institutional loans at a discount to their par redemption value, and will be subject to
a “redemption event” within (on average) 24 months. We also invest directly in debt of private companies. We define
a “redemption event” as a maturity event or a put event (where investors in the target company’s debt security
can have a redemption right at a pre-determined price). We hold such debt an average of 12 – 18 months, during
which time we anticipate working actively with the target company’s management to effect and/or participate in a restructuring
or exchange of the invested securities for new securities.



We make investments in
target companies that meet our investment criteria. The size of an individual investment will vary based on numerous factors, including
the amount of funds raised in our offering. However, assuming we raise the maximum offering amount of $750.0 million, we expect
to hold at least 50 investments, and we anticipate that the minimum investment size will be approximately $250,000. We do not anticipate
being heavily invested in any one industry, and generally, we do not expect to invest in more than two different classes of debt
of the same target company. We invest in debt and equity-linked debt of target companies with a minimum enterprise value of $200.0
million and whose debt and equity-linked debt is actively traded in the secondary loan market. We also make senior secured direct
loan investments in companies with a minimum enterprise value of $5.0 million. For such senior secured direct loan investments,
we may receive equity securities to boost overall returns. We expect our portfolio to be predominantly composed of fixed-rate high-yield,
senior secured term loan 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 shareholders
the ability to receive distributions as well as the potential capital appreciation resulting from the restructuring of the debt
of our target companies. To the extent we have distributable income available we anticipate making distributions on a monthly basis
to our shareholders.



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



F-9







On August 9, 2011, we filed
a registration statement on Form N-2 to sell up to 75,000,000 shares of common stock, $0.001 par value per share, at an initial
public offering price of $10.00 per share. The registration statement was declared effective by the SEC on March 1, 2012. We commenced
operations when we raised gross offering proceeds of over $1.0 million, all of which was from persons who were not affiliated with
us or our Manager by one year from the date the registration statement was declared effective by the SEC. Prior to the successful
satisfaction of that condition, all subscription payments were placed in an account held by the escrow agent, UMB Bank, N.A., in
trust for the benefit of our subscribers, pending release to us. We achieved the minimum offering requirement on July 10, 2012
and commenced operations on such date. As of December 31, 2016, we issued 6.3 million shares of common stock, including 0.5 million
shares under our distribution reinvestment plan (“DRIP”), less 0.3 million shares redeemed under our tender offer.
Gross proceeds from our common stock issuances total $62.6 million, including $4.7 million under our DRIP less $2.9 million paid
to redeem shares in our prior quarterly tender offers.



Note 2.  Summary of Significant Accounting Policies



Basis of Presentation



The financial
statements of the Fund included herein were prepared in conformity with accounting principles generally accepted in the
United States of America ("U.S. GAAP") and pursuant to the requirements for reporting on Form 10-K and Articles 6
or 10 of Regulation S-X. The Fund is a single reportable segment.



Use of Estimates in the Preparation of Financial Statements



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



Investments – Money Market



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



Investment Classification



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



Organizational and Offering Costs



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



U.S. Federal Income Taxes



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



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



F-10







New Accounting
Pronouncements



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



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





In August 2014,
FASB issued ASU No. 2014-15, Presentation of Financial Statements- Going Concern (Subtopic 205-40) ("ASU 2014-15"). ASU
2014-15 requires management to assess an entity's ability to continue as a going concern by incorporating and expanding upon
certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of
the term substantial doubt, (2) require an evaluation every reporting period, including interim periods, (3) provide
principles for considering the mitigating effect of Management's plans, (4) require certain disclosures when substantial
doubt is alleviated as a result of consideration of Management's plans, (5) require an express statement and other
disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date
that the financial statements are issued (or available to be issued). The amendments in ASU 2014-15 are effective for the
annual period ending after December 15, 2016, and for any annual periods and interim periods thereafter. We adopted the
provisions of ASU 2014-15 in 2016. The adoption of ASU 2014-15 did not require any additional disclosures in our
financial statements for the year ended December 31, 2016.





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



Revenue Recognition



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



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





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



For loans and debt
securities with contractual PIK interest, which represents contractual interest accrued and added to the principal balance, we
generally will not accrue PIK interest for accounting purposes if the portfolio company valuation indicates that such PIK interest
is not collectible. We do not accrue as a receivable interest on loans and debt securities for accounting purposes if we have reason
to doubt our ability to collect such interest. Original issue discounts, market discounts or premiums are accreted or amortized
using the effective interest method as interest income. We record prepayment premiums on loans and debt securities as interest
income when we receive such amounts.



Our total investment income
was $3.1 million for the year ended December 31, 2016, as compared to $3.5 million for the year ended December 31, 2015 and $3.3
million for the year ended December 31, 2014, respectively. The decrease in total investment income for the year ended December
31, 2016 as compared to the year ended December 31, 2015 was primarily due to the decrease in fee income in 2016 as compared to
2015, because in 2015 the 5.0% origination fee was earned and immediately accrued on our investment in Relativity Media, LLC.
The fee income earned on investments in 2016 was lower and is being amortized over the term of the loan instead of realized upon
receipt. At December 31, 2016, the weighted average coupon yield was 8.6%, as compared to 7.6% at December 31, 2015 and 10.7%
at December 31, 2014. This coupon yield is for the non-defaulted and non-equity positions. Based on current and prior three quarter’s
net assets, average net assets as of December 31, 2016 were $31.8 million, as compared to $39.2 and $36.7 million for the years
ended December 31, 2015 and 2014, respectively.



F-11







For the year ended December
31, 2016, thirteen of the investments in the portfolio did not accrue interest as either the investment is an equity security or
the issuers were in default of the coupon payment for more than the thirty-day grace period. Interest income was accrued through
the date of the last coupon payment received for the debt investments. The following table presents those thirteen investments:



|Portfolio Company                         |  | Asset Type                      |  | Investment Coupon Rate |       |   | Maturity Date
|----------------------------------------- |  | ------------------------------- |  | ---------------------- | ----- | - | -------------
|Affinion Group, Inc.(2)                   |  | Equity – Common Stock           |  |                        | -     |   |              
|Ansgar Media, LLC - Class B Units         |  | Equity – Preferred Stock        |  |                        | -     |   |              
|Aspect Software, Inc. (3)                 |  | Equity – Common Stock           |  |                        | -     |   |              
|Aspire Holdings (1)                       |  | Equity – Common Stock           |  |                        | -     |   |              
|Education Management, LLC                 |  | Equity – Common Stock           |  |                        | -     |   |              
|Education Management, LLC (4)             |  | Warrant                         |  |                        | -     |   |              
|GeoCommerce, Inc.                         |  | Warrant                         |  |                        | -     |   |              
|Logan's Roadhouse, Inc. (7)               |  | Senior Secured Second Lien Debt |  |                        | 10.75 | % |              
|NII Holdings, Inc.(5)                     |  | Equity – Common Stock           |  |                        | -     |   |              
|Nima, LLC                                 |  | Warrant                         |  |                        | -     |   |              
|Nuverra Environmental Solutions, Inc. (6) |  | Warrant                         |  |                        | -     |   |              
|Saratoga Resources, Inc.                  |  | Senior Secured Second Lien Debt |  |                        | 12.50 | % |              
|UCI International, Inc.                   |  | Senior Unsecured Debt           |  |                        | 8.63  | % |              





|(1) | Converted from exchange of 12.00% Endeavour International Corp first lien bonds.                                                                                                                                                                                                                                                                                                         
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Received in exchange of 13.50% senior subordinated bonds.                                                                                                                                                                                                                                                                                                                                
|(3) | Converted from exchange of 3.00% PIK senior unsecured convertible notes.                                                                                                                                                                                                                                                                                                                 
|(4) | Received in exchange of 15.00% Cash/PIK bonds.                                                                                                                                                                                                                                                                                                                                           
|(5) | Received in exchange of 10.00% senior unsecured debt.                                                                                                                                                                                                                                                                                                                                    
|(6) | Received early exchange fees in form of warrants for participating in the exchange offer.                                                                                                                                                                                                                                                                                                
|(7) | The company filed for bankruptcy in Delaware on August 8, 2016 and is in the final stages of restructuring. The Fund participated in DIP financing as part of company’s restructuring process during bankruptcy and has received PIK Second Lien Exit Facility T/L in exchange. The Fund also participated in Equity exchange which is still in process and is expected to complete soon.



The following table presents
four investments that were completely written off during the year ended December 31, 2016:



|Portfolio Company                     |  | Asset Type                      |  | Investment Coupon Rate |       |   | Maturity Date
|------------------------------------- |  | ------------------------------- |  | ---------------------- | ----- | - | -------------
|Aspect Software, Inc.                 |  | Senior Secured Second Lien Debt |  |                        | 10.63 | % |              
|Suntech Power Holdings Company, Ltd.  |  | Senior Unsecured Debt           |  |                        | 3.00  | % |              
|QuickSilver Resources, Inc.           |  | Senior Subordinated Debt        |  |                        | 7.13  | % |              
|Relativity Media, LLC - Class E Units |  | Equity – Preferred Stock        |  |                        | -     |   |              



Aspect Software, Inc. filed
for bankruptcy and hence defaulted on their 10.63% notes. As part of restructuring program, the company offered its noteholders
to participate in the rights offering, which in turn would convert to equity. The 10.63% notes were hence written off completely.
There is no scope of recovery on the Suntech Power Holdings Company, Ltd and Quicksilver Resources, Inc., hence these two have
also been written off. Relativity Media, LLC, the entity in which we made our original investment, was dissolved as part of the
Relativity Media reorganization process during the year ended December 31, 2016. The investment was removed from the Schedule of
Investments and the loss of $10.4 million was realized. The company has now emerged out of bankruptcy as a new operating company.



Note 3. Valuation of Portfolio Investments



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



F-12







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



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



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



Level 3: Unobservable inputs for
the asset or liability.



The investment portfolio
is recorded on a trade date basis. The Fund determines the net asset value of its investment portfolio each quarter. Securities
that are publicly-traded are valued at the reported closing price on the valuation date. Twenty of the forty-seven investments
were valued using the closing market price at period end December 31, 2016.



