Peter Rabover, CFA

Portfolio Manager
Artko Capital LP

January 19th, 2017

Dear Partner,

For the 2nd fiscal and 4th calendar quarter of 2016, a partnership interest in Artko Capital LP returned 11.2%
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 8.8%, 10.1%, and 3.8%, respectively. For the 12 months of
calendar 2016, an interest in Artko Capital LP returned 33.2% net of fees, while investments in the most
comparable aforementioned market indexes were up 21.3%, 20.4%, and 12.0%, respectively. Our monthly
results are available in the table at the end of this letter. We are happy with our performance this quarter
and will focus the letter on our process and discussing how we got there.

On EBITDA Valuations and Public vs Private Markets

A big part of our investment process is determining upside and downside valuations for our portfolio
companies. The valuation process is certainly more art than science, and there are many valuation tools
to use in calculating a company’s potential value. You have likely noticed that in our typical discussions on
how we think about potential returns and margin of safety for our investments that we often use the
phrase “EBITDA multiple,” or what the company is worth relative to its Earnings Before Interest, Taxes,
Depreciation & Amortization (EBITDA). As a confession of sorts, we will admit that we hate using EBITDA
to value public companies. It’s an ugly metric that usually does not represent the true economic reality of
the company’s growth, profitability, and capital intensity. So why do we bother?

To understand the importance of the EBITDA in valuation, one first must look at the investment markets
in which our partnership participates. As we try to create a value-added investment product that would
be hard to replicate via an index, we tend to invest mostly in the small- and micro-capitalization public
markets with low liquidity. Of the more than 5,000 investable stocks traded on major U.S. exchanges,
about 2,500 of them are below a market capitalization of $1 billion. This does not include the other
approximately 2,500 that are composed of many business units that if broken apart could also be worth
less than $1 billion. By comparison, there are at least 2,000 private equity funds in the North America, the
vast majority of which are small, at an average of approximately $250mm, and on average hold 8 to 10
companies in their portfolios. That means the true small-capitalization company investment market is
likely three to five times bigger than our current small-capitalization public market when looking at the
number of companies available for investment1.

It is in this private market where earnings based on Generally Accepted Accounting Principles (GAAP)
matter little, and the de facto transaction currency of the EBITDA multiple is king. It is also a popular

1
According to pitchbook.com, there were at least 7,580 of PE-backed inventory companies as of 6/30/2016

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“currency” in the public and private credit markets to establish debt ratings, borrowing levels, and interest
expense. For a private buyer or borrower, the EBITDA is the benchmark against which to establish the
financial leverage and future returns they may put on the company to take it private or bring back to the
public. It is also a benchmark upon which a private buyer may look to when wanting to improve the
profitability of the firm. Having spent a portion of our career assisting in a number of M&A transactions,
both for strategic and private equity parties, we have witnessed first-hand the ability of private investors
to take out significant costs and grow revenues in small, uncomplicated deals. Additionally, the current
low levels of interest rates allow private investors to finance at lower rates, increasing debt levels and
deal multiples, as can be seen below, and in turn driving up comparisons for public market valuations.

It is for the existence of these much larger private markets and larger public players why the EBITDA
matters when analyzing public investments—from both the return and margin of safety perspectives.
Instead of short-term price volatility, we tend to view risk in probabilities of permanent capital impairment
of our investments. Since the spectacular collapse of Enron and Tyco in 2001/2002 and the subsequent
introduction of the Sarbanes Oxley Act, it has become increasingly more expensive from the cost of capital
perspective, to be a small-capitalization public company. Some of the ways we tend to examine our margin
of safety valuations and return potential is to see how attractive these investments may be under certain
scenarios to the private and larger strategic investors and the potential for their returns using operational
improvements, synergies, and financial leverage, if these companies ceased to be publicly traded. So while
the EBITDA multiple may remain an anathema to those looking at large public companies unlikely to ever
be bought out, it will continue to be an important tool in our valuation toolbox when we consider potential
investment paths for our holdings.

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Core Portfolio Additions

● State National Companies (SNC) – We added an initial 6% position this quarter, which we later
increased to 8%, in a small, Texas specialty insurance company, State National Companies (SNC).
While insurance is generally a boring business, SNC is anything but. The company has two excellent
separate niche insurance businesses: Collateral Protection and Program Services.

The Collateral Protection business assists financial institutions, mostly credit unions, in insuring
collateral, mostly cars, if the borrower’s insurance coverage runs out. Unlike traditional car insurance,
which has consumer price sensitivity, this business is a leader in an oligopoly, where the main
determinant is not the price the consumer pays for the insurance but the ease of business for the
contracting financial institution. While most insurance companies have very high Combined Ratios (a
ratio combining losses and administrative expenses as a percent of revenue) in the high 90s, and the
best car insurance companies, such as Geico and Progressive boast CRs in the mid-90s, SNC is able to
earn an eye-popping 85% Combined Ratio in this line of business. In fact, we believe the biggest risk
to this segment is the government deciding that SNC is earning TOO MUCH money and increasing
regulatory scrutiny on an already highly regulated business. Finally, this segment is characterized by
SNCs exclusive partnership with the Credit Union National Association (CUNA), which puts SNC into
95% of all credit unions in the United States and along with an excellent technology platform creates
a significant barrier to entry for any potential competitors.

