Peter Rabover

Portfolio Manager
Artko Capital LP

January 23, 2020

Dear Partner,

For the fourth calendar quarter of 2019, an average partnership interest in Artko Capital LP returned
17.6% net of fees. At the same time, investments in the most comparable market indexes—Russell 2000,
Russell Microcap, and the S&P 500—were up 9.9%, 13.5%, and 9.1% respectively. For the calendar year
2019, an average partnership interest in Artko Capital LP returned 61.0% net of fees, while investments
in the aforementioned market indexes were up 25.5%, 22.4%, and 31.5% respectively. Our detailed results
and related footnotes are available in the table at the end of this letter. Our results this quarter came
from broad portfolio contributions from Recro Pharma, Spartan Motors, Gaia, Altria and Research
Solutions while a modest pullback in US Ecology warrants and Tesla puts detracted from the overall
performance.
Inception Inception
1Q19 2Q19 3Q19 4Q19 1 year 3 year
7/1/2015 Annualized
Artko LP Net 10.3% 15.7% 7.9% 17.6% 61.0% 13.3% 101.8% 16.9%
Russell 2000 Index 14.6% 2.1% -2.4% 9.9% 25.5% 8.6% 41.7% 8.1%
Russell MicroCap Index 13.1% 0.9% -5.5% 13.5% 22.4% 6.4% 29.6% 5.9%
S&P 500 Index 13.7% 4.3% 1.7% 9.1% 31.5% 15.3% 71.8% 12.8%

On Finding Ideas

When your portfolio manager first moved to this country in 1991 at a ripe age of 11, from USSR, one of
the first things he discovered was that people just threw away soda cans on the ground and you could
pick them up and (get this!) return them for cash! Now of course this is a normal American cultural concept
but for your portfolio manager coming from a poor and broken socialist society the fact that you could
actually find “money” on the ground in America was a mind-blowing concept. Thus, the first few months
living in United States were spent diligently making $3 to $5 a day for a few hours work picking up and
recycling cans:

I had my sweet spots where I could find a dollar worth of cans in just a few minutes, but in general
it was a grind looking for the cans in some less than amazing places. One glorious unforgettable
day however, I found a $20 bill on the ground and it was arguably one of the best days of my young
life up to that point. If this sounds like an old Simpsons episode, allow me to assure you that it
played out just like it, with soda, pizza and lots of video games (no Cats show though). Now, of
course, as a kid I was sure that this find was as a result of my sharp eye and an entrepreneurial
prowess but of course a big part of this find was just luck.

In some ways the investment management business is no different. Last year was a fantastic year for our
partnership and of course we are very pleased with the results, a big part of which came from our usual
“can searching” grind, but we have to, of course, recognize that an element of luck was present in finding
our “$20 bill” and while we are very excited about it and there will likely be pizza and video games, we
are still very much focused on the boring processes and subsequent results of continuing to find the “cans”
off the beaten path. For transparency purposes, given the unusual year, we included a contribution
analysis table at the end of the letter for you to see the sources of our performance last year. You should
refer to our past letters for investment theses on our contributors last year.

1|Page
Downloaded from www.hvst.com by (id:260507) on 01/23/2020
One of the questions we often get asked a lot is where do find our cans … errr investment ideas. We wish
we could tell you that there is a magic secret sauce process, but the truth is there are many sources and
they are all equally valuable to us:

• The buyside world has changed significantly over the last two decades with social media and
buyside oriented idea websites becoming a more important part of the investment management
food chain. Some of the world’s smartest small cap investors can be found on Twitter or idea
websites. In a way it is a self-selecting group that has embraced new ways of thinking about
investing, research, and communicating. As a result, we have been lucky enough to develop a
fantastic network of other likeminded small and microcap investors over the years whose
contribution to our idea sourcing process has gained in importance. For example, our successful
investments in 2019 in Recro Pharma (REPH) and Altria (MO) came as suggestions from investors
within our network whose opinions we value and have clearly worked out well. While we would
not go as far as saying this network is a source of competitive advantage for us, it is becoming an
important part of our research process from new idea sourcing to occasionally acting as a sanity
check on our investment theses.