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



The following table presents
investments that were not valued using the closing market price, as of December 31, 2016:



|Portfolio Company                                       |  | Asset Type                      |  |  | Investment  Coupon Rate |       |   | Maturity Date
|------------------------------------------------------- |  | ------------------------------- |  |  | ----------------------- | ----- | - | -------------
|Ansgar Media, LLC - Class B Units                       |  | Equity – Preferred Stock        |  |  |                         | -     |   |              
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |  |                         | 12.00 | % |              
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |  |                         | 12.00 | % |              
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |  |                         | 12.00 | % |              
|Ansgar Media, LLC                                       |  | Senior Secured First Lien Debt  |  |  |                         | 12.00 | % |              
|Aspire Holdings (1)                                     |  | Equity – Common Stock           |  |  |                         | -     |   |              
|Aspect Software, Inc. (2)                               |  | Equity – Common Stock           |  |  |                         | -     |   |              
|Claire’s Stores, Inc. Term Loan. (3)                    |  | Senior Secured First Lien Debt  |  |  |                         | 9.00  | % |              
|CLSIP, LLC Term Loan (3)                                |  | Senior Secured First Lien Debt  |  |  |                         | 9.00  | % |              
|Claire’s (Gibraltar) Holdings Limited Term Loan (3)     |  | Senior Unsecured Debt           |  |  |                         | 9.00  | % |              
|Colt Defense, LLC (4)                                   |  | Senior Unsecured Debt           |  |  |                         | 8.00  | % |              
|Education Management, LLC                               |  | Equity – Common Stock           |  |  |                         | -     |   |              
|Education Management, LLC                               |  | Warrant                         |  |  |                         | -     |   |              
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |  |                         | 12.00 | % |              
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |  |                         | 12.00 | % |              
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |  |                         | 12.00 | % |              
|GeoCommerce, Inc.                                       |  | Senior Secured First Lien Debt  |  |  |                         | 12.00 | % |              
|GeoCommerce, Inc.                                       |  | Warrant                         |  |  |                         | -     |   |              
|Logan’s Roadhouse, Inc. (5)                             |  | Senior Secured Second Lien Debt |  |  |                         | 10.75 | % |              
|Logan’s Roadhouse, Inc. PIK Exit Facility Term Loan (5) |  | Senior Secured Second Lien Debt |  |  |                         | 9.50  | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Senior Secured First Lien Debt  |  |  |                         | 12.00 | % |              
|Nima, LLC                                               |  | Warrant                         |  |  |                         | -     |   |              
|Nuverra Environmental Solutions, Inc.                   |  | Senior Secured Second Lien Debt |  |  |                         | 12.50 | % |              
|Nuverra Environmental Solutions, Inc.                   |  | Warrant                         |  |  |                         | -     |   |              



|(1) | Converted from exchange of 12.00% Endeavour International Corp, senior secured first lien debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The original 10.63% senior secured second lien notes due on May 15, 2017 defaulted. As part of Aspect’s bankruptcy and planned reorganization process, the Fund participated in a rights offering to purchase a new 3.00% PIK senior unsecured convertible note maturing on May 23, 2023 in an effort to facilitate recovery of its previous investment in the senior secured lien notes in Aspect. On November 25, 3.00% PIK senior unsecured convertible notes were exchanged out for mandatory conversion to shares of common stock of Aspect Software Parent, Inc. at a rate of 1/30 i.e. one common share per $30.00 in principal amount of notes outstanding.
|(3) | On September 20, 2016, all of 10.50% senior subordinated notes and 8.88% senior secured second lien notes were exchanged for 9.00% of Claire’s Stores, Inc. Term Loan, CLSIP Term Loans and of Claire’s Gibralter Term Loans.                                                                                                                                                                                                                                                                                                                                                                                                                                      



F-13







|(4) | On January 19, 2016, there was a mandatory exchange offer to exchange all of the 8.75% senior unsecured notes to 8.00% PIK third lien notes.                                                                                                                                                                                                                                             
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | The company filed for bankruptcy in Delaware on August 8, 2016 and is in the final stages of restructuring. The Fund participated in DIP financing as part of company’s restructuring process during bankruptcy and has received PIK Second Lien Exit Facility T/L in exchange. The Fund also participated in Equity exchange which is still in process and is expected to complete soon.



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



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



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



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



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



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



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



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



|                                |  | Level 1 |       |  | Level 2 |   |        | Level 3 |  |   | Total | 
|------------------------------- |  | ------- | ----- |  | ------- | - | ------ | ------- |  | - | ----- | 
|Investments – Money Market      |  | $       | 6,210 |  |         | $ | —      |         |  | $ | —     | 
|U.S. Government Securities      |  |         | —     |  |         |   | 4,946  |         |  |   | —     | 
|Senior Secured First Lien Debt  |  |         | —     |  |         |   | 6,483  |         |  |   | 2,525 | 
|Senior Secured Second Lien Debt |  |         | —     |  |         |   | 1,781  |         |  |   | 8     | 
|Senior Unsecured Debt           |  |         | —     |  |         |   | 6,141  |         |  |   | 132   | 
|Senior Subordinated Debt        |  |         | —     |  |         |   | 1,496  |         |  |   | —     | 
|Equity Securities               |  |         | —     |  |         |   | 84     |         |  |   | 3,126 | 
|Total                           |  | $       | 6,210 |  |         | $ | 20,931 |         |  | $ | 5,791 | 





F-14







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



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



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



There were two transfers
between levels for the year ended December 31, 2015. One transfer was Affinion Group, Inc.’s, 13.5% notes due August 15,
2018, which were restructured by the company to a non-interest bearing private equity holding and hence transferred to Level 3.
The other transfer was Colt Defense, LLC’s 8.75% senior unsecured notes, due November 15, 2017, which were exchanged for
8.00% senior unsecured notes due July 12, 2021 at $105.08 for every $1,000 of old notes. Although the restructuring process completed
after December 31, 2015, the plan for reorganization was already proposed prior to year-end.



During the year ended December
31, 2015, the following were the transfers in or out of levels (dollars in thousands):



|                         |  | Level 1 |   |  | Level 2 |   |      | Level 3 |  |   | Total | 
|------------------------ |  | ------- | - |  | ------- | - | ---- | ------- |  | - | ----- | 
|Senior Unsecured Debt    |  | $       | — |  |         | $ | (132 | )       |  | $ | 132   | 
|Senior Subordinated Debt |  |         | — |  |         |   | (816 | )       |  |   | —     | 
|Equity Securities        |  |         | — |  |         |   | —    |         |  |   | 816   | 
|Total                    |  | $       | — |  |         | $ | (948 | )       |  | $ | 948   | 



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



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



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



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



F-15







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



Changes in Level 3 assets
measured at fair value for the year ended December 31, 2015 are as follows (dollars in thousands):



|                                |  | Fair ValueatDecember 31, 2014 |       |  | Transfers in |   |     | Purchases(SalesandSettlement)(1) |  |   | Amortization and  Accretion of Fixed Income Premiums  and Discounts |  |  | Realized and Unrealized Gains (Losses) |     |   | Fair ValueatDecember 31, 2015 |   |        | Change inUnrealizedGains
                                                                                      and(Losses) forInvestmentsheld as ofDecember 31, 2015 | 
|------------------------------- |  | ----------------------------- | ----- |  | ------------ | - | --- | -------------------------------- |  | - | ------------------------------------------------------------------- |  |  | -------------------------------------- | --- | - | ----------------------------- | - | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Senior Secured First Lien Debt  |  | $                             | 578   |  |              | $ | —   |                                  |  | $ | 2,000                                                               |  |  | $                                      | —   |   |                               | $ | (53    | )                                                                                                                                                                    | 
|Senior Secured Second Lien Debt |  |                               | 239   |  |              |   | —   |                                  |  |   | —                                                                   |  |  |                                        | —   |   |                               |   | (231   | )                                                                                                                                                                    | 
|Senior Unsecured Debt           |  |                               | —     |  |              |   | 132 |                                  |  |   | —                                                                   |  |  |                                        | (43 | ) |                               |   | 43     |                                                                                                                                                                      | 
|Equity Securities               |  |                               | 874   |  |              |   | 816 |                                  |  |   | 10,400                                                              |  |  |                                        | (18 | ) |                               |   | (8,946 | )                                                                                                                                                                    | 
|Total                           |  | $                             | 1,691 |  |              | $ | 948 |                                  |  | $ | 12,400                                                              |  |  | $                                      | (61 | ) |                               | $ | (9,187 | )                                                                                                                                                                    | 



| | (1) | Includes purchases of new investments, effects of refinancing and restructurings, premium and discount
accretion and amortization, PIK interest, net proceeds from investments sold and principal payments received.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Realized and unrealized
gains and losses are included in net realized gain (loss) from investments and net unrealized appreciation (depreciation) on investments
in the statements of operations. The change in unrealized depreciation for Level 3 investments still held as of December 31, 2015
of $9.2 million is included in net unrealized appreciation (depreciation) on investments in the statements of operations for the
year ended December 31, 2015.



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



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





As part of liquidation
analysis, the Fund performs a Leveraged Buyout Analysis of its Portfolio Companies and calculates asset coverage and recovery value
for each individual loan.





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



|                                |  |            |       |  |                     |             |                    |                                           |      |   |       | Range   | 
|------------------------------- |  | ---------- | ----- |  | ------------------- | ----------- | ------------------ | ----------------------------------------- | ---- | - | ----- | ------- | 
|                                |  | Fair Value |       |  | Valuation Technique |             | Unobservable Input |                                           | Mean |   |       | Minimum | 
|Senior Secured First Lien Debt  |  | $          | 2,525 |  |                     | Liquidation |                    | Transaction Value                         |      | $ | 2,525 |         | 
|Senior Secured Second Lien Debt |  |            | 8     |  |                     | Liquidation |                    | Transaction Value                         |      |   | 8     |         | 
|Senior Unsecured Debt           |  |            | 132   |  |                     | Liquidation |                    | Transaction Value                         |      |   | 132   |         | 
|Equity Securities               |  |            | 3,126 |  |                     | Liquidation |                    | Transaction Value / Discounted Cash Flows |      |   | 9,155 |         | 
|Total                           |  | $          | 5,791 |  |                     |             |                    |                                           |      |   |       |         | 



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



F-16







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



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



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



|                                |  | Investments at Amortized Cost |        |  | Investments at Fair Value |   |        | Fair Value Percentage of  Total Portfolio | 
|------------------------------- |  | ----------------------------- | ------ |  | ------------------------- | - | ------ | ----------------------------------------- | 
|Investments – Money Market      |  | $                             | 6,210  |  |                           | $ | 6,210  |                                           | 
|U.S. Government Securities      |  |                               | 4,947  |  |                           |   | 4,946  |                                           | 
|Senior Secured First Lien Debt  |  |                               | 10,826 |  |                           |   | 9,008  |                                           | 
|Senior Secured Second Lien Debt |  |                               | 4,491  |  |                           |   | 1,789  |                                           | 
|Senior Unsecured Debt           |  |                               | 12,330 |  |                           |   | 6,273  |                                           | 
|Senior Subordinated Debt        |  |                               | 2,878  |  |                           |   | 1,496  |                                           | 
|Equity Securities               |  |                               | 12,738 |  |                           |   | 3,210  |                                           | 
|Total                           |  | $                             | 54,420 |  |                           | $ | 32,932 |                                           | 



Note 4.  Related Party Transactions



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



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



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



Due from related party
consists of $67,000 of true up for management fees from writing down certain portfolio investments at the end of a quarter in prior
quarters, $67,000 in Blue Sky state filing fees by the Fund instead of our Manager, $13,000 in allocation of the Directors and
Officers insurance policy costs to our Manager, and $90,000 in expenses related to legal and other operational costs allocated
to our Manager instead of the Fund.



