Peter Rabover, CFA

Portfolio Manager
Artko Capital LP

July 16, 2017

Dear Partner,

For the 4th fiscal and 2nd calendar quarter of 2017, a partnership interest in Artko Capital LP returned 8.3%
net of fees. At the same time, an investment in the most comparable market indexes—Russell 2000,
Russell Microcap, and the S&P 500—gained 2.5%, 3.8%, and 3.1%, respectively. For the 12 months of our
fiscal 2017, an interest in Artko Capital LP returned 28.5% net of fees, while investments in the most
comparable aforementioned market indexes were up 24.6%, 27.6%, and 17.9%, respectively. Our monthly
results and related footnotes are available in the table at the end of this letter. We are excited to finish
our second year as a partnership while maintaining a 20.4% internal rate of return (IRR) for our partners.
As always, we are thankful for your long-term commitment to the partnership’s success.
CY 2017 Inception Inception
3Q16 4Q16 1Q17 2Q17 1 year
YTD 7/1/2015 Annualized
Artko LP Net 10.6% 11.2% -3.5% 8.3% 4.6% 28.4% 45.0% 20.4%
Russell 2000 Index 9.1% 8.8% 2.5% 2.5% 5.0% 24.6% 16.2% 7.8%
Russell MicroCap Index 11.3% 10.1% 0.4% 3.8% 4.2% 27.6% 12.2% 5.9%
S&P 500 Index 3.9% 3.8% 6.1% 3.1% 9.3% 17.9% 22.6% 10.7%

Return On Invested Capital (ROIC) and how it fits into our process

If we were to pick an investment process topic that we suspect we will return to many times in the coming
years, Return On Invested Capital (ROIC) or Cash Flow Return On Assets (CFROA), is probably one that will
come up more frequently than others. During a recent Fourth of July small-town parade in 90-degree
weather, we came upon a simple business with the greatest ROIC in the world: a lemonade stand powered
by a little girl on a busy corner. A girl with a (likely borrowed) folding table that can be bought for $10 on
any website and a $10, 136-serving Country Time Lemonade mix was selling those cups like gangbusters
for 50 cents a cup (a price we suspect could have been doubled without much trouble). In a few hours
she ran out of lemonade mix and went home with at least a $60 bounty or a whopping 200% ROIC in one
afternoon!

While this example is shown in jest and no little girl’s lemonade stand will likely survive the onslaught of
the inevitable Amazon lemonade drone delivery business, analyzing a potential business in the public
markets isn’t dissimilar. We tend to look for simple to explain business models that can generate
substantial and sustainable returns using little capital. Easier said than done, since most of these
businesses tend to already trade at justifiably high valuations. While the small- and micro-cap space offers
more opportunities to find these, they tend to be few and far between. As such, a big part of our
investment process focuses on those companies that have significant opportunities to expand their ROICs
from depressed levels, in addition to having a valuation- or asset-based margin of safety. There are many
formulas that show how to calculate various definitions of ROICs or Economic Value Added (EVA) and even
more showing a theoretical value of a company based on its growth and ROICs. Nevertheless, a simple
truth holds: A company that is expanding its ROICs is going to expand its valuation multiples and value. In
other words, the little girl’s business would be worth more if she could make more than $60 using the
same table and lemonade mix the following week.

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Of course, low capital requirements and high returns on capital present a different challenge: the
attraction of competitors. Seeing the success of our adorable lemonade-peddling friend is sure to attract
her classmates setting up tables on nearby corners within a few days. Therefore, the second half of any
ROICs analysis should always include an analysis of sustainability of these returns and the length of the
competitive advantage period (CAP) where a company can reinvest its profits at similar rates of return.
It’s no surprise that software has the highest returns and tends to have the shortest competitive
advantage periods due to its low capital requirements and “winner take all” characteristics. In comparison,
staples like food, drugs, and transportation tend to have longer CAPs due to higher capital intensity and
higher barriers to entry via regulation. If our friend had cheapest source of lemonade, was the only one
with $20 among her friends, or had the exclusive permission from all of her neighbors to set up shop on
the block, she is likely to continue to earn her $60 dollars for many town holidays to come. We believe
our newest addition in Spartan Motors, discussed below, as well as most positions in the Core Portfolio,
fits the narrative of simple, high incremental ROIC opportunity companies and a majority of our
investment theses will continue to focus on investing in companies with high sustainable ROICs.