• In general, we do not put as much emphasis on management conversation as some of our

counterparts, but we have found allocating time to attend investor conferences and meeting with
some interesting management teams can be a good source of ideas. Some of our more recent
successful additions of State National (SNC), NRC Group Warrants (now ECOLW), Spartan Motors
(SPAR) and Research Solutions (RSSS) came from initial meetings with management at
conferences. We are considering allocating more of our new idea sourcing time to attending more
conferences in 2020.

• An old but tried and proven method for finding new ideas is screening for them. We generally like
to focus on screening for companies with clean balance sheets, high Cash Flow Return On Assets
(CFROA) and insider buys or high insider ownership. Some of the examples of successful
investments from this source have been US Geothermal (HTM), Village Supermarkets (VLGEA),
and Viad (VVI).

• Other sources of new ideas have been personal experiences, such as our investment in Joint
Chiropractic (JYNT) as a result of your portfolio manager’s own back issues; revisiting old ideas
from the watchlist such as Flotek (FTK); or even our own Limited Partner suggestions such as
Sharps Compliance (SMED) or HireQuest (HQI).

Of course, these are all just initial sources of ideas, of which we counted close to a 100 in 2019, where we
spent at least a few hours reading the financials and doing the first pass of initial due diligence. Most of
those do not make the first pass cut-off for not meeting the criteria we consider important for a successful
investment, some end up on our continuously expanding watch list, and a few end up making it through
the research gauntlet to make it into the portfolio. While we are pretty comfortable with our sources of
finding “the cans” we are always on the lookout for new idea channels and research process
enhancements and look forward to continuously updating you on the ever-evolving process.

Core Portfolio Additions

• Altria (MO) – In what we acknowledge is a “slight deviation” from our microcap focus we
opportunistically added a 9% Core Portfolio position to Altria, a $95b market cap behemoth, at an
average price of $40.40 early in the 4th quarter. Occasionally the market gods will give value investors

2|Page
Downloaded from www.hvst.com by (id:260507) on 01/23/2020
 a gift in the form of selling off great companies that are unpalatable to some investor classes and
giving us an opportunity to buy excellent assets on the cheap. One of our favorite things about this
business is the occasional opportunities in the market to take advantage of extremely negative short-
term sentiment to buy excellent long-term assets. Last quarter’s Altria purchase fit perfectly into that
bucket. Earlier in our career we had an opportunity to work for a large cap value strategy where we
saw firsthand how well the reversion to the mean value investing strategy works with companies with
long public histories and high quality consistent earnings and, in a nutshell, this is our main thesis on
Altria.

Altria certainly has its share of problems including a secularly declining combustible tobacco product
market and overpaying for its Juul and Cronos investments at the top of the market. However, the
company’s ability to continuously raise prices to offset the volume declines with low price elasticity
impact and to consistently grow its earnings per share (EPS); its regulatory capture moat and oligopoly
status all provide a significant margin of safety at our initial purchase levels. Additionally the future
diversification benefits provided by its portfolio of non-combustible tobacco products, including its
investments in Juul, on!, and IQOS, as well as a broad portfolio of other “sin” investments including
its investment in Cronos Group, one of the largest cannabis companies in Canada, and a $14 billion
stake in AmBev that should increase its dividend payout in 2020, provide what we consider an
additional layer to the margin of safety analysis. Our purchase of the stock was at a forward dividend
yield of over 8.5% which, in a period of ultra-low interest rates and all-time high market valuations,
implied that the market believed that the company will face negative EPS and dividend per share (DPS)
growth. This was, of course, all sentiment and uncertainty driven as non-stop and conflicting panicked
headlines of various knee jerk regulatory actions against its Juul investment, which represented a
minor portion of its overall enterprise value, drove the stock down 30% from its 2019 high and almost
50% from its 2017 high.

