Peter Rabover, CFA

Portfolio Manager
Artko Capital LP

July 12, 2016

Dear Partner,

For the 4th fiscal and 2nd calendar quarter of 2016, a partnership interest in Artko Capital LP returned 5.7%
net of fees. At the same time, an investment in the most comparable market index alternatives Vanguard
Russell 2000 ETF, iShares Microcap ETF, and the Vanguard S&P 500 Index ETF–gained 3.8% 4.0%, and
2.4%, respectively. For the last 12 months of our fiscal 2016, an interest in Artko Capital LP returned 12.9%
net of fees while investments in the most comparable aforementioned market index alternatives were
down -6.7%, -12.0%, and up +3.9%, respectively. Our gross, quarterly, and cumulative results, as well as
those for the comparable indexes, are available in the table below. We are happy about our first full year
performance and will focus the letter on discussing how we got there.

On Catalyst-Driven Investing

A big part of our investment process is not only identifying undervalued quality securities but also figuring
out the events that will lead them to appreciate in price within our target holding period. Buying
something just because its undervalued is unlikely to result in high long-term returns and, generally, we
look for catalysts that will get us there. However, we would not call this particular strategy “event driven,”
as we consider soft catalysts (e.g., continued high ROICs and growth) just as value creating as hard
catalysts (e.g., special dividends or spin offs).

One of the most difficult aspects of this particular strategy is getting comfortable with “not knowing.” Can
we predict with 100% certainty whether a company is going to keep paying special dividends or divest a
business to unlock enterprise value? Of course not. We have to be able to act with less than perfect
information. But just as a good chef knows that combining certain ingredients and cooking them under a
specific heat and using proper cookware will result in a quality meal, our job involves researching the
specific company or industry ingredients ensuring that external economic or regulatory environments are
the proper “temperature” for those ingredients to create value.

The most important ingredient in forecasting catalysts is making sure that the people who are in charge
of making economic value-creating decisions are properly incentivized to make them. Sometimes
answering the most basic questions, such as “What is management’s motivation to make this event
happen?” or “Is this person going to get stinking rich if he/she does what we think needs to happen?” can
shed some excellent light on figuring out the likelihood of certain events. Unlike in large caps, where
management usually has already accumulated significant wealth and is likely more concerned with ego
and reputation than earning an extra few million, we find that most management teams of small-cap
companies are still very much in the wealth accumulation stage and are hungry to grow it.

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Other ingredients we consider are the balance sheet, historical actions by the company and management
team, and industry dynamics. The balance sheet is perhaps the second most important ingredient in
catalyst driven investing. Does the balance sheet have hidden assets that can be monetized or spun off?
Does it have the capacity to undertake value-creating events? Does it make sense to have the current
capital structure? Thinking through the answers to these questions helps us to narrow down our potential
investment candidates and likelihoods of catalysts happening.

Finally, we tend to look for answers to questions like “Has this company, board, or management team
done this sort of transaction before?” or “Are there industry events or dynamics that make a catalyst
likely?” via our due diligence process. In the end, there are no “sure thing” events in investment
management and investing involves high degrees of uncertainty, but we’ve found when buying
uncertainty at a high margin of safety with the research process focused on ascertaining the likelihoods
of value creating events tends to work very well over the long term.

We had a good first year and out of the 15 securities in our fully invested portfolio, a significant portion
of the positive performance in the down small-cap markets came from 7 securities that had realized some
sort of catalyst or event. We’d like to review what happened in our portfolio over the last 12 months
below:

● USA Technologies – This was a 7% position for us that has appreciated over 48% from our initial buy-
in levels and close to 30% from our dollar cost average price this fiscal year as we continued to add to
the position as our confidence in the thesis increased. The company began to convert on its significant
growth opportunity of increasing its vending machine connections by 32% to add to its installed base
and ending the 1st quarter of 2016 with over 400,000 connections. With the increasing value of
transactions, as well as transactions per connection, it was able to grow its recurring revenue base by
over 34% for the 9 months of its fiscal 2016. More importantly, by converting the financing for its
transaction equipment from internal capital to external capital, the company has begun to show
consistent free cash flow generation which we expect to increase exponentially going forward. We’re
encouraged that our thesis is panning out and still consider this a strong conviction idea within our
portfolio. Longer term, we believe this company would be a better fit within a larger financial
transaction processing company and still expect over a 100% upside from today’s levels in the
intermediate future.