Core Portfolio Additions

● Spartan Motors (SPAR) – We added an initial 6% position this quarter, which we later increased to 8%,
in a fantastic manufacturer of “last mile” delivery vans, emergency vehicles (think firetrucks!) and
chassis for large scale Recreational Vehicles (RVs). Spartan, a $300 million market capitalization
company with no debt, has a leading position in a duopoly delivery van market, which should continue
to grow above historical trends with ecommerce and package delivery set to grow in double digits in
the near future.

While the high ROIC van business segment is arguably the jewel of the empire, with expanding 10%
EBITDA margins, and at current relative valuation levels accounts for the entire value of the company,
we believe the real opportunity lies in the turnaround of bigger emergency vehicles segment by the
reputable CEO Daryl Adams. When Adams joined the company two years ago, he found a historically
mismanaged and culturally inefficient enterprise. Since then, Adams, who recently bought $3 million
worth of SPAR stock on the open market to add to his $2 million holding, has made great strides in
improving operations in every segment. In our experience of investing in turnarounds of small
industrial manufacturers, we believe the company’s problems are easily fixable under Adams’
leadership and should drive company-wide EBITDA margins from 4% today to above industry averages
of 10% in the next two to three years. Included among some of the easy fixes are consolidating
facilities and purchasing departments, investing in hereto non-existent Enterprise Resource Planning
software, implementing a culture of lean manufacturing, and compensating the new slate of
impressive managers on ROIC enhancing metrics, such as operating income growth and working
capital improvements.

We expect SPAR’s EBITDA to grow from $30 million in 2016 to over $90 million by 2019 and with low
additional capital investment requirements and a substantial portion of those profits to convert to
Free Cash Flow. As the company improves its Cash Flow Return on Assets (CFRA) and ROIC from low
single digits to potentially 20% or higher, we expect the valuation multiples to expand from 8x to over
10x and for the potential return on this investment to exceed 200% from our initial $8.55 per share
purchase levels. In the meantime, the Sum Of The Parts valuation of at least 100% higher than today’s
stock price and a CEO willing to monetize the company assets for the right price, provide the right
margin of safety for this investment.

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Core Portfolio Sales

• CSW Industrials (CSWI) and Graham Corporation (GHM) – We sold our combined ~7.0% position in
the two small industrials this past quarter to make room for our investment in Spartan Motors. In the
end, there was nothing wrong with CSWI or GHM. They were good investments each earning over
20% during our two-year holding period. However, with our expectations going forward of low
double-digit returns from these investments, they just did not meet our hurdle for staying in the
portfolio, as we generally look for at least a 100% potential upside from our investments. We have
not been adding to the positions for some time now with new partnership asset inflows and their size
in the portfolio has shrunk from 12% to below 8%. Finally, we felt that while GHM’s cash-laden balance
sheet provided a strong margin safety, the current struggling energy environment would prevent the
business from thriving in the foreseeable future. In the end, we will keep our eye on these high ROIC
businesses and would look to potentially enter again at lower prices.

Other Portfolio Updates

• Hudson Technologies (HDSN) – In a reversal of last quarter’s 20% stock price drop where we added
an additional 2% on the dip, Hudson came roaring back 30% higher in 2Q as unfounded fears of the
Environmental Protection Agency (EPA) repealing the R-22 phase-out began to dissipate. The
company also reported solid results during the quarter with refrigerant pricing ticking up in double
digits as supply problems ahead of a hot summer continue to manifest and very strong gross margins,
above 32% from 27% a year ago, showing how pricing power can quickly translate to significant
profitability. Finally, the stock was added to the Russell indexes this past quarter, which increased
liquidity and visibility for the company. While at current $9.30 stock price, the stock is up 180% from
our initial purchases a year ago, we still believe there is significant value left in this investment and
continue to hold it as a 9.0% portfolio position.

• Destination XL (DXLG) – Destination XL has been our biggest underperformer this quarter, swinging
wildly from $2.85 to $1.95 back up to $2.75 and closing the quarter at $2.35. The stock performance
of this low liquidity stock driven by broad market fear factors on the overall retail sector does not
match the fundamental reality of the company’s performance. While the 1st quarter results came in
line with our and the company expectations of flat revenues, by April 2017 the company had ramped
up its announced advertising campaign resulting in a 6.4% comparable same store sales increase for
the first month. The company is on track to deliver 2-4% same store sales growth for the year and
over $30 million in pre-growth capital expenditures Free Cash Flow. While we are mindful of the
competitive environment, we believe that 3x Free Cash Flow multiple is just too low for a quality
company with its own significant online business boasting an incredible 8% return rate. We’ve been
adding to our position on the dips, lowering our overall cost basis to below $2.50 per share, though
these adds should be viewed as temporary as this is likely to remain, a smaller, 6% to 7%, core portfolio
position. (Further discussion of the impact of macro-economic uncertainty factors is discussed in our
Market Outlook section.)