Program Services, a segment that represents 70% of pre-tax income, is a niche semi-brokerage
business that assists non-traditional players, such as institutional investors or foreign insurance
companies, as well as independent general agents, that are interested in participating in the highly
regulated U.S. Property & Casualty (P&C) insurance markets as a separate investment class. While the
traditional P&C business model involves selling insurance through an internal sales force and then
reinsuring a portion of it with the reinsurance industry while retaining most of the risk, SNC’s business
model leverages its 37 years of experience and an AM Best A-rated balance sheet by accepting P&C
risk from independent agents that do not have sufficient capital to write it, and immediately passing
a 100% of this risk on to nontraditional participants interested in earning returns in the US P&C
markets. In return for this “rent-a-balance sheet” service, SNC collects stable and predictable fees
from both sides. The main risk that SNC faces is the credit risk from its customers, which it mitigates
by ensuring sufficient collateral is available from almost all of its clients. In fact, in the 37 years of
participating in this business segment, SNC has never lost a dollar of the more than $12 billion worth
of premiums they have written. With the alternative capital demands from non-traditional players
expected to double over the next few years, with even pension funds hiring insurance experts, this
segment is well placed to significantly grow with the market.

In addition to SNC’s ability to continue to earn high-teens returns on equity, the company boasts a
clean, unlevered balance sheet and a well-incentivized management team led by the founder, Terry
Ledbetter, who is one of the most respected executives in the insurance industry. Mr. Ledbetter and
his family still own close to 50% of the company, with the stake worth over $300 million, and are very
well incentivized to preserve value and grow the company. We were able to buy this unique company
at only 8.5x our estimate of forward earnings, well within our estimate of margin of safety, and during
the quarter, the stock appreciated close to 40% from our purchase price of ~$10.25 a share. We still
expect an additional 150% upside from today’s price levels over the next 3 to 5 years and are
enthusiastic about the continued potential for this investment.

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Core Portfolio Sales

● Village Supermarkets (VLGEA) – During the quarter, we sold our remaining 3% interest in Village
Supermarkets at $32.00 and, including the dividends, earning a 35% return over approximately a one-
year holding period. We were very happy with the performance of the stock, and our thesis of multiple
mean reversion has played out well. We didn’t see any fundamental changes underlying the core
business that would cause us to increase our price target and worries about increasing local
competition negatively impacting the company’s same store sales growth and its ability to continue
to earn high returns on capital caused us to revisit our thesis. With the stock having reached close to
our price target, we did not feel comfortable with the lower margin of safety and risk reward ratio
and sold our remaining shares. We are still fans of the company, and its “hidden asset,” a ~13%
ownership in a high-growth co-op Wakefern, which continues to increase in value, and would be
buyers of the stock again if it comes back within the low $20s price range.

Other Portfolio Updates

 Full House Resorts (FLL) – We added another 1% to our small ~2% position in Full House Resorts as
the $50mm market cap small casino operator, led by industry veteran Dan Lee, continued to make
strong progress on its strategy to transform its balance sheet and grow its top line. During the 4th
quarter of 2016, the company completed a small, $5mm, rights offering in which we participated. The
company will use the proceeds toward $10mm of growth projects with high returns on capital
potential, such building a ferry terminal at the Rising Star Casino Resort in Indiana and the renovations
at the Grand Lodge Casino in Lake Tahoe in Nevada. Since we have been invested, the company has
made significant efforts to grow its EBITDA and cash flows while lowering its relative debt levels with
the acquisition of Billy Broncos Casino and significant improvements in their casino’s profitability. The
company’s net debt levels are at a more sustainable ~3.0x Net Debt/EBITDA, versus 5.0x 18 months
ago, with lower interest costs and higher free cash flow generation. Since the rights offering at $1.30
per share and our addition near the same levels, the stock has rallied to close the year at $2.40 per
share, a result we are certainly happy with. As we expect the company to improve its EBITDA to
$30mm in the intermediate term and with industry private and public multiple comparisons at 7.0x
to 9.0x EBITDA, our expectation for this investment is another 200% upside with a lower risk profile
than 18 months ago.

 USA Technologies (USAT) – USAT was our biggest underperformer this quarter, down over 20%. As
we mentioned in our last letter, we felt the stock had run up ahead of its fundamental value and did
not add to the position with additional fund inflows. However, during the quarter, the stock had pulled
back as much as 35%, and we had a very candid and encouraging conversation with management
about the company’s cost structure and opportunities. We took advantage of the pullback and our
renewed confidence in the thesis and added an additional 3% back to the position to make it a full 7%
position of our Core Portfolio.