● US Geothermal (HTM) – HTM was a 10% position in the portfolio for us this year and it has appreciated
over 55% from our buy-in levels and 40% from our dollar cost average price, on the back of a number
of transactions and announcements. We expected the company to continue to convert the 200
megawatt (MW) project pipeline to grow its current 40 MW geothermal base. Some of the key
announcements this year included:
● A purchase of 35 MW of capital equipment for $1.5 million, or a 95% discount, saving the company
$28 million on future capital expenditures.
● Operational progress on a 28 MW project in Geysers, CA, by attaining the necessary permit and
connection agreements. The company is currently looking to sign a Power Purchase Agreement
(PPA) prior to starting construction. We believe an expected near term announcement of a PPA
should be received well by the markets.
● A $5.1 million buyout of Goldman Sachs’s minority interest of the Raft River, ID, plant. The buyout
enabled US Geothermal to announce an immediate $3 million expenditure project to increase the
plant output from 9 MW to 13 MW by 3Q 2016, and increase its annual free cash flow by another
$1.5 million, or approximately 25% over last year.

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 ● A project to increase the output of its Neal Hot Springs, OR, plant by 3 MW by building a cooling
tower. The company is currently testing well flow in the area to provide water for the tower and
we expect it to move on this project in the near future.
● Obtaining financial capacity to borrow up to $50 million from Prudential Capital Group, removing
a major overhang with respect to the uncertainty surrounding the company’s ability to finance
the growth of its pipeline and fear of an equity dilution.

By themselves, these were not major events, however, taken together they show a management team
committed to capitalizing on the tremendous growth opportunity ahead, which should provide
another 100 to 200% upside from today’s price and for the company to generate over $20 million in
highly recurring free cash flow from last year’s ~$6 million figure.

 Gaiam (GAIA) – GAIA was also a 10% position in the portfolio for us this year, and it has appreciated
approximately 20% due to its announced transaction in 2nd calendar quarter of 2016. While we were
patiently waiting for the announced spin off of the streaming yoga TV business to materialize this
year, the company decided to go in a different direction by selling the brand and travel businesses for
$180 million or $7.20 per share. While we always valued those businesses between $150 million to
$200 million, we were pleasantly surprised by the deal. However, we’re more excited about what the
company is going to look like post-transaction. In July 2016, management completed a tender offer
of $7.75 per share for approximately 40% of the outstanding shares, which left the company with over
$7.00 per share in cash and real estate and only 75 cents for the streaming yoga TV business which
we estimate to be worth between $7.50 to $15 per share in the next few years. The business has a
7,000+ title library with close to 170,000 global subscribers expected to grow 80% a year for the next
few years. This will drain some of the cash from the balance sheet, but we think investing in a high-
recurring cash flow customer base with very low content creation costs makes tremendous economic
sense and a longer term subscriber base of close to 1 million should be very attractive to a bigger
media company.

 Village Supermarkets (VLGEA) – VLGEA was a 7% position in the portfolio from our initial September
2015 buy and including a generous 4% dividend yield has returned close to 20% from our initial buy-
in and dollar cost average prices. While no significant events have materialized, including a special
dividend anticipated by us, the company continued to report positive same store sales and strong free
cash flows while fighting higher wage headwinds and competitive pressures. Our original thesis was
that a company that earns a consistent 10-12% Return On Invested Capital (ROIC) due to its strategic
ownership of a large co-op should appreciate to at least 7X-8X EBITDA multiples of its average
performing peers as the market appreciates the company’s returns and cash flow generating ability.
The company has closed the gap with its peers somewhat and now trades at 5X forward EBITDA
multiple and a 10% free cash flow yield with a rare unlevered balance sheet. We anticipate the daily
stock sales by the blind trust of one of the original founders, that sometimes account for as much as
20% of the daily volume, to stop by 4Q 2016, giving an additional boost to the stock price.