• State National Companies (SNC) – We couldn’t be more pleased with the performance of this
investment over the last year. It is up over 80% since our September 2016 purchase and 30% for the
quarter. The company has continued to hit on all cylinders in its Fronting Services segment and
Collateral Protection and continues to raise its guidance quarter after quarter. One of our bigger
worries for this company was its concentration of big contracts on the Fronting Services side of the
business. During the quarter, State National announced two big contract wins totaling $200 million in

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 annualized premiums, which significantly boosted the company’s Free Cash Flow generation and
diversified its book of business to lower the aforementioned concentration worries. While we do not
act on market rumors, the stock’s performance this quarter was also helped by reports that the
company was in the process of shopping itself to potential buyers. Despite the significant run up in
the stock, we believe that at current valuation levels this excellent operator, with high incremental
and sustainable ROICs, is still trading 40% below its current fair value and it remains one of our bigger
positions at 10% of the portfolio.

• US Geothermal (HTM) – US Geothermal, another 10% position, continued its progress toward
developing its pipeline of geothermal projects in the Western United States. While the company
currently has approximately 40 megawatts (MW) of geothermal power in three plants under
management in Nevada, Oregon, and Idaho, the real value in the investment is the development of
its pipeline of additional projects that we expect to come on line in the near future. One is a 30MW
project in Geisers, CA. and another one is an expansion of its Sam Emidio plant in Nevada. The good
news that came out during the quarter and pushed the stock up 15%, is that the Nevada project, Sam
Emidio II, has increased its proven reserve estimate from 10MWs a year ago to 47MW today. At this
point, the company is in the process of bidding for Power Purchase Agreements (PPAs) with interested
parties in California and Nevada, a drawn out and uncertain process. We believe that at current $4.50
per share price, the company’s value is backed by its long-life assets and significant Free Cash Flow
generation. Should these projects sign PPAs and begin construction, the upside is well over a 100%.
The characteristics of the risk-reward of this investment (heads we win and tails we don’t lose much)
and its relatively small exposure to changes in the economy, is why it continues to be a significant
holding in our portfolio.

• We’ve invested under 1% of our portfolio this quarter in put options of two companies where we
determined near term events would lead to a fall in their stock prices. So far, they have both worked
out well contributing approximately 0.5% to portfolio performance this quarter.

Market Outlook and Commentary

The most popular TV show in the United States throughout this bull market cycle has been the HBO-based
fantasy drama “Game of Thrones.” Over the last six seasons, set in the world of seemingly endless
summer, the recurring phrase that continued to permeate the show has been “Winter is coming.” The
characters pay homage to the potential of winter but because it has been warm and sunny for such an
unprecedented period, instead of truly preparing for winter it sort of devolved into a repeatable idiom
whose original meaning has been lost. In a way, today’s markets are not dissimilar. It has been almost a
decade since we saw real economic- or market-based discomfort. The Great Recession and the stock
market crash of 2008 have been replaced by an unstoppable bull market and an ever-expanding economy.
The bogeyman of a bear market is something portfolio managers tell their young analysts to make them
work harder, but he hasn’t been seen or heard from in years, breeding incredible complacency as
measured by the historically low volatility in the markets today.

Since we wrote our first letter to you two years ago, the broad market index, S&P 500 has returned 22.6%.
In mid-2015, the expected 2016 S&P earnings were $130 and 2017 earnings expectations were around
$146. Looking at the same earnings expectations today, 2017 earnings are expected to be $131.50 and
2018 earnings expectations are at $147. In other words, while the market and market multiples are
climbing, from 15.6x Forward Twelve Months (FTM) in 2015 to 17.6x today, the hope for earnings growth
keeps being pushed out further and further. It’s been one off thing or another as to why this is happening,

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such as the energy sector getting hit or the dollar getting stronger resulting in negative earnings revisions.
The economy continued to grow at a decent clip of over 2% during that time, interest rates were low and
investment choices for real returns relative to the U.S. stock markets were non-existent allowing investors
to shrug off the continuous push out of earnings growth.