At December 31, 2016, $70,000 of the $76,000 of prepaid expenses was prepaid management fees for the first quarter of 2017.



Due diligence
fees received by the Fund from the borrowers related to the Fund’s direct lending transactions are remitted to our
Manager, VII Peaks Capital, LLC, as the collateral and administrative agent (Agent) for the loans. Due diligence fees
received are not revenues or expenses of the Fund and therefore are not reflected in the financial statements and such fees
for 2016 totaled $475,000.



Investment Advisory Agreement



The Fund has entered into
an investment advisory agreement with the Manager to manage the Fund’s investment activities. Pursuant to the investment
advisory agreement, the Manager implements the Fund’s business strategy on a day-to-day basis and performs certain services
for us, subject to oversight by our Board of Directors, or a committee thereof. The Manager is responsible for, among other duties,
determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing
asset management duties. The initial investment advisory agreement was signed on August 20, 2013 and was effective for two years.
The agreement must be re-approved annually thereafter by a majority of the non-interested members of the Board of Directors. On
August 22, 2016, the non-interested members of the Board of Directors re-approved the agreement between the Manager and the Fund
under the agreement’s existing terms.



F-17







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 $100.0 million; 1.75% of net assets between $100.0 million and $250.0
million; and 1.5% of net assets over $250.0 million. For the years ended December 31, 2016, 2015 and 2014, the Fund incurred $0.6
million, $0.8 million and $0.7 million of base management fees, respectively.



The
incentive fee has two parts. The first part, the subordinated incentive fee on income, is calculated and payable quarterly in arrears
based upon the Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter. The subordinated
incentive fee on income is 20% of pre-incentive net investment income subject to a quarterly return to investors, expressed as
a rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 2.0% (8.0% annualized).
The second part of the incentive fee, the incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated
investments from the portfolio and is determined and payable in arrears as of the end of each calendar year (or upon termination
of the investment advisory agreement). This fee equals 20% of the Fund’s incentive fee capital gains, which will equal the
Fund’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed
net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any
previously paid capital gains and incentive fees. For the years
ended December 31, 2016, 2015 and 2014, the Fund did not incur any incentive fees related to net investment income or capital gains.



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



Under the investment advisory
agreement, the Manager bears all offering and organizational expenses. Pursuant to the terms of the investment advisory agreement,
the Fund has agreed to reimburse the Manager for any such organizational and offering expenses incurred by the Manager not to exceed
1.5% of the gross subscriptions raised by the Fund over the course of the offering period. From each sale of common stock, the
Fund pays the Manager the lesser of 1.5% of the gross offering proceeds or the amount of unreimbursed offering and organizational
expenses incurred by the Manager. The Fund expenses organizational and offering costs as they become payable to the Manager under
the investment advisory agreement.



Administration Agreement



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



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



F-18







Note 5.  Common Stock



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



On July 10, 2012, the Fund had raised sufficient
proceeds to break escrow on its IPO and through December 31, 2016, the Fund has sold 6.6 million shares of common stock for gross
proceeds of $65.5 million including the purchases made by the Manager.



During the year ended December 31, 2016, the
Fund did not sell any shares of common stock as its prospectus was not effective. Also, for the year ended December 31, 2016, there
we no treasury shares repurchased.



Note 6. Borrowings



Wells Fargo Credit Facility



On August 4, 2015, the Fund entered an agreement
with Wells Fargo Advisors, LLC for a revolving line of credit. The amount the Fund can borrow is based upon the value of cash deposited
in an account at Wells Fargo Advisors, LLC and the treasury notes that Wells Fargo purchases, which serve as collateral for the
loan. On August 27, 2015, the Fund initially drew down $2.0 million. As of December 31, 2015, the outstanding balance was $4.5
million. As of December 31, 2016, the outstanding balance under this credit line was $6.4 million. The interest rate on the outstanding
balance is a negotiated rate based on the Fund’s assets under management with Wells Fargo Advisors, LLC and is currently
3.25%. The term of the line of credit is indefinite and may be terminated by the Fund or Wells Fargo Advisors, LLC at any
time.



Morgan Stanley Credit Facility



On September 10, 2015,
the Fund entered an agreement with Morgan Stanley Private Bank, N.A. The amount the Fund can borrow is based upon the value of
cash deposited in an account at Morgan Stanley Private Bank, N.A., which serves as a collateral for the loan. The maximum amount,
which the Fund may borrow under the line of credit, is $1.8 million. The line was paid off during the second quarter and the account
was closed as of June 30, 2016.



Note 7.  Income Taxes



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



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



Note 8.  Earnings (Loss) Per Share



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



The following information sets forth the computation
of the weighted average basic and diluted net increase (decrease) in net assets per share from operations for the years ended December
31, 2016, 2015 and 2014 (dollars in thousands except share and per share amounts):



|                                                                          |  | For the Year Ended December 31, |           |  | For the Year Ended December 31, |   |           | For the Year Ended December 31, | 
|------------------------------------------------------------------------- |  | ------------------------------- | --------- |  | ------------------------------- | - | --------- | ------------------------------- | 
|                                                                          |  | 2016                            |           |  | 2015                            |   |           | 2014                            | 
|Basic and diluted:                                                        |  |                                 |           |  |                                 |   |           |                                 | 
|Net increase (decrease) in net assets resulting from operations           |  | $                               | 7,614     |  |                                 | $ | (13,359   | )                               | 
|Weighted average common shares outstanding                                |  |                                 | 6,256,208 |  |                                 |   | 6,077,127 |                                 | 
|Net increase (decrease) in net assets resulting from operations per share |  | $                               | 1.22      |  |                                 | $ | (2.20     | )                               | 



The Fund had no
potentially dilutive securities as of December 31, 2016, 2015 or 2014, resulting in the same number of shares for basic and diluted.



F-19







Note 9. Tender Offer Program



We do not currently intend
to list our shares on any securities exchange and do not expect a public market for them to develop in the foreseeable future.
Therefore, shareholders should not expect to be able to sell their shares promptly or at a desired price. Beginning with the fourth
calendar quarter of 2013, and on a quarterly basis through June 30, 2015, the Board of Directors approved a tender offer to repurchase
shares of our common stock at a price equal to 90% of our offering price on the date of repurchase. In the third quarter of 2015,
the Board of Directors decided to suspend the repurchase program, as the Fund was not raising any new capital. When a tender offer
is approved by the Board of Directors, we intend to limit the number of shares to be repurchased during any calendar year to 20%
of the weighted average number of shares outstanding in the prior calendar year, or 5.0% in each quarter, though the actual number
of shares that we offer to repurchase may be less considering the limitations noted above. We will offer to repurchase such shares
on each date of repurchase at a price equal to 90% of our offering price. For the year ended December 31, 2016, no tender offer
was approved by the Board of Directors.



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



|For the Three Months Ended |  | Repurchase Date      |  | Shares Repurchased |         |  | Percent of Shares Tendered that were Repurchased |  |     | Repurchase Price Per Share |  |   | Aggregate Consideration For Repurchased Shares (‘000s)* | 
|-------------------------- |  | -------------------- |  | ------------------ | ------- |  | ------------------------------------------------ |  | --- | -------------------------- |  | - | ------------------------------------------------------- | 
|December 13, 2013          |  | December 12, 2013    |  |                    | 548     |  |                                                  |  | 100 | %                          |  | $ | 9.135                                                   | 
|March 31, 2014             |  | March 14, 2014       |  |                    | 550     |  |                                                  |  | 100 | %                          |  |   | 9.135                                                   | 
|June 30, 2014              |  | June 27, 2014        |  |                    | 34,025  |  |                                                  |  | 100 | %                          |  |   | 9.135                                                   | 
|September 30, 2014         |  | September 30, 2014   |  |                    | 38,482  |  |                                                  |  | 100 | %                          |  |   | 9.000                                                   | 
|December 31, 2014          |  | December 30, 2014    |  |                    | 6,061   |  |                                                  |  | 100 | %                          |  |   | 8.775                                                   | 
|March 31, 2015             |  | March 30, 2015       |  |                    | 5,811   |  |                                                  |  | 100 | %                          |  |   | 8.775                                                   | 
|June 30, 2015              |  | June 29, 2015        |  |                    | 215,935 |  |                                                  |  | 69  | %                          |  |   | 8.775                                                   | 
|September 30, 2015         |  | September 30, 2015** |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|December 31, 2015          |  | December 31, 2015**  |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|March 31, 2016             |  | March 31, 2016**     |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|June 30, 2016              |  | June 30, 2016**      |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|September 30, 2016         |  | September 30, 2016** |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|December 31, 2016          |  | December 31, 2016**  |  |                    | —       |  |                                                  |  | —   |                            |  |   | —                                                       | 
|                           |  |                      |  |                    |         |  |                                                  |  |     |                            |  |   |                                                         | 



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



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



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



Note 10.  Distributions



Subject to our Board of
Director’s discretion and applicable legal restrictions, we have historically declared and paid ordinary cash distributions
at a rate equal to 7.35% of our latest offering price per share. Since the distribution paid to shareholders on September 30, 2015,
with a record date of August 30, 2015, we have paid distributions monthly. Prior to the September 30, 2015, we paid distributions
on a semi-monthly basis. We changed to paying distributions monthly in order to reduce costs. We may fund our cash distributions
to shareholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from
operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, and dividends or
other distributions paid to us on account of preferred and common equity investments in portfolio companies. We have not established
limits on the amount of funds we may use from available sources to make distributions.



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



F-20







As of December 31, 2016,
the Fund had not accrued any stockholder distributions that were unpaid. As of December 31, 2015, the Fund had accrued $0.3 million
in stockholder distributions that were unpaid. All amounts with record dates in December 2015 and paid in January 2016 had been
accrued in the December 31, 2015 financial statements.