The Enhanced portion of the portfolio has had a number of significant value-creating events throughout
the year as well:

● Kodak $14.93 September 2018 Warrants – We were very excited about the performance in our Kodak
warrants this past year. We originally allocated approximately 4.5% of portfolio capital to these
securities and continuously added to the position as the price went from $3 to below $2 early in 2016
to keep at the same proportion level. In 1Q16, the company announced the intention to sell its

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 PROSPER ink jet commercial printing system and began to take steps to refinance its high-cost capital
structure. The market soon began to appreciate the true value of the underlying assets and their cash
flow generating ability, with the stock appreciating over 45% in 2Q16. At the same time, our warrant
position has appreciated over 100% from its lows and is now close to 9% of the portfolio. We expect
imminent announcements from management on the PROSPER sale and refinancing and will likely
begin to pare down our position to control our exposure if the price continues to move up.

● Full House Resorts – Our 2% position in Full House did not disappoint this year as it returned over
30%. Our investment in this company was mostly an investment in one of the most respected
managers in the gaming industry, Dan Lee. Over the course of the last year, Lee has successfully turned
around the underwhelming operations of four casino properties in Nevada, Indiana, and Mississippi,
improving 1Q16 revenues and EBITDA by 11% and 79%, respectively. In June 2016, Full House closed
the acquisition of Billy Broncos Casino in Colorado Springs for an advantageous 5X EBITDA price and
was able to refinance its onerous debt burden creating significant breathing room for management
to continue to create value. We’re excited to continue to watch what Lee can do with this $36 million
market cap company.

● MMA Capital Management (MMAC) – Our original 3% position in MMAC has returned over 45% this
past year on the back of company completing a number of value unlocking transactions that helped
to grow its book value 46%. MMAC bought back over 12% of shares outstanding in the last year, and
over 25% over the last 2 years, significantly below its accounting and economic book value, creating
substantial accretion to the shareholders. Other book value growth was driven by a net increase in
the fair value of the company’s bond portfolio and by net income generated during 2015 and 2016
from net gains on assets, derivatives and extinguishment of liabilities from the company’s balance
sheet. Finally, the company signed a lucrative deal to manage the $211 million tax credit portfolio for
Bank of America, where it gets to collect substantial asset management fees without taking on
significant capital risk. Going forward, we anticipate the company to grow its book value by at least
100% by continuing to monetize the hidden assets on its balance sheet, including its interest in a
Savannah, GA, real estate venture; its put option to buy back Morrison Grove Asset Management in
2019; growing the solar lending joint venture, and buying back more shares below the company’s
economic value.

Our other investments in CSW Industrials, Graham Holdings, and Viad contributed modestly to our
performance with returns ranging from 1% to 6% without major significant events. Our investment in
National Research Corporation has returned over 11% in the form of regular and special dividends while
the price has stayed relatively flat. On the downside, our investments in the warrants of AIG and Del Taco
were down approximately 7%, and we’ve taken advantage of the lower prices by adding to our original
3% positions.

Other Portfolio Updates

Core Portfolio Sales

To revisit our sales process: on the upside, we sell when we believe that our investments are now trading
at fair value (or beyond) and where we see opportunities to deploy that capital elsewhere. More
importantly, to the downside, we will always take the loss when it is clear that thesis is irreparably broken,
as was the case this past quarter.