If you’ve been reading the market commentary section of our investor letters, you know we’ve been a fan
of comparing the real 10-year Treasury rate to the inverse of the S&P 500 Price to Earnings ratio, the
earnings yield. Over the last two years, that spread, the equity risk premium, has gone from approximately
6% to closer to 4% on higher market valuations, and moving in line with historical averages. This analysis
also required us to believe that earnings expectations will be correct; however, as we see today, those
earnings expectations remain the same as they were two years ago so the true earnings yield may be even
lower. However, the bigger signal coming through the macro data noise is the flattening of the yield curve.
While the 10-year Treasury has remained consistently in place at around 2.35%, the shorter-term rates
have gone from .05% to over 1.00% on Federal Reserve tightening actions. In the past, yield curve
flattening or inverse movement signals have implied higher potential for economic and market trouble
ahead. At the same time, we believe political uncertainty coming from the Trump administration on its
tax and healthcare policies and the possibility that the Federal Reserve overshoots on macro policy create
an environment of high uncertainty, for not only us, but also companies and consumers alike. As a
partnership, we are likely to become more cautious in the near future and may look to hold 20% to 30%
of our assets in cash in anticipation of better investment opportunities at lower prices or engage in
hedging out market risk. Winter is coming. Don’t expect us to be complacent in the face of increasing
uncertainty.

Partnership Updates

We’ve welcomed 6 new partners to the partnership this quarter bringing our total to 21 by the end of
July. With 90% of our assets having a lock up of over 3.5 years, we feel comfortable taking much longer
term oriented investment decisions going forward. We are excited about the continued partnership
growth and look forward to seeing you at our annual partner event on July 17 in San Francisco. We are
likely to have our next event in early 2018, as we will move to converge our fiscal and calendar years in
line with your tax reporting periods.

Next Fund Opening

Our next fund openings will be August 1, 2017, and September 1, 2017. Please reach out for updated
offering documents and presentations at info@artkocapital.com or 415.531.2699

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 Appendix: Performance Statistics Table

Russell MicroCap
Artko LP Gross Artko LP Net Russell 2000 Index S&P 500 Index
Index

Jul-15 2.1% 1.7% -1.2% -3.2% 2.1%

Aug-15 -3.7% -3.7% -6.3% -5.4% -6.0%
Sep-15 1.6% 1.4% -4.9% -5.8% -2.5%
Oct-15 1.7% 1.5% 5.6% 5.4% 8.4%
Nov-15 4.1% 3.3% 3.3% 3.8% 0.3%
Dec-15 0.2% 0.0% -5.0% -5.2% -1.6%
Jan-16 -5.2% -5.4% -8.8% -10.4% -5.0%
Feb-16 0.9% 0.8% 0.0% -1.5% -0.1%
Mar-16 8.9% 7.5% 8.0% 7.1% 6.8%
Apr-16 1.4% 1.1% 1.6% 3.2% 0.4%
May-16 3.5% 2.7% 2.3% 1.3% 1.8%
Jun-16 2.3% 1.8% -0.1% -0.6% 0.3%
Jul-16 12.4% 10.0% 6.0% 5.2% 3.7%
Aug-16 0.5% 0.4% 1.6% 2.6% 0.1%
Sep-16 0.1% 0.1% 1.1% 2.9% 0.0%
Oct-16 -1.5% -1.3% -4.8% -5.7% -1.8%
Nov-16 13.5% 11.0% 11.2% 11.6% 3.7%
Dec-16 1.8% 1.4% 2.8% 4.6% 2.0%
Jan-17 -2.2% -2.3% 1.5% 0.4% 1.9%
Feb-17 2.3% 2.2% 1.9% 1.0% 4.0%
Mar-17 -3.4% -3.5% 0.1% 0.9% 0.1%
Apr-17 2.7% 2.7% 1.1% 1.0% 1.0%
May-17 0.1% 0.1% 2.1% 2.4% 1.4%
Jun-17 6.7% 5.4% 3.5% 5.2% 0.6%

YTD 5.9% 4.6% 5.0% 4.2% 9.3%

1 Year 36.4% 28.4% 24.6% 27.6% 17.9%
Inception 7/1/2015 61.1% 45.0% 16.2% 12.2% 22.7%
Inception Annualized 26.9% 20.4% 7.8% 5.9% 10.7%

Monthly Average 2.1% 1.6% 0.9% 0.9% 0.9%

Monthly St Deviation 4.4% 3.8% 4.5% 4.8% 3.1%
Correlation w Net - 1.00 0.80 0.75 0.62

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 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.

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