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



Source of Distribution by Cash vs. DRIP:



|                                       |  |           |          |  | Net        |   |       | Realized    |  |   |           |  |  |       |       |  |         |   |        |      | 
|-------------------------------------- |  | --------- | -------- |  | ---------- | - | ----- | ----------- |  | - | --------- |  |  | ----- | ----- |  | ------- | - | ------ | ---- | 
|                                       |  |           |          |  | Investment |   |       | Gain From   |  |   | Return of |  |  |       |       |  | Paid in |   |        |      | 
|Period                                 |  | Per Share |          |  | Income     |   |       | Investments |  |   | Capital   |  |  | Total |       |  | Cash    |   |        | DRIP | 
|July 12, 2012 - September 30, 2012     |  | $         | 0.183750 |  |            | $ | 32    |             |  | $ | -         |  |  | $     | 18    |  |         | $ | 50     |      | 
|October 1, 2012 - December 31, 2012*   |  |           | 0.260750 |  |            |   | 118   |             |  |   | -         |  |  |       | 82    |  |         |   | 200    |      | 
|January 1, 2013 - March 31, 2013*      |  |           | 0.262586 |  |            |   | 247   |             |  |   | 47        |  |  |       | 75    |  |         |   | 369    |      | 
|April 1, 2013 - June 30, 2013          |  |           | 0.186504 |  |            |   | 235   |             |  |   | 43        |  |  |       | 27    |  |         |   | 305    |      | 
|July 1, 2013 - September 30, 2013      |  |           | 0.186504 |  |            |   | 244   |             |  |   | 47        |  |  |       | 183   |  |         |   | 474    |      | 
|October 1, 2013 - December 31, 2013    |  |           | 0.186504 |  |            |   | 72    |             |  |   | 258       |  |  |       | 219   |  |         |   | 549    |      | 
|January 1, 2014 - March 31, 2014       |  |           | 0.186504 |  |            |   | 168   |             |  |   | 85        |  |  |       | 379   |  |         |   | 632    |      | 
|April 1, 2014 - June 30, 2014          |  |           | 0.186504 |  |            |   | 372   |             |  |   | -         |  |  |       | 382   |  |         |   | 754    |      | 
|July 1, 2014 - September 30, 2014      |  |           | 0.184668 |  |            |   | 135   |             |  |   | 29        |  |  |       | 644   |  |         |   | 808    |      | 
|October 1, 2014 - December 31, 2014    |  |           | 0.181467 |  |            |   | 144   |             |  |   | 52        |  |  |       | 748   |  |         |   | 944    |      | 
|January 1, 2015 - March 31, 2015       |  |           | 0.179154 |  |            |   | 153   |             |  |   | 52        |  |  |       | 824   |  |         |   | 1,029  |      | 
|April 1, 2015 - June 30, 2015          |  |           | 0.179154 |  |            |   | 705   |             |  |   | 163       |  |  |       | 243   |  |         |   | 1,111  |      | 
|July 1, 2015 - September 30, 2015      |  |           | 0.209015 |  |            |   | 240   |             |  |   | 142       |  |  |       | 904   |  |         |   | 1,286  |      | 
|October 1, 2015 - December 31, 2015**  |  |           | 0.170315 |  |            |   | —     |             |  |   | 68        |  |  |       | 996   |  |         |   | 1,064  |      | 
|January 1, 2016 – March 31, 2016 ***   |  |           | 0.169969 |  |            |   | 8     |             |  |   | —         |  |  |       | 1,045 |  |         |   | 1,053  |      | 
|April 1, 2016 - June 30, 2016****      |  |           | 0.107188 |  |            |   | —     |             |  |   | —         |  |  |       | 669   |  |         |   | 669    |      | 
|July 1, 2016 - September 30, 2016***** |  |           | 0.214372 |  |            |   | 305   |             |  |   | —         |  |  |       | 1,042 |  |         |   | 1,347  |      | 
|October 1, 2016 - December 31, 2016    |  |           | 0.107186 |  |            |   | 160   |             |  |   | 78        |  |  |       | 439   |  |         |   | 677    |      | 
|TOTAL                                  |  | $         | 3.342094 |  |            | $ | 3,338 |             |  | $ | 1,064     |  |  | $     | 8,919 |  |         | $ | 13,321 |      | 



* Includes a special distribution
of $0.077 per share.



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



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



**** For the period
from April 1, 2016 to June 30, 2016, the Fund had a net investment loss of approximately $4 thousand and a realized loss from investments
of approximately $12.6 million. These amounts are reflected on the source of distributions table below in the distributions from
paid in capital amount. The allocation of the distributions between net investment income and return of capital are different than
previously reported as a result of the correction of an accounting error. For further detail, please see Item 9A Controls and Procedures.



***** For the period
from July 1, 2016 to September 30, 2016, the Fund had a realized loss from investments of approximately $0.04 million. That amount
is reflected on the source of distributions table below in the distributions from paid in capital amount. The allocation of the
distributions between net investment income and return of capital are different than previously reported as a result of the correction
of an accounting error. For further detail, please see Item 9A Controls and Procedures.





F-21







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



Percentage of Distributions by Source:



|                                      |  |           |          |  | Net        |  |    | Realized    |  |  | Return  |  
|------------------------------------- |  | --------- | -------- |  | ---------- |  | -- | ----------- |  |  | ------- | -
|                                      |  |           |          |  | Investment |  |    | Gain From   |  |  | of      |  
|Period                                |  | Per Share |          |  | Income     |  |    | Investments |  |  | Capital |  
|July 12, 2012 - September 30, 2012    |  | $         | 0.183750 |  |            |  | 64 | %           |  |  | 0       | %
|October 1, 2012 - December 31, 2012 * |  |           | 0.260750 |  |            |  | 59 | %           |  |  | 0       | %
|January 1, 2013 - March 31, 2013*     |  |           | 0.262586 |  |            |  | 67 | %           |  |  | 13      | %
|April 1, 2013 - June 30, 2013         |  |           | 0.186504 |  |            |  | 77 | %           |  |  | 14      | %
|July 1, 2013 - September 30, 2013     |  |           | 0.186504 |  |            |  | 51 | %           |  |  | 10      | %
|October 1, 2013 - December 31, 2013   |  |           | 0.186504 |  |            |  | 4  | %           |  |  | 47      | %
|January 1, 2014 - March 31, 2014      |  |           | 0.186504 |  |            |  | 27 | %           |  |  | 13      | %
|April 1, 2014 - June 30, 2014         |  |           | 0.186504 |  |            |  | 49 | %           |  |  | 0       | %
|July 1, 2014 - September 30, 2014     |  |           | 0.184668 |  |            |  | 17 | %           |  |  | 3       | %
|October 1, 2014 - December 31, 2014   |  |           | 0.181467 |  |            |  | 15 | %           |  |  | 6       | %
|January 1, 2015 - March 31, 2015      |  |           | 0.179154 |  |            |  | 15 | %           |  |  | 5       | %
|April 1, 2015 - June 30, 2015         |  |           | 0.179154 |  |            |  | 63 | %           |  |  | 15      | %
|July 1, 2015 - September 30, 2015     |  |           | 0.209015 |  |            |  | 19 | %           |  |  | 11      | %
|October 1, 2015 - December 31, 2015   |  |           | 0.170315 |  |            |  | —  | %           |  |  | 6       | %
|January 1, 2016 – March 31, 2016      |  |           | 0.169969 |  |            |  | 1  | %           |  |  | —       | %
|April 1, 2016 - June 30, 2016**       |  |           | 0.107188 |  |            |  | —  | %           |  |  | —       | %
|July 1, 2016 - September 30, 2016**   |  |           | 0.214372 |  |            |  | 23 | %           |  |  | —       | %
|October 1, 2016 – December 31, 2016   |  |           | 0.107186 |  |            |  | 24 | %           |  |  | 11      | %



* Includes a special distribution
of $0.077 per share.

** The allocation of the distributions
between net investment income and return of capital are different than previously reported as a result of the correction of an
accounting error.



The following table reflects
the sources of the cash distributions on a tax basis that the Fund has paid on its common stock (dollars in thousands) during the
fiscal years ended December 31, 2016, 2015 and 2014:





|Source of Distributions:                 |  | Year ended
    December 31, 2016 |       |  | Year ended
    December 31, 2015 |  |       | Year ended   December 31, 2014 | 
|---------------------------------------- |  | -------------------------------- | ----- |  | -------------------------------- |  | ----- | ------------------------------ | 
|Distributions from net investment income |  | $                                | 473   |  |                                  |  | 12.6  | %                              | 
|Distributions from realized gains        |  |                                  | 78    |  |                                  |  | 2.1   |                                | 
|Distributions from paid in capital       |  |                                  | 3,195 |  |                                  |  | 85.3  |                                | 
|Total                                    |  | $                                | 3,746 |  |                                  |  | 100.0 | %                              | 



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



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



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



|     |  | Offering Expenses |     |  | Distribution from
Net Investment Income excluding offering costs |   |       | % Distribution from Net Investment  Income excluding  offering costs |  |  | % Distributions from Realized  Gains excluding  offering costs |   |  | % Distributions from Paid In  Capital  excluding  offering costs |   
|---- |  | ----------------- | --- |  | ---------------------------------------------------------------- | - | ----- | -------------------------------------------------------------------- |  |  | -------------------------------------------------------------- | - |  | ---------------------------------------------------------------- | --
|2016 |  | $                 | —   |  |                                                                  | $ | 473   |                                                                      |  |  | 13                                                             | % |  |                                                                  | 2 
|2015 |  | $                 | 96  |  |                                                                  | $ | 926   |                                                                      |  |  | 21                                                             | % |  |                                                                  | 9 
|2014 |  | $                 | 352 |  |                                                                  | $ | 1,171 |                                                                      |  |  | 37                                                             | % |  |                                                                  | 5 
|2013 |  | $                 | 322 |  |                                                                  | $ | 1,120 |                                                                      |  |  | 66                                                             | % |  |                                                                  | 23
|2012 |  | $                 | 142 |  |                                                                  | $ | 292   |                                                                      |  |  | 100                                                            | % |  |                                                                  | — 