While almost anything is possible, we consider the possibility of negative earnings and dividend
growth to be improbable in the intermediate future, and it is much more likely, given the historically
predictable dynamics of the domestic and global combustible tobacco product markets and the
hedging investments in aforementioned product portfolio, that the company will continue to grow
EPS and DPS at the forecasted mid-single digit growth levels. The main reason why we do not like to
invest in large cap companies is because they generally do not meet our return hurdles of double-digit
IRRs and the triple-digit absolute returns we expect out of our microcap investments over our
expected holding periods. We believed that even without a dividend yield re-rating our investment in
Altria would provide a double-digit IRR return based off expected dividend growth, however, our main
thesis is that large caps are mean reverting over time. Altria’s 5- and 10- year historical median
dividend yields have been around 4% to 5%, and our baseline expectation is for at least 5% dividend
growth over the next five years and an eventual re-rating at close to 6% dividend yield, handicapping
for eventually higher relative interest rates and more uncertainty than the last 10 years. This would
imply annualized IRRs of 20% to 40% and we have already been rewarded in the form of almost 26%
total returns on this investment in 4Q19 where we reduced our position slightly to allocate capital to
other investments.

• We are in the process of slowly adding to new, illiquid Core Portfolio investments which we will discuss
in future partner letters as we finish building out our positions.

3|Page
Downloaded from www.hvst.com by (id:260507) on 01/23/2020
Other Portfolio Updates

• Recro Pharma (REPH) – Continuing with the theme of negative sentiment gifts by market gods, by far
our biggest contributor to the performance this past year has been our original 10% portfolio
investment in Recro Pharma, producing over 138% returns, including the Baudax Bio (BXRX) spin off,
since our purchase in the 1st quarter of 2019. Our original investment at $8.00 and at around $8.90
cost average was worth $18.33 by year end and an additional $2.86 of realized gains (on REPH shares
equivalent) on our sale of BXRX in the 4th quarter of 2019, at an average price of over $7.10. Our
original thesis that the market sentiment on the second rejection by the FDA of the (now) BXRX pain
management drug Meloxicam, that pushed the stock down to sub $6 levels, completely mispriced the
incredibly lucrative Contract Development & Manufacturing Organization (CDMO) asset. The CDMO
was growing at high double digits with long term contracts and 40% operating margins; with an
implied valuation of less than 4X EBITDA when the public and private transaction comps were all in
the 12X to 16X range.

So far this has played out better than expected with management recognizing that the market was
overly concerned on the focus and the potential for capital misallocation on the venture capital-esque
pharma side of the business at the expense of the much more valuable CDMO segment by spinning
off BXRX on the surprising news that the FDA tentatively allowed the appeal of the previous rejections
to go through. While we thought the roughly ~$2.00 per REPH share (sub-$5.00 per BXRX share) carve
out may have been too generous we also recognized our own limitations in being able to value the
binomial outcome of a single drug nanocap where we have almost zero competitive advantage
relative to our purely pharmaceutical industry focused counterparts. We were happy to take
advantage of the higher price ($7.00+) and liquidity to exit this portion of our position at a nice post
spin-off 40% profit.

Moving on to the core asset, the CDMO, the company continued to fire on all cylinders in 2019,
growing revenues 37% and operating income 87% on a YTD basis through 3Q19 with more growth
expected in the 4th quarter and beyond, on the strength of new customer additions and growth from
existing clients. For the most part we have kept most of our position intact other than small trims for
risk management purposes and the position remains one of our largest holdings at over 13% of the
portfolio. Our original thesis that this best-in-class asset is for sale by a management team that is
(oddly) focused on the BXRX side of the business and is currently trading at 8X to 9X our estimate of
2020 EBITDA (which has a significant Free Cash Flow flow through component) while transactions in
a hot M&A market are still in the mid-teens multiples range is still intact. REPH should continue to
generate significant returns for our partners either through organic growth and a multiple re-rating
or an eventual transaction and are excited about what the future holds for this investment.