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 Babcock & Wilcox Enterprises – We sold our 4.5% position in Babcock & Wilcox Enterprises toward
the end of 2Q16. As a reminder, it was a business spun off from the Babcock & Wilcox Company in
mid-2015. At the time, it had all the elements that we look for: depressed price due to shareholder
base dislocation, large net cash position, and properly incentivized management. Additionally, a
growing non-coal backlog offered good visibility, and intention to diversify away from its high-margin
coal plant aftermarket service business, which at the time, accounted for close to 50% of the business,
presented a good investment opportunity. While the initial results and price reaction were
encouraging, we were on the sidelines with adding more to the position due to our concerns regarding
the secular nature of the coal market decline. On June 28, 2016, the company pre-announced a
number of actions, including a restructuring of the coal power segment due to what it now sees a 15-
20% decline in the next 12-24 months for its parts and services business and a large charge for a
mistake it made on a Waste-To-Energy project in Europe.

This raised a number of red flags for us, mostly the inability of management to forecast or see its
markets, which just a few weeks ago they expected to be flat. Our experience told us that realistically
it is unlikely to be the last guidance down or a restructuring announcement. Even though the stock
dropped over 15% from our buy-in levels, we felt the thesis was broken and our margin of safety was
no longer there as we saw more potential for permanent capital impairment. We decided to take our
loss and exit the position. In the end, our investment in Babcock & Wilcox detracted approximately
80 basis points from the overall portfolio performance as our largest single position loss in fiscal 2016.

In an exercise of identifying mistakes that we would not like to repeat to avoid similar losses, we found
a couple that we hope will make us better investors in the future. First, while we were skeptical of the
end market stability based on our research, we fell for the reassurances of management that it was
likely to be flat. We should have been more skeptical and weighted the industry trends more. As
Warren Buffett once said, “When a management with a reputation for brilliance tackles a business
with a reputation for bad economics, it is the reputation of the business that remains intact.” Second,
we will be more mindful in committing large amounts of capital to positions that have exposure to
industries in secular decline despite the potential upside. It is much harder to assess a true margin of
safety in these situations and while we got out with a ~15% loss it could have been worse.

Core Portfolio Additions

● Demand Media (DMD) – Our newest core portfolio position in Demand Media offers a rare strong
margin-of-safety/high-upside opportunity in tech, a sector in which companies can easily lose 30 to
40% in a session, a risk that we as value investors do not have the stomach nor mandate to take on.
In this particular case, with 70% of the $100 million market cap in cash and the $30 million Enterprise
Value (EV) of the company trading at less than 0.3X EV/Revenues, with more than $100 million in Net
Operating Losses (NOLs), we felt our downside was limited. On the upside, this company has two
segments: Market Places and Content & Media led by a strong management team, including CEO Sean
Moriarty, who recently led the sale of Ticketmaster for more than $1 billion. We really like this
business for the Market Places segment that has Society6 and Saatchi Art– two companies that
connect artists to consumers to sell art and custom artist-designed clothing/gifts. These two profitable
businesses have been growing its $52 million revenue base at a high 40% rate, on par with its two
competitors RedBubble and Etsy, both of which trade at more than 2.5X+ forward revenues. This
would put the valuation for the Market Places business close to $160 million, or more than 4X today’s
Enterprise Value of the whole company. In other words, you’re getting the high-quality Market Places

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 business at a 75% discount, and getting the Content & Media business for free. The C&M business is
composed of three internet content properties Livestrong, eHow. and StudioD, generating
approximately $65 million in annual revenues. The new management team has taken the tough
decision to completely revamp these business from a high-volume, low-quality “content farm”
business to a higher-quality, more mobile- and video-oriented content business that is more targeted
to social media traffic, which resulted in the revenue base shrinking by over 70 percent. Additionally,
Demand Media just sold the Cracked.com content property for 4.0X revenues to E W Scripps, showing
that they are certainly willing to sell these segments at the right price. While we’re not very excited
about this segment and are worried about its potential to continue to drain cash, we do believe it
should be worth something, at least at 1.0X-1.5X revenues, resulting in a 200% upside to $15 per share
from today’s price levels. Since our initial entry management has made more tough decisions in
shrinking the StudioD workforce to control expenses and initiating a small $5 million share buy back
in 2016.