F-22







Note 11.  Financial Highlights



The following is a schedule of financial highlights
for the years ended December 31, 2016, 2015, 2014, 2013 and 2012:



|                                                                     |  | For the year ended December 31, 2016 |           |   | For the year ended December 31, 2015 |   |           | For the year ended December 31, 2014 |  |   | For the year ended December 31, 2013 |    |  | For the year ended December 31, 2012 |          
|-------------------------------------------------------------------- |  | ------------------------------------ | --------- | - | ------------------------------------ | - | --------- | ------------------------------------ |  | - | ------------------------------------ | -- |  | ------------------------------------ | ---------
|                                                                     |  |                                      |           |   |                                      |   |           |                                      |  |   |                                      |    |  |                                      |          
|Per share data:                                                      |  |                                      |           |   |                                      |   |           |                                      |  |   |                                      |    |  |                                      |          
|Net asset value, beginning of period                                 |  | $                                    | 4.61      |   |                                      | $ | 7.34      |                                      |  | $ | 8.70                                 |    |  | $                                    | 8.77     
|                                                                     |  |                                      |           |   |                                      |   |           |                                      |  |   |                                      |    |  |                                      |          
|Results of operations (1)                                            |  |                                      |           |   |                                      |   |           |                                      |  |   |                                      |    |  |                                      |          
|Net investment income                                                |  |                                      | 0.07      |   |                                      |   | 0.14      |                                      |  |   | 0.19                                 |    |  |                                      | 0.37     
|Net realized gain (loss) on investments                              |  |                                      | (2.12     | ) |                                      |   | 0.06      |                                      |  |   | 0.04                                 |    |  |                                      | 0.18     
|Net unrealized gain (loss) on investments                            |  |                                      | 3.27      |   |                                      |   | (2.40     | )                                    |  |   | (1.46                                | )  |  |                                      | (0.23    
|Net increase (decrease) in net assets resulting from
    operations  |  |                                      | 1.22      |   |                                      |   | (2.20     | )                                    |  |   | (1.23                                | )  |  |                                      | 0.32     
|                                                                     |  |                                      |           |   |                                      |   |           |                                      |  |   |                                      |    |  |                                      |          
|Stockholder distributions (2)                                        |  |                                      |           |   |                                      |   |           |                                      |  |   |                                      |    |  |                                      |          
|Distributions from net investment income                             |  |                                      | (0.08     | ) |                                      |   | (0.14     | )                                    |  |   | (0.19                                | )  |  |                                      | (0.37    
|Distributions from realized gains                                    |  |                                      | (0.01     | ) |                                      |   | (0.06     | )                                    |  |   | (0.04                                | )  |  |                                      | (0.18    
|Distributions from capital                                           |  |                                      | (0.51     | ) |                                      |   | (0.54     | )                                    |  |   | (0.50                                | )  |  |                                      | (0.24    
|Net decrease in net assets resulting from stockholder distributions  |  |                                      | (0.60     | ) |                                      |   | (0.74     | )                                    |  |   | (0.73                                | )  |  |                                      | (0.79    
|                                                                     |  |                                      |           |   |                                      |   |           |                                      |  |   |                                      |    |  |                                      |          
|Capital share transactions                                           |  |                                      |           |   |                                      |   |           |                                      |  |   |                                      |    |  |                                      |          
|Impact from issuance of common stock (3)                             |  |                                      | —         |   |                                      |   | 0.21      |                                      |  |   | 0.60                                 |    |  |                                      | 0.40     
|Impact from reinvestment of stockholder distributions (4)            |  |                                      | 0.10      |   |                                      |   | —         |                                      |  |   | —                                    |    |  |                                      | —        
|Net increase in net assets resulting from capital share transactions |  |                                      | 0.10      |   |                                      |   | 0.21      |                                      |  |   | 0.60                                 |    |  |                                      | 0.40     
|Other (5)                                                            |  |                                      | (0.02     | ) |                                      |   | —         |                                      |  |   | —                                    |    |  |                                      | —        
|Net asset value, end of period                                       |  | $                                    | 5.31      |   |                                      | $ | 4.61      |                                      |  | $ | 7.34                                 |    |  | $                                    | 8.70     
|Shares outstanding at end of period                                  |  |                                      | 6,337,606 |   |                                      |   | 6,181,515 |                                      |  |   | 5,546,292                            |    |  |                                      | 3,151,376
|Total return (7)                                                     |  |                                      | 23.62     | % |                                      |   | (31.96    | )%                                   |  |   | (8.88                                | )% |  |                                      | 7.72     
|Ratio/Supplemental data:                                             |  |                                      |           |   |                                      |   |           |                                      |  |   |                                      |    |  |                                      |          
|Net assets, end of period (in thousands)                             |  | $                                    | 33,682    |   |                                      | $ | 28,490    |                                      |  | $ | 40,688                               |    |  | $                                    | 27,424   
|Average net assets (in thousands)                                    |  | $                                    | 31,831    |   |                                      | $ | 39,246    |                                      |  | $ | 36,686                               |    |  | $                                    | 21,372   
|Ratio of net investment income to average net assets (6)(9)          |  |                                      | 1.47      | % |                                      |   | 2.12      | %                                    |  |   | 2.23                                 | %  |  |                                      | 3.73     
|Ratio of operating expenses to average net assets (6)(9)             |  |                                      | 8.33      | % |                                      |   | 6.83      | %                                    |  |   | 6.65                                 | %  |  |                                      | 4.03     
|Ratio of expenses reimbursed to average net assets (9)               |  |                                      | 0.65      | % |                                      |   | —         | %                                    |  |   | —                                    | %  |  |                                      | 3.63     
|Portfolio turnover ratio (8)                                         |  |                                      | 83.71     | % |                                      |   | 56.67     | %                                    |  |   | 36.08                                | %  |  |                                      | 59.80    










|(1) | The per share amounts were derived by using the weighted average shares outstanding during the period. There was no expense waiver and reimbursement for the years ended December 31, 2016, December 31, 2015 and December 31, 2014. Net investment income per share excluding the expense reimbursements equals ($0.06) for the year ended December, 31, 2013. Net investment income per share excluding the expense reimbursements equals ($1.52) for the year ended December, 31, 2012.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The per share data for distributions reflects the actual amount of distributions declared per share during the period.                                                                                                                                                                                                                                                                                                                                                                    





F-23







|(3) | The issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock in the Fund’s continuous offering.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | The impact from reinvestment of stockholder distributions on a per share basis reflects the incremental net asset value changes as a result of the reinvestment of stockholder distributions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(5) | Includes the impact of different share amounts used in calculating per share data as a result of calculating certain per share data based on weighted average shares outstanding during the period and certain per share data based on shares outstanding as of a period end or transaction date.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(6) | The ratios are after giving effect to amounts reimbursed by the Manager under an expense reimbursement agreement. See “Note 4 – Related Party Transactions.” For the years ended December 31, 2016, December 31, 2015 and December 31, 2014, there was no expense waiver and reimbursement. For the year ended December 31, 2013, excluding the expense reimbursement, the ratio of net investment income and operating expenses to average net assets is (0.14)% and 7.90%, respectively. For the year ended December 31, 2012, excluding the expense reimbursement, the ratio of net investment income and operating expenses to average net assets is (12.83)% and 17.84%, respectively.                                                        
|(7) | Total return is calculated assuming a purchase of shares at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the DRIP. For the years ended December 31, 2016, December 31, 2015 and December 31, 2014, there was no expense reimbursement. The total return based on net asset value for the year ended December 31, 2013, includes the effect of the expense reimbursement which equaled 3.63%. The total return based on net asset value for the year ended December 31, 2012, includes the effect of the expense reimbursement which equaled 6.24%.
|(8) | Portfolio turnover rate is calculated using the lesser of year-to-date sales or purchases over the average of the invested assets at fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(9) | Ratios calculated based on average net assets using current and prior 3 quarters net assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



Note 12.  Selected Quarterly Data (Unaudited)



The following is the quarterly results of operations
for the years ended December 31, 2016 and 2015. 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, 2016 |          
|Investment income                                    |  | $                 | 785      
|Operating expenses                                   |  |                   |          
|Total Expenses                                       |  |                   | 625      
|Net expenses                                         |  |                   | 625      
|Net investment income (loss)                         |  |                   | 160      
|Realized and unrealized gain, net                    |  |                   | 812      
|Net increase in net assets resulting from operations |  | $                 | 972      
|Per share information - basic and diluted            |  |                   |          
|Net investment income                                |  | $                 | 0.03     
|Net increase in net assets resulting from operations |  | $                 | 0.15     
|Weighted average shares outstanding                  |  |                   | 6,313,427





|(1) | For the quarters ended
    September 30, 2016 and June 30, 2016, the investment income, net investment income and realized and unrealized gain, net
    amounts are different than previously reported as a result of the correction of an accounting error. For further detail, please see Note 13 Subsequent Events.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





|                                                                |  | Quarter Ended     |          
|--------------------------------------------------------------- |  | ----------------- | ---------
|                                                                |  | December 31, 2015 |          
|Investment income                                               |  | $                 | 335      
|Operating expenses                                              |  |                   |          
|Total Expenses                                                  |  |                   | 603      
|Net expenses                                                    |  |                   | 603      
|Net investment income                                           |  |                   | (268     
|Realized and unrealized gain (loss), net                        |  |                   | (9,521   
|Net increase (decrease) in net assets resulting from operations |  | $                 | (9,789   
|Per share information - basic and diluted                       |  |                   |          
|Net investment income                                           |  | $                 | 0.04     
|Net increase (decrease) in net assets resulting from operations |  | $                 | (1.59    
|Weighted average shares outstanding                             |  |                   | 6,153,563



F-24







Note 13.  Subsequent Events



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



On May 23, 2016, the Board
of Directors of the Fund approved resolutions to reorganize the Fund as a closed end fund that would operate as an “Interval
Fund”.



On September 29, 2016,
the Fund filed a final proxy statement with the SEC to reorganize the Fund as a closed end fund that would operate as an “Interval
Fund”. An Interval Fund is a closed end fund that has adopted a fundamental policy of making periodic repurchase offers of
the fund’s shares pursuant to SEC Rule 23c-3. The reorganization is subject to shareholder approval. The final proxy statement
was submitted to shareholders on October 7, 2016 and requests shareholder approval with the following resolutions relating to the
reorganization:



| | · | Withdrawal
of the Fund’s election to be treated as a BDC;
| | - | ---------------------------------------------------------



| | · | Reorganization of the Fund from a Maryland corporation to a Delaware Statutory Trust;
| | - | -------------------------------------------------------------------------------------



| | · | Approval of a fundamental policy under which the Fund will make annual repurchases offers of between 5% and 25% at the net asset value per share of the Fund;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Approval of fundamental restrictions of the Fund’s investments that are consistent with the Fund’s current investment strategy;
| | - | -------------------------------------------------------------------------------------------------------------------------------



| | · | Approval of a new investment management agreement with the current Manager, which would result in the following changes to its management agreement: management fees would be calculated on gross assets instead of net assets; elimination of the current incentive fee on capital gains; all organization and offering expenses would be payable directly by the Fund, whereas they are now incurred by the Manager and reimbursed to the extent of 1.5% of gross offering proceeds.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The annual shareholder
meeting was adjourned twice during the fourth quarter of 2016 as the proxy voting did not reach a quorum. During the last week
of December 2016, the quorum was reached and the shareholders approved the conversion to an Interval Fund. Management anticipates
the completion of the conversion during the second quarter of 2017. In the meantime, the Fund will continue to operate as a BDC.