• Gaia (GAIA) – Our 13% of portfolio investment in GAIA has continued to be a wild ride since our original
purchase almost five years ago. In 2019 the company shifted its focus from acquiring subscribers at
break neck 50%+ growth pace to a more moderated 20%+ growth rate with a focus on profitability
via higher quality, stickier subscribers of its “alternative content” channels versus the fickle yoga
content subscribers that admittedly have a number of free alternatives. This transition has not gone
down well with the market, and on the surface, the fundamental results. However, we felt it was
important to separate the short-term costs of changing the strategy with the long-term fundamentals
and the future opportunities for the company. Having grown subscribers 51% in 2018, full of lower
quality cohorts, the company was faced with a “double whammy” in 2019 of having a significant

4|Page
Downloaded from www.hvst.com by (id:260507) on 01/23/2020
 number of the 2018 cohorts discontinue their subscriptions and having to replace all of them, while
still having to add enough to grow which was a significant strain on the expense base relative to
revenues and cash balance. The market was not impressed with the shift with the stock continuing
to drop over 50% in the first half of 2019.

However, our belief is as the 2017 and 2018 lower quality cohorts continue to leave the user base and
are replaced with, what our quantitative and qualitative research has shown to be, higher quality and
lower disconnect rate subscribers, that in 2020 and beyond, the company’s operating expense base
should stabilize and grow at significantly lower rates than the top line which should feed into
profitability and future Free Cash Flow generation. We have already begun to see that transition in
the form of lower operating expenses from $20mm+ a quarter in 2018 to a more stable ~$15mm a
quarter throughout 2019 while growing revenues and gross profits at 25% to 30% growth rates, aided
by price increases, which should continue to flow through in 2020. We expect that 2020 will be a Free
Cash Flow positive year, with the real cash flow generating power of the business model beginning to
show in the 2nd half of 2020.

Gaia continues to be a source of controversy within the investment community with many people
being turned off by the aforementioned cash flow burn, the content, and management’s shift in
strategy. However, we believe it is important to separate personal and emotional views on topics like
Gaia’s content from recognizing a relatively large under-served global market clamoring for its content
and the like-minded community. While change in strategy is never a pleasant experience to go
through as a buyside investor, much like ourselves, recognizing in the first few years of our
partnership’s existence that our product is not suitable for a substantial part of the institutional
investment market and is much more popular with High Net Worth individuals and small family offices
and changing our own marketing strategy as a result, we cannot help but empathize with Gaia
management team’s recognition that a change was needed to have a path to sustainable profitability
rather than continuously and blindly throwing marketing dollars on lower quality customers. As a
result of our conviction in the name, despite the 50% price drop in the first half of the year, Gaia was
a source of realized and unrealized profits for us in 2019 as we have added and reduced (due to
portfolio risk management) to and from our positioning, as the stock traded from below $6.00 per
share to over $9.00 twice in 2019. Loosely defined we believe the stock market offers patient long-
term oriented value investors opportunities to take advantage of extreme negative sentiment,
misunderstood fundamentals, and stock specific factors such as liquidity, to make outsized returns.
While it is rare to find all three, in addition to the aforementioned sentiment and fundamental factors,
Gaia’s significantly high short interest relative to its stock float and daily liquidity should provide
additional optionality for outsized returns for our partnership in 2020 and beyond as management
continues to execute on its new strategy with an expected shift in fundamentals and sentiment
leading to significant short seller covering.

• Research Solutions (RSSS) – Our investment in Research Solutions continued to fire on all cylinders in
the fourth quarter and 2019 by appreciating 47% on the strength of growth in its Platforms segment
and an announcement on its partnership with Evidence Partners. In November 2019, the company
announced a strategic partnership with Evidence Partners, a Canadian provider of systematic peer
review software via its Distiller SR product. A systematic peer review is essentially a review of most
current academic research (that is conveniently distributed by the Research Solutions Transactions
segment) on various scientific topics and is usually a regulatory requirement for various organizations.
The two platforms are complimentary, not competitive, and early on the partnership can take on

5|Page
Downloaded from www.hvst.com by (id:260507) on 01/23/2020
 many forms, from customer list swaps and increased Transaction segment revenue starting in 2020,
to an eventual merger serving the corporate and academic scientific research community with an
integrated suite of top notch software and published products.