Market Outlook and Commentary

We started our first year in July 2015 with one European drama, the Greek fiscal crisis, or Grexit, and
ended it in June 2016 with another–the British voting to leave the European Union, or Brexit. In between,
we had economic growth scares and a collapse of oil to $26 per barrel in winter of 2016. Throughout all
that, the resilient U.S. economy has managed to continue to grow at an over 2% clip and lower the
unemployment rate to levels not seen since the late 2000s. As we enter the second half of 2016, we are
starting to see the beginnings of certain structural weaknesses, led by a buildup in inventories, lower job
creation, and signs of late stages of the credit cycle, combined with the uncertainty over the Brexit and
U.S. November 2016 elections. However, unless we see an exogenous system shock on the scale of
Lehman or 9/11–the events that tipped the world into the last two recessions–we are not expecting a
near term contraction. We see tailwinds in housing, good job creation and strong consumer demand to
continue to carry the US GDP growth in positive territory but our outlook is tempered more to a slower,
1-2% growth.

Over the last year, the small- and micro-cap markets are down ~5% and 10% from their highs while the
S&P 500 price level is modestly up. Corporate earnings for the last 12 months have been battered by the
energy sector, down 77%, and a somewhat stronger dollar; however, we expect for earnings growth to
return to high single digits by 2017, if global economic growth continues at our expected pace of
approximately 2%. The earnings yield, the inverse of the price to earnings ratio, has remained steady at
5.9%, though still below its historical average of 6.8%. However, over the last year the 10-year Treasury
rate has dropped by 1% to below 1.5%, or almost negative in real terms, widening the real spread over
the equity yield to over 6.4%, significantly above the historical average of ~4%. With $11 trillion worth of
global bond assets offering a negative rate of return and an expectation for global central banks to
continue to run an incredibly loose monetary policy we expect the U.S. stock markets to continue to trade
at higher than historical multiples and lower earning yields for the foreseeable future due dearth of better
investment alternatives for investors. However, with more pressure on earnings from slower growth, we
anticipate market volatility to pick up as investors become more sensitive to any hick ups that could
potentially hinder earnings growth. We still see this as a stock pickers market and will continue to look for
bargains, however, in the coming year you should expect us to begin to hold more cash and to
opportunistically engage in broad market hedges.

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Parting Words

“It's easy to grin / When your ship comes in / And you've got the stock market beat. / But the man
worthwhile, / Is the man who can smile, / When his shorts are too tight in the seat” – Judge Smails,
Caddyshack

Our partnership had a great first year, and we are satisfied with our results. Part of our success has been
staying away from the underperforming and more volatile small-cap sectors in energy, pharmaceuticals,
or technology, where we rarely feel we can have a competitive research advantage. However, there will
likely be periods where those sectors will become “hot” again, and we may well underperform the market
indexes. We hope to still be smiling during the periods when our “shorts are too tight.”

Partnership Updates

 We are looking forward to having you and your guests join us on July 18 in San Francisco for our annual
dinner, where we’ll be able to discuss our year and outlook in more detail. You should have received
your invitation in June.
 As part of our business continuity planning, we have added to our partnership agreement one of our
limited partners, Guillermo Roditi Dominguez, as our main operational back-up. Mr. Roditi Dominguez
is based in Los Angeles and is the founder and Portfolio Manager of New River Investments. He will
be a caretaker manager and will manage the wind-down of the partnership should we, the General
Partner, become incapacitated or are prevented from carrying out our duties. He has over a decade
of investment industry experience and has been a close informal advisor to Artko Capital LP since
before our launch.
 You should begin to receive communication from our auditor, M. D. Hall & Company in the 2nd half of
2016 as we prepare for the calendar 2015 and 2016 audits.

Finally, we want to thank our auditor, M. D. Hall & Company, our fund administrators, HC Global Fund
Services, and our law firm, The Securities Law Group, who support the smooth running operations and
compliance of our partnership.

Next Fund Opening

Our next fund openings will be August 1, 2016, and September 1, 2016. Please reach out for offering
documents and presentations at [email protected] or 415.531.2699

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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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