On January 11, 2017,
the Fund signed a senior secured loan agreement to invest $2.0 million in Digital Golf Technologies, LLC. The loan agreement specifies
that the investment will be made in four draws of $0.5 million per draw. The initial draw of $0.5 million was made on January 17,
2017 and the second draw was made on March 3, 2017. The two remaining draws are due on or around June 1, 2017 and September 1,
2017. In conjunction with this investment, the Fund will also receive, per $0.5 million draw, a Warrant to purchase 11,111 Series
A Preferred Units for an aggregate purchase price of $1.00 in total with an aggregate value of $0.05 million. In the first quarter
2017, the Fund received warrants to purchase a total of 22,222 Series A Preferred Units.



On January 12, 2017,
the Fund sold $0.6 million par value of investments in APX Group, Inc.'s 8.75% senior unsecured notes at the rate of $102.50.



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



On January 24, 2017,
Goodman Networks, Inc. entered into a restructuring support agreement of the company's 12.125% senior secured notes due 2018. The
restructuring support agreement sets forth the commitment of the company, the consenting noteholders, and the consenting equity
holders to support a comprehensive restructuring of over $325.0 million of the company’s long term debt. The restructuring
will be effectuated no later than February 27, 2017, through a joint prepackaged plan of reorganization to be filed under chapter
11 of the Bankruptcy Code in the United States Bankruptcy Court.



On February 1, 2017,
APX Group Holdings, Inc. issued an additional $300.0 million aggregate principal amount of 7.875% senior secured notes due 2022.
The net proceeds from this offering are intended to redeem $300.0 million aggregate principal amount of its 6.375% senior secured
notes due 2019. In connection to the same redemption, $0.3 million of Fund's 6.375% senior secured notes were partially called
at the rate of $103.188 on January 23, 2017.



On February 6, 2017,
iHeartCommunications, Inc. announced the expiration of its private offer to holders of outstanding 10.0% senior notes due 2018
to exchange outstanding notes for newly-issued 11.25% priority guarantee notes due 2021. The Fund submitted its consent to accept
the exchange offer on February 7, 2017.



On February 6, 2017,
the Fund submitted its consent to receive 128.40 shares of the new reorganized holding common stock for every $1,000 in principal
amount of unexchanged 10.75% senior secured second lien Logan's Roadhouse, Inc. notes.



On February 16, 2017,
the Fund made an additional investment of $0.45 million in a senior secured first lien loan to Nima, LLC.



On February 16, 2017,
the Board of Directors of the Fund declared one monthly distribution, and voted to keep the annual distribution rate at 7.35% of
the current $8.75 gross offering price. The distribution was to stockholders of record on February 16, 2017 and was paid on February
28, 2017.



On February 27, 2017,
the Board of Directors of the Fund declared one monthly distribution, and voted to keep the annual distribution rate at 7.35% of
the current $8.75 gross offering price. The distribution was to stockholders of record on March 1, 2017 and was paid on March 30,
2017.



On March 31, 2017, the
VII Peaks Co-Optivist Income BDC II Inc. (the “Fund”), in consultation with the Fund’s independent registered
public accounting firm, concluded that certain of the Fund’s financial statements for the three and six months ended June
30, 2016 and the three and nine months ended September 30, 2016 included in the Fund’s Form 10-Q should no longer be relied
upon due to the accounting error described below. The financial statements affected for these periods are the Statements of Assets
and Liabilities, Statements of Operations, Statements of Changes in Net Assets, Statements of Cash Flows and Schedule of Investments.



The Fund is restating
these financial statements to correct errors in the accounting for certain warrants received in connection with direct loans that
the Fund made. Specifically, the Fund did not assign a cost to the warrants based upon their fair value on the date of receipt
relative to the total fair value of the debt and warrants received. The difference between the face amount of the debt and its
recorded cost resulting from the assignment of value to the warrants is to be treated as original issue discount, and accreted
into interest income over the life of the loan.



For the quarter ended June
30, 2016, compared to what was previously reported, the Fund’s restated net investment income increased by $85,000 and
its unrealized capital gains decreased by the same amount. For the quarter ended September 30, 2016, compared to what was previously
reported, the Fund’s restated net investment income increased by $175,000 and its unrealized capital gains decreased by
the same amount. There was no effect on the Fund’s net asset value per share (NAV) for those periods. The Fund intends
to file amended Forms 10-Q/A for the quarters affected.



On April 6, 2017, the
Fund made an additional investment of $0.5 million in a senior secured first lien loan to Nima, LLC.



On April 7, 2017, the
Fund made an investment of $1.34 million in a senior secured first lien loan to Vieste Group, LLC. In conjunction with this investment,
the Fund received a Warrant to purchase 94,628.5017 Class A Units for an aggregate purchase price of $1.00 in total with an aggregate
value of $0.1 million.



On April 24,
2017 the Board of Directors of the Fund declared one monthly distribution, and voted to keep the annual distribution rate at 7.35%
of the current $8.75 gross offering price. The distribution was to stockholders of record on April 24, 2017 and was paid on April
28, 2017.







On May 17, 2017,
in the Relativity Media case, the pending motion to convert the bankruptcy case to chapter 7 liquidation was dismissed with
prejudice by the petitioning creditors. The court did not discuss the adversary case related to the Fund's matter.



On
May 22, 2017, the Board of Directors of the Fund declared two monthly distributions, and voted to keep the annual distribution
rate at 7.35% of the current $8.75 gross offering price. The distributions was to stockholders of record on May 22, 2017,
and was paid on May 30, 2017; and to stockholders of record on June 1, 2017, payable on June 30, 2017.







F-25









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



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



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



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



| | (3) | During
the fiscal year ended December 31, 2015 and during the subsequent period through the date of BPM’s dismissal, there were
no disagreements between us and BPM, whether or not resolved, on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which if not resolved to the satisfaction of BPM, would have caused BPM to make reference
thereto in its report on our audited financial statements. In connection with the audits of the fiscal years ended December 31,
2015 and 2014, and the interim period ended March 31, 20167, there have been no “reportable events” (as defined in
Item 304(a)(1)(v) of Regulation S-K).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



ITEM 9A. CONTROLS AND PROCEDURES



Disclosure Controls



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



57







Management’s
report on Internal Control Over Financial Reporting



Our management is
responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act
Rules 13a-15(f) and 15d-15(f), internal control over financial reporting is a process designed by, or under the
supervision of, the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and
effected by the Fund’s Board of Directors, management and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
U.S. GAAP. Based on our management’s evaluation under the framework in Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), management concluded that our internal
controls over financial reporting were effective as of December 31, 2016.



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



Management has
concluded it has material weaknesses resulting from the following:





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



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



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



Change in Internal
Control Over Financial Reporting



There were no changes
in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the year
ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.





ITEM 9B. OTHER INFORMATION



None.



58







Part III



ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE



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



Biographical Information



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



Directors



The following persons
serve as our directors and on the committees indicated:



|Nominee                         |  | Age |  | Director Since |  | Independent |  | Expiration of Term |  | Principal Occupation or Affiliation         |  | Committees                                
|------------------------------- |  | --- |  | -------------- |  | ----------- |  | ------------------ |  | ------------------------------------------- |  | ------------------------------------------
|Jeya Kumar                      |  | 62  |  | 2012           |  | Yes         |  | 2019               |  | Advisor at MediaLink Singapore              |  | Audit; Nominating and Corporate Governance
|Robert Winspear                 |  | 51  |  | 2012           |  | Yes         |  | 2017               |  | President of Winspear Investments, LLC      |  | Audit, Nominating and Corporate Governance
|Stephen F. Shea                 |  | 47  |  | 2015           |  | No          |  | 2017               |  | Director and Member of Investment Committee |  | Managing Partner                          
|Gurpreet (Gurprit) S. Chandhoke |  | 42  |  | 2012           |  | No          |  | 2018               |  | Director and Member of Audit Committees     |  | Chairman                                  
|Amit Mahajan                    |  | 41  |  | 2012           |  | Yes         |  | 2018               |  | Director at PineBridge Investments          |  | Nominating and Corporate Governance       



Executive Officers



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



|Name                            |  | Age |  | Position Held                                   
|------------------------------- |  | --- |  | ------------------------------------------------
|Gurpreet (Gurprit) S. Chandhoke |  | 42  |  | Chief Executive Officer and President           
|Michelle MacDonald              |  | 49  |  | Chief Financial Officer, Treasurer and Secretary
|Emily Silva                     |  | 52  |  | Chief Compliance Officer                        
|Garima Kakani                   |  | 32  |  | Controller                                      



Information about Directors



Gurpreet (Gurprit) S. Chandhoke



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



59







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



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



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



Mr. Chandhoke is a registered
representative with Arete, which is the principal underwriter of the Fund. The Manager and Arete have entered into a joint venture
to acquire investment advisers, but the joint venture had not made any acquisitions as of June 2, 2017.



Stephen F. Shea



Mr. Shea has been a Managing
Partner of the Manager since August 2009. Prior to joining the Manager, Mr. Shea worked as a consultant with investment banking
and venture/private equity teams and helped registered investment advisers integrate and build out offerings into distribution
channels with his long standing connections at a number of wire houses. Mr. Shea also advised hedge funds on new seeding opportunities
in the commodities/futures space. Prior to his consulting work, from October 2005 to March 2007, Mr. Shea was Vice President of
Institutional Sales RIA Team for Fidelity Investments in San Francisco, spending the majority of his time as a director of sales
for Institutional Investment Managers, RIA wealth management teams and banks and trust companies. In addition, Mr. Shea was responsible
for the signing, business development and retention of SEC registered RIA relationship in San Francisco and the Pacific Northwest.
Prior to working for Fidelity Investments, Mr. Shea worked for Wentworth, Hauser and Violich Investment Counsel. At Wentworth,
Mr. Shea was a member of Stock Selection and Investment Policy committees. He co-developed an open architecture WRAP, Sub-Advised,
RIA platform. Before that, from December 1999 to March 2001, Mr. Shea worked at Deutsche Bank/Alex Brown. At Deutsche Bank/Alex
Brown, Mr. Shea acted as a lead broker for many of the top technology executives.



Mr. Shea holds a BS in
Business and Finance from St. Mary’s College in California.



Mr. Shea is a registered
representative with Arete Wealth Management, LLC (“Arete”), which is the principal underwriter of the Fund. The Manager
and Arete have entered into a joint venture to acquire investment advisers, but the joint venture had not made any acquisitions
as of  June 2, 2017.