On the financials side Research Solutions continued to deliver with what appears to be a stabilized
and finally growing Transactions segment, and a 45% y/y growth in Platforms revenues with 320
platform deployments and a $3.5mm Annualized Recurring Revenue at an 82.4% gross profit margin.
The management team seems to have zeroed in on the most effective selling techniques and with a
blue-chip customer list we would be surprised if we did not begin to see an acceleration in the top
line growth rate. We expect 2020 to be an initial profitability year for the company with 2021 and
beyond becoming significant Free Cash Flow generation years when we expect the company to re-
rate to its high double-digit operating profit multiples of its Information Services peers. While the
company’s fundamentals are doing great and there is a decently positive sentiment in the stock, its
liquidity is the real issue, that despite being a 260% return stock since our initial purchase, has kept
the stock under the radar. We believe 2020 will be the year when the company gets uplisted to Nasdaq
and with close to a $100mm market cap should get the notice of Wall Street. In short, we still expect
significant return contributions to our partnership from this holding, which remains one of our largest
positions.

Market Outlook and Portfolio Commentary

As of last December, the economy had expanded for 127 months meaning the economy avoided a
recession for the first calendar decade ever. Buoyed by an incredibly resilient consumer, 3.5%
unemployment rate and 3% wage growth, as well as an overly accommodating Fed policy the economy
continued to grow at its 2.1% trend rate. The market, as measured by S&P 500, shrugged off the recession
fears and the negative performance of 2018 and came roaring back 31.5% in 2019 with its valuation
continuing to move almost lock step in line with interest rates, at almost 19x forward earnings (5.4%
earnings yield).

On the surface, the market appears to be richly valued, though not out of line relative to its average
spread vs 10 Year Treasury bond yield. The economy is on track to shrug off recession fears, and with
lower uncertainty on US Trade policy, it looks like we are in for another year of modest ~2% economic

6|Page
Downloaded from www.hvst.com by (id:260507) on 01/23/2020
expansion. However, the above numbers only tell half the story, as Royce Investment Partners points
out in its analysis of the market:

“Large-Cap (+21.7%) and mega-cap (+26.1%) stocks, as represented by the Russell Top 50, have
dominated market returns over the last 18 months, with the latter especially strong. Small and
micro-caps (3.7% and -3.9%), on the other hand, have lagged. The 18-month return spread
between mega-caps and micro-caps of nearly 30% seems extreme”

And while the large caps continue to be richly valued, small and microcaps appear to be relatively cheaper
with Russell 2000 stocks trading at 90% of EV/EBIT valuation of its larger cap Russell 1000 counterpart.
The market leadership continues to be guided by lower quality, non earners, a factor we maintain is
unsustainable in the long run. In short, while there continue to be worries about the rich valuations of the
broader market we continue to believe that the stratification of high quality small and microcaps versus
the larger capitalization lower quality stocks is bound to reverse in the intermediate future. A scenario
that we favor would be a catch up by small caps versus a more flatter return environment for the large
caps, whose returns should be driven by mid-single digit earnings growth, as its multiple expansion is
unlikely to continue its hereto unstoppable march. With our Core Portfolio’s median market cap at around
$150mm and with 2020 being a profitability inflection year for a large number of our Core Portfolio
holdings we are feeling positive about the intermediate future.

Partnership Updates

We welcomed two new partners to the partnership this quarter, bringing our total to 45 at the end of
December. We will be in Miami/Palm Beach in mid-March and would welcome any partners that would
like to catch up in person. Additionally, the partnership is in the process of relocating its registration to
Colorado from California, as well as updating its documents. Please stay on the lookout for communication
from us on these topics as well as our usual year end audit. Finally, as is annual tradition, we will be having
our partnership dinner in on February 10th, 2020 in San Francisco. The past year’s events were well
attended and very fun and we look forward to seeing all of you again in a few weeks. We are excited about
the continued growth in partners and assets under management and, as always, are thankful for your
business.

Next Fund Opening

Our next partnership openings will be February 1, 2020, and March 1, 2020. Please reach out for updated
offering documents and presentations at info@artkocapital.com or 415.531.2699.