Jeya Kumar



Since July 2013 to the
present, Mr. Kumar has been an advisor at MediaLink Singapore, which is engaged in Media and IT services. From April 2012 to the
present, he has served as an Independent Director at Spring Seed Capital in Singapore. Spring Seed Capital is a Singapore government
entity investing in Singapore based startups. From November 2011 to July 2013 he was the CEO (Asia Pacific) for IPSoft Inc., which
is engaged in technology led IT management services. Prior to joining IpSoft, he was the Advisor to Patni Computer Systems, Ltd.
(“Patni”), which provides consulting, technology and business process outsourcing, and product engineering services.
Prior to being an advisor to Patni, from February 2009 to May 2011, Mr. Kumar served as the Chief Executive Officer of Patni, where
he drove the Fund’s global operations and defined and executed the Fund’s long-term strategy.



From January 2008 to January
2009, Mr. Kumar served as the Chief Executive Officer of MphasiS Limited, which provides applications services, infrastructure
services, and business process outsourcing services. Prior to MphasiS, from September 2006 to January 2008, Mr. Kumar was Senior
Vice-President of Sun Microsystems (“Sun”), which sold computers, computer components, computer software, and information
technology services, and was a member of Sun’s Executive Management Group. At Sun, Mr. Kumar was responsible for his business
unit’s financial performance, strategy, marketing, portfolio management, in-market management, product engineering, technology
development, M&A and channels in more than 120 countries. Prior to this, he held various management and executive positions
with a number of global technology firms.



Mr. Kumar has a Masters
of Business degree from Curtin University, Australia; Bachelors of Business degree from the Royal Melbourne Institute of Technology,
Australia; and postgraduate diplomas in Computer Science, Management Studies and Marketing Management. He also attended the Advanced
Management Program at Oxford University.



60







Mr. Kumar’s broad
and extensive experience as an executive officer for global companies, including being responsible for such companies’ performance
and strategy support his appointment to the Board.



Robert Winspear



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



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



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



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



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



Mr. Winspear’s extensive
investment experience as Vice President and Chief Financial Officer of Associated Materials Incorporated and service on the Board
of Directors Alpha Financial Technologies/EAM Corporation support his appointment to the Board.



Amit Mahajan



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



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



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



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



|Name of 
Director |  | Name of Owners and
 Relationships to
 Director |  | Company                               |  | Title of Class              |  | Value of
 Securities |       |     | Percent of Class | 
|----------------- |  | ---------------------------------------------- |  | ------------------------------------- |  | --------------------------- |  | -------------------- | ----- | --- | ---------------- | 
|Amit Mahajan      |  | CXI Valley I, LLC (1)                          |  | VII Peaks Venture Capital II, LLC (2) |  | Series A-1 Preferred Shares |  | $                    | (674) | (3) |                  | 
|Amit Mahajan      |  | CXI Valley I, LLC (1)                          |  | VII Peaks BDC Investors, LLC (4)      |  | Class A Interests           |  | $                    | 0     | (5) |                  | 



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



| | (2) | VII Peaks Capital, LLC is the manager of the Fund.
| | --- | --------------------------------------------------



| | (3) | Valuation is the capital account value as of December 31,
2015.
| | --- | ---------------------------------------------------------------



| | (4) | VII Peaks Capital, LLC is the managing member of the Fund.
In addition, the Class A Interests are entitled to receive their pro rata share of a royalty payable by VII Peaks Capital, LLC
in the amount of $25,000 per month.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Valuation is the capital account value as of December 31,
2015.
| | --- | ---------------------------------------------------------------



61







Information about Executive
Officers Who Are Not Directors



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



|Name, Address and Age      |  | Position(s) Held with Company                    |  | Principal Occupation(s) during Past Five Years                                                                                                                                                                                                                                                                                                                                                                              
|-------------------------- |  | ------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Michelle E. MacDonald (49) |  | Chief Financial Officer, Treasurer and Secretary |  | Vice President of Compliance for VII Peaks Capital, LLC since August 2014; Chief
    Compliance Officer at KBR Capital Markets from April 2013 to September 2013; Chief Financial Officer for a real estate fund
    manager from July 2012 to April 2013; Chief Operating Office for a broker dealer from May 2006 to December 2012; instructor
    and     tutor in securities licensing review courses from 1998 to 2015.
|Emily Silva (52)           |  | Chief Compliance Officer                         |  | Director at Cipperman Compliance Services (February 2014 to present); Various positions at The Vanguard Group from 1999 to January 2014, including Advertising Compliance Manager.                                                                                                                                                                                                                                          
|Garima Kakani (32)         |  | Controller                                       |  | Senior Analyst with VII Peaks Capital, LLC since December 2013; Manager of Reporting and Analytics with KBR Capital Markets from March 2011 to September 2013; Various positions at D.E. Shaw (Indian branch) from March 2007 to September 2009.                                                                                                                                                                            



Corporate Governance and Board Matters



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



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



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



Committees of the Board of Directors



Our Board of Directors
has the following committees:



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



62







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



Board Leadership Structure



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



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



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



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



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



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



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



Risk Oversight and Board Structure



Through its direct oversight
role, and indirectly through its committees, the Board of Directors performs a risk oversight function for the Fund consisting
of, among other things, the following activities: (1) at regular and special board meetings, and on an ad hoc basis as needed,
receiving and reviewing reports related to the performance and operations of the Fund; (2)reviewing and approving, as applicable,
the compliance policies and procedures of the Fund; (3) meeting with the portfolio management team to review investment strategies,
techniques and the processes used to manage related risks; (4) meeting with, or reviewing reports prepared by, the representatives
of key service providers, including the investment adviser, administrator, distributor, transfer agent, custodian and independent
registered public accounting firm of the Fund, to review and discuss the activities of the Fund and to provide direction with respect
thereto; and (5) engaging the services of the chief compliance officer of the Fund to test the compliance procedures of the Fund
and its service providers. Gurpreet Chandhoke, who is an “interested person” of the Fund as defined in Section 2(a)(19)
of the 1940 Act, serves as both the chief executive officer and chairman of the Board of Directors. The Board of Directors feels
that Mr. Chandhoke, as chief executive officer of the Fund, is the director with the most knowledge of the Fund’s business
strategy and is best situated to serve as chairman of the Board of Directors. The Fund’s charter, as well as regulations
governing business development companies generally, requires that a majority of the Board of Directors be persons other than “interested
persons” of the Fund, as defined in Section 2(a)(19) of the 1940 Act. The Board of Directors does not currently have a lead
independent director. The Board, after considering various factors, has concluded that its structure is appropriate at this time
given the fact that it is a newly-formed entity with no assets. As the Fund’s assets increase, the Board of Directors will
continue to monitor its structure and determine whether it remains appropriate based on the complexity of the Fund’s operations.



63







Procedure for Contacting the Board of Directors



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



Compensation Committee Interlocks and Insider Participation



Our board of directors
did not have a separate compensation committee during the fiscal year ended December 31, 2016, and as a result our full board served
as the compensation committee. Gurpreet Chandhoke and Stephen Shea were the only members of our board of directors who were officers
during the fiscal year ended December 31, 2016. The board does not pay compensation to its officers, and therefore the board of
directors did not engage in deliberations regarding executive compensation. Messrs. Chandhoke and Shea are each partial owners
of our Manager, which receives compensation under an investment advisory agreement with us.



No executive officer of
us served as a member of (i) the compensation committee of another entity of which one of the executive officers of such entity
served on our compensation committee (or board committee performing equivalent functions) or (ii) the board of directors of another
entity of which one of the executive officers of such entity served on our board, during the fiscal year ended December 31, 2016.



Section 16(a) Beneficial Ownership Reporting Compliance



Pursuant to Section 16(a)
of the Exchange Act, the Fund’s directors and executive officers, and any persons holding more than 10% of its common stock,
are required to report their beneficial ownership and any changes therein to the SEC and the Fund. Specific due dates for those
reports have been established, and the Fund is required to report herein any failure to file such reports by those due dates. Based
solely on a review of the copies of such reports and written representations delivered to the Fund by such persons, all filings
were made timely during the year ending December 31, 2016.



ITEM 11. EXECUTIVE COMPENSATION



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



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



We entered into our current
investment advisory agreement on August 20, 2013, and it was approved by our shareholders on December 13, 2013. The current agreement
will remain in effect for a period of two years from the date that it was approved by our shareholders, and will remain in effect
from year-to-year thereafter if approved annually by our Board of Directors or by the affirmative vote of the holders of a majority
of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested
persons.



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



64







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



On August 22, 2016, the
board conducted an annual review of the current advisory agreement. In connection with the foregoing approvals, the Board determined
that the Manager had the capabilities, resources and personnel necessary to provide the services to the Fund required under the
current advisory agreement. The disinterested members of the board noted that, in their consideration of the amended and restated
advisory agreement, they relied upon the information provided to them in connection with their most recent approval of the current
advisory agreement. The disinterested members further noted that the Manager confirmed that there were no material changes to such
previously provided information.



The
Board of Directors did not identify any particular information
that was most relevant to its consideration to approve the amended and restated advisory agreement and each director may have afforded
different weight to the various factors.



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



Advisory Fees



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



Base Management Fee



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



Incentive Fee



The incentive fee has two
parts. The first part, which we refer to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears
based upon our “pre-incentive fee net investment income” for the immediately preceding quarter. The subordinated incentive
fee on income is 20% of pre-incentive net investment income subject to a quarterly return to investors, expressed as a rate of
return on adjusted capital at the beginning of the most recently completed calendar quarter, of 2.0% (8.0% annualized). For this
purpose, “pre-incentive fee net investment income” means interest income, dividend income and any other income (including
any other fees, other than fees for providing managerial assistance, such as commitment, origination, structuring, diligence and
consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating
expenses for the quarter (including the base management fee, expenses reimbursed to our Manager under the investment advisory agreement
and any interest expense and distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee).
Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original
issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet
received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses
or unrealized capital appreciation or depreciation. The calculation of the subordinated incentive fee on income for each quarter
is as follows:



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



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



65







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



The second part of the
incentive fee, which we refer to as the incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated
investments from the portfolio and is determined and payable in arrears as of the end of each calendar year (or upon termination
of the investment advisory agreement). This fee equals 20.0% of our incentive fee capital gains, which equals our realized capital
gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital
losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains
incentive fees.



Director Compensation



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



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



The following table sets forth the compensation
of the Fund’s directors for the year ended December 31, 2016:



|Name                  |  | Fees Earned and
    Payable in Cash |        |  | All Other
    Compensation |  |   | Total | 
|--------------------- |  | ----------------------------------- | ------ |  | -------------------------- |  | - | ----- | 
|Interested Directors  |  |                                     |        |  |                            |  |   |       | 
|                      |  |                                     |        |  |                            |  |   |       | 
|Gurpreet S. Chandhoke |  |                                     | —      |  |                            |  | — |       | 
|Stephen F. Shea       |  |                                     | —      |  |                            |  | — |       | 
|Independent Directors |  |                                     | —      |  |                            |  | — |       | 
|                      |  |                                     |        |  |                            |  |   |       | 
|Jeya Kumar            |  | $                                   | 13,281 |  |                            |  | — |       | 
|Amit Mahajan          |  | $                                   | 10,757 |  |                            |  | — |       | 
|Robert Winspear       |  | $                                   | 13,281 |  |                            |  | — |       | 



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



The following table sets
forth, as of the June 2, 2017, information with respect to the beneficial ownership of our common stock by:



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



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



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



66







Beneficial ownership
is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities.
There is no common stock subject to options that are currently exercisable or exercisable within 60 days of the offering. Percentage
of beneficial ownership is based on 6,397,027 shares of common stock outstanding as of June 2, 2017.



|                                                  |  | Shares Beneficially OwnedImmediately Prior toThis Offering (1) |  
|------------------------------------------------- |  | -------------------------------------------------------------- | -
|Name                                              |  | Number                                                         |  
|5% Stockholders                                   |  |                                                                |  
|None                                              |  |                                                                | —
|Executive Officers:                               |  |                                                                |  
|Michelle E. MacDonald                             |  |                                                                | —
|Emily Silva                                       |  |                                                                | —
|Garima Kakani                                     |  |                                                                | —
|Interested Directors:                             |  |                                                                |  
|Gurpreet (Gurprit) S. Chandhoke                   |  |                                                                | —
|Stephen F. Shea                                   |  |                                                                | —
|Independent Directors:                            |  |                                                                |  
|Jeya Kumar                                        |  |                                                                | —
|Amit Mahajan                                      |  |                                                                | —
|Robert Winspear                                   |  |                                                                | —
|All officers and directors as a group (6 persons) |  |                                                                | —



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



|                                |  | Dollar Range ofEquity SecuritiesBeneficiallyOwned (1) (2) (3) |     
|------------------------------- |  | ------------------------------------------------------------- | ----
|Interested Directors:           |  |                                                               |     
|Gurpreet (Gurprit) S. Chandhoke |  |                                                               | None
|Stephen F. Shea                 |  |                                                               | None
|Independent Directors:          |  |                                                               |     
|Jeya Kumar                      |  |                                                               | None
|Amit Mahajan                    |  |                                                               | None
|Robert Winspear                 |  |                                                               | None



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



Since August 20, 2013,
the Fund has been managed by VII Peaks Capital, LLC (the “Manager”). Prior to August 20, 2013 the Fund was managed
by VII Peaks-KBR BDC Advisor II, LLC (the “Prior Manager”), which was wholly-owned by VII Peaks-KBR, LLC which was
a joint venture between the Manager and KBR Capital Advisors, LLC (“KBR”).



Investment Advisory Agreement



The Fund has entered into
an investment advisory agreement with the Manager to manage the Company’s investment activities dated August 20, 2013. Prior
to August 20, 2013, the Fund’s investment activities were managed by the Prior Manager pursuant to an investment advisory
agreement that had substantially the same terms as the Fund’s present agreement with the Manager. On August 22, 2016, the
non-interested Board Members re-approved the agreement between the Manager and the Fund under the agreement’s existing terms. Pursuant
to the investment advisory agreement, the Manager implements the Fund’s business strategy on a day-to-day basis and performs
certain services for us, subject to oversight by our Board. The Manager is responsible for, among other duties, determining investment
criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties.
Under the investment advisory agreement, the Manager is entitled to a base management and incentive fee as outlined in the investment
advisory agreement with the Fund. The base management fee is 2% of net assets below $100 million; 1.75% of net assets between $100
million and $250 million; and 1.5% of net assets over $250 million. For the years ended December 31, 2016 and 2015, the Fund incurred
$0.6 million and $0.8 million of base management fees, respectively.



67







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



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



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



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



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



Expense Reimbursement Agreement



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



Administration Agreement



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



68







ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



The table below summarizes
the fees billed for the years ending December 31, 2016 and 2015 by our auditors, BPM LLP and OUM & Co.,
LLP.



|                   |  | 2016 |         |  | 2015 |  
|------------------ |  | ---- | ------- |  | ---- | -
|Audit Fees         |  | $    | 100,377 |  |      | $
|Audit Related Fees |  |      | —       |  |      |  
|Tax Fees           |  |      | 6,343   |  |      |  
|Other              |  |      | 10,311  |  |      |  
|Total              |  | $    | 117,031 |  |      | $



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



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



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



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



69







PART IV



ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES



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



The following financial statements are set forth
in Item 8:



|                                                                                         | Page
|---------------------------------------------------------------------------------------- | ----
|                                                                                         |     
|Report
    of Independent Registered Public Accounting Firm                              | F-1 
|Report of Previous Independent Registered Public Accounting Firm                         | F-2 
|Statements of Assets and Liabilities as of December 31, 2016 and 2015                    | F-3 
|Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014            | F-4 
|Statements of Changes in Net Assets for the Years Ended December 31, 2016, 2015 and 2014 | F-5 
|Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014            | F-6 
|Schedules of Investments as of December 31, 2016 and 2015                                | F-7 
|Notes to Financial Statements                                                            | F-9 



| | 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, 2016
(and are numbered in accordance with Item 601 of Regulation S-K):



|ExhibitNo. |  | Description of Document                                                                                                                                                                                                                                                  
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1        |  | Articles of Incorporation of VII Peaks-KBR Co-Optivist Income BDC II, Inc. ( Incorporated by reference to Exhibit (a)(1) to Amendment No. 1 to registration statement on Form N-2 filed on December 19, 2011 )                                                           
|3.2        |  | Articles of Amendment and Restatement of of VII Peaks-KBR Co-Optivist Income BDC II, Inc. ( Incorporated by reference to Exhibit (a)(2) to Amendment No. 1 to registration statement on Form N-2 filed on March 1, 2012 )                                                
|3.3        |  | Second Articles of Amendment and Restatement to Articles of Incorporation of VII Peaks-KBR Co-Optivist Income BDC II, Inc. ( Incorporated by reference to Exhibit 3.1 to Form 8-K filed on June 28, 2012 )                                                               
|3.4        |  | Articles of Amendment to Articles of Incorporation of VII Peaks Co-Optivist Income BDC II, Inc. ( Incorporated by reference to Exhibit (a) to Form 8-K filed on September 16, 2013 )                                                                                     
|3.5        |  | Bylaws of the Registrant ( Incorporated by reference to Exhibit (b) to Amendment No. 1 to registration statement on Form N-2 filed on December 19, 2011 )                                                                                                                
|4.1        |  | Form of Subscription Agreement ( Incorporated by reference to Exhibit (d) toAmendment No. 7 to registration statement on Form N-2 filed on July 28, 2014 )                                                                                                               
|4.2        |  | Form of Additional Subscription Agreement ( Incorporated by reference to Exhibit (d) toAmendment No. 7 to registration statement on Form N-2 filed on July 28, 2014 )                                                                                                    
|4.3        |  | Distribution Reinvestment Plan ( Incorporated by reference to Exhibit (e) to Amendment No. 2 to the registration statement on Form N-2 filed on February 15, 2012 )                                                                                                      
|10.1       |  | Investment Advisory Agreement between VII Peaks Co-Optivist Income BDC II, Inc. and VII Peaks Capital, LLC dated August 20, 2013 ( Incorporated by reference to Exhibit (g) to Form 8-K filed on August 23, 2013 )                                                       
|10.2       |  | Dealer Manager Agreement between VII Peaks Co-Optivist Income BDC II, Inc. and Arete Wealth Management, LLC ( Incorporated by reference to Exhibit (h) to Form 8-K filed on March 11, 2016 )                                                                             
|10.3       |  | Form of Selected Dealer Agreement (Included as Exhibit A to the Dealer Manager Agreement) ( Incorporated by reference to Exhibit (h) to Form 8-K filed on March 11, 2016 )                                                                                               
|10.4       |  | Form of Custody Agreement ( Incorporated by reference to Exhibit (j) to Amendment No. 2 to the registration statement on Form N-2 filed on February 15, 2012 )                                                                                                           
|10.5       |  | Custodian Agreement with Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on November 30, 2016)                                                                                                                 
|10.6       |  | Administration Agreement between VII Peaks Co-Optivist Income BDC II, Inc. and VII Peaks Capital, LLC dated February 24, 2014 ( Incorporated by reference to the Annual Report on Form 10-K filed on March 11, 2014 )                                                    
|10.7       |  | License Agreement between VII Peaks Capital, LLC, VII Peaks-KBR BDC Advisor II, LLC and VII Peaks Co-Optivist Income BDC II, Inc. ( Incorporated by reference to Exhibit (k)(2) to Amendment No. 2 to the registration statement on Form N-2 filed on February 15, 2012 )
|14         |  | Code of Ethics ( Incorporated by reference to Exhibit (r) to Amendment No. 2 to the registration statement on Form N-2 filed on February 15, 2012 )                                                                                                                      
|21.1*      |  | Subsidiaries of VII Peaks Co-Optivist Income BDC II, Inc.                                                                                                                                                                                                                
|31.1*      |  | Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended                                                                                                                                                      



70







|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.
| | - | ---------------



ITEM 16. FORM 10-K SUMMARY



None.



71







SIGNATURES



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



|                   | VII Peaks Co-Optivist Income BDC II, Inc.
|------------------ | -----------------------------------------
|                   |                                          
|Date: June 2, 2017 | By                                       
|                   |                                          
|                   |                                          
|                   |                                          
|                   |                                          



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



|                   | VII Peaks Co-Optivist Income BDC II, Inc.
|------------------ | -----------------------------------------
|                   |                                          
|Date: June 2, 2017 | By                                       
|                   |                                          
|                   |                                          
|                   |                                          
|                   |                                          



|                   | VII Peaks Co-Optivist Income BDC II, Inc.
|------------------ | -----------------------------------------
|                   |                                          
|Date: June 2, 2017 | By                                       
|                   |                                          
|                   |                                          
|                   |                                          
|                   |                                          



|Date: June 2, 2017 | By | /s/ Stephen Shea     
|------------------ | -- | ---------------------
|                   |    | Stephen Shea         
|                   |    | (Interested Director)



|Date: June 2, 2017 | By | /s/ Jeya Kumar        
|------------------ | -- | ----------------------
|                   |    | Jeya Kumar            
|                   |    | (Independent Director)



|Date: June 2, 2017 | By | /s/ Amit Mahajan      
|------------------ | -- | ----------------------
|                   |    | Amit Mahajan          
|                   |    | (Independent Director)



|Date: June 2, 2017 | By | /s/ Robert Winspear   
|------------------ | -- | ----------------------
|                   |    | Robert Winspear       
|                   |    | (Independent Director)



72