7|Page
Downloaded from www.hvst.com by (id:260507) on 01/23/2020
 Appendix A: Performance Statistics Table
Russell MicroCap
Artko LP Gross Artko LP Net Russell 2000 Index S&P 500 Index
Index
YTD 71.5% 61.0% 25.5% 22.4% 31.5%

1 Year 71.5% 61.0% 25.5% 22.4% 31.5%

3 Year 17.5% 13.2% 8.6% 6.3% 15.3%
Inception 7/1/2015 146.7% 101.8% 41.7% 29.6% 71.8%
Inception Annualized 22.2% 16.9% 8.1% 5.9% 12.8%

Monthly Average 1.8% 1.4% 0.8% 0.6% 1.1%

Monthly St Deviation 5.1% 4.6% 4.7% 5.0% 3.5%
Correlation w Net - 1.00 0.78 0.75 0.71

Appendix B: 2019 Gross Performance Attribution Analysis

Ticker Company Contribution Portfolio

REPH Recro Pharma 13.4% Core
SPAR Spartan Motors 10.4% Core
JYNT Joint Chiropractic 8.4% Core
NRCG/ECOL Warrants US Ecology 7.0% Enhanced
SKY Skyline Champion 6.3% Core
EEI Ecology & Environment 4.8% Core
RSSS Research Solutions 4.6% Core
USAT USA Technologies 3.6% Enhanced
VVI Viad 3.3% Core
HQI Command Center 2.8% Core
MO Altria 2.3% Core
GAIA Gaia 2.0% Core
Rest of Portfolio 2.6%

Total (Gross Returns) 71.5%

8|Page
Downloaded from www.hvst.com by (id:260507) on 01/23/2020
 Legal Disclosure

The Partnership’s performance is based on operations during a period of general market growth and
extraordinary market volatility during part of the period, and is not necessarily indicative of results the
Partnership may achieve in the future. In addition, the results are based on the periods as a whole, but
results for individual months or quarters within each period have been more favorable or less favorable
than the average, as the case may be. The foregoing data have been prepared by the General Partner and
have not been compiled, reviewed or audited by an independent accountant and non-year end results
are subject to adjustment.

The results portrayed are for an investor since inception in the Partnership and the results reflect the
reinvestment of dividends and other earnings and the deduction of costs, the management fees charged
to the Partnership and a pro forma reduction of the General Partner’s special profit allocation, if
applicable. The General Partner believes that the comparison of Partnership performance to any single
market index is inappropriate. The Partnership’s portfolio may contain options and other derivative
securities, fixed income investments, may include short sales of securities and margin trading and is not
as diversified as the indices, shown. The Standard & Poor's 500 Index contains 500 industrial,
transportation, utility and financial companies and is generally representative of the large capitalization
US stock market. The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000
Index and is generally representative of the small capitalization U.S. stock market. The Russell Microcap
Index is comprised of the smallest 1,000 securities in the Russell 2000 Index plus the next 1,000 securities
(traded on national exchanges). The Russell Microcap is generally representative of the microcap segment
of the U.S. stock market. All of the indices are unmanaged, market weighted and reflect the reinvestment
of dividends. Due to the differences among the Partnership’s portfolio and the performance of the equity
market indices shown above, however, the General Partner cautions potential investors that no such
index is directly comparable to the investment strategy of the Partnership.

While the General Partner believes that to date the Partnership has been managed with an investment
philosophy and methodology similar to that described in the Partnership’s Offering Circular and to that
which will be used to manage the Partnership in the future, future investments will be made under
different economic conditions and in different securities. Further, the performance discussed herein does
not reflect the General Partner’s performance in all different economic cycles. It should not be assumed
that investors will experience returns in the future, if any, comparable to those discussed above. The
information given above is historic and should not be taken as any indication of future performance. It
should not be assumed that recommendations made in the future will be profitable, or will equal, the
performance of the securities discussed in this material. Upon request, the General Partner will provide
to you a list of all the recommendations made by it within the past year.

This document is not intended as and does not constitute an offer to sell any securities to any person or
a solicitation of any person of any offer to purchase any securities. Such an offer or solicitation can only
be made by the confidential Offering Circular of the Partnership. This information omits most of the
information material to a decision whether to invest in the Partnership. No person should rely on any
information in this document, but should rely exclusively on the Offering Circular in considering whether
to invest in the Partnership.

9|Page
Downloaded from www.hvst.com by (id:260507) on 01/23/2020