 Demand Media/Leaf Group (LFGR) – During the quarter, Demand Media reported its first positive
quarterly revenue growth of 12% in over two years as the strength of its Market Places segment
growing revenues at 32% and now representing ~60% of revenues, more than offset the 9% decline
in the smaller Content & Media segment. The Content & Media segment, which manages two popular
websites, eHow and Livestrong, showed a 5% quarter over quarter growth showing a stabilization of

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 its core businesses. Livestrong performed well growing its revenues 31% year over year implying that
the main culprit of underperformance is eHow. The company has undertaken a segmentation strategy
of eHow content by assigning it to more niche vertical, “do-it-yourself” websites where the traffic
uplift is two to three times than on the current website. However, it will take more time for this
strategy to play out before we see positive results and the company is able to monetize the higher
traffic.

As the company has turned into a positive growth enterprise, they have changed the company name
to Leaf Group. Overall, we are pleased with the performance as the Content & Media segment is
turning a page and the Market Places segment is performing well. While the stock was up 15% during
the quarter on the positive results, we believe showing continued growth over the next few quarters
and eventual cash flow generation will make the market appreciate the Sum-Of-The-Parts value of
this company, which is at least a 150% above today’s price levels.

 Hostess Brands $5.75 October 2020 Warrants (TWNKW) – Our 3% investment in the warrants of
former Special Purpose Acquisition Company (SPAC) of Gores Holdings, now Hostess Brands, returned
50% this past quarter. The company completed its transaction of acquiring Hostess Brands from its
private equity sponsors, a “backdoor IPO,” and began trading on the public markets. Given Hostess’s
iconic brand, attractive growth profile, reputable management and excellent Free Cash Flow
generation, it did not take long for the stock and the warrants to begin to appreciate in value. While
the warrants have returned over a 125% for us since our initial purchase, we still believe the stock
trades at least a 40% discount to its peers, and our expectation for the warrants is to appreciate at
least another 300% from the year-end price levels. We believe as the company gets more Wall Street
coverage, begins to report results that will hit major databases, and leaves its SPAC reputation behind,
the stock should close the valuation gap in short order.

 Additionally, our portfolio’s performance this quarter was helped by ~20% moves in our industrial
investments in Hudson Technologies (HDSN), Graham Corp (GHM), and CSW Industrials (CSWI), as the
stocks rallied with the market in the second half of the quarter. We decided to take some gains, or
about 1%-2% from each position’s weight in the portfolio, and re-invested the gains in other positions
within the portfolio with better risk reward opportunities.

National Research Corporation, Viad, Gaiam, and AIG Warrants also contributed with 15% to 20% returns
this quarter, while a ~5% decline in US Geothermal detracted from the overall portfolio’s growth.
Additionally, we have lost approximately 0.70% of overall portfolio performance this past quarter on
hedging activities on pre- and post-election uncertainty.

Market Outlook and Commentary

The last quarter of 2016 was certainly a wild ride for the small-cap markets. After dropping close to 10%
throughout October and early November, the surprise election of Donald Trump as President of the
United States has propelled the Russell 2000 and Russell Microcap indexes over 20% over the last two
months of 2016. However, as context, the markets are still only marginally above their levels of 18 months
ago as can be seen by the table at the end of this letter.

The renewed optimism about the potential moves of the new administration’s ability to drive economic
growth via infrastructure investment, a laissez-faire attitude toward regulation, and lower corporate taxes
were enough for the market to shrug off concerns over the threat of a trade war with China and rising
interest rates. We take a more incredulous view of these developments and continue to believe that the

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U.S. economy will only grow in the 1.5% to 2.0% a year range over the next few years with somewhat
increased inflation. However, higher capital intensity, increasing corporate debt levels, and operating
margins at historical highs are unlikely to produce significant corporate earnings growth going forward.
Despite the potential for the corporate earnings growth estimates to be overstated, we are still seeing the
overall market equity risk premium, S&P 500 forward earnings yield less real 10-year Treasury yield, at
above 6% and within the acceptable historical range. While we do not consider this a forecasting tool, it
is an important indicator on where we are historically with relative market valuations.

As we mentioned earlier, the low absolute levels of interest rates are continuing to drive private market
valuations and are likely to continue to drive public market valuations as well. Given the expectation of
less than a 1% increase in rates in 2017, we are not expecting a significant multiple contraction in the near
future. However, with the increased uncertainty brought forward with the election of an unpredictable
administration, we are likely to see more volatility and market pullbacks and rallies, which may present
good buying opportunities off our watch list.

Partnership Updates

We have welcomed four new partners to the partnership this past quarter bringing our total to 12. We
are excited about the partnership growth and look forward to seeing you at our annual event in July. In
the meantime, please be on the lookout for communication from our audit firm M.D. Hall & Company as
they prepare for the 2015 and 2016 calendar year audit.

Next Fund Opening

Our next fund openings will be February 1, 2017, and March 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%

YTD 43.2% 33.2% 21.3% 20.4% 12.0%

1 Year 43.2% 33.2% 21.3% 20.4% 12.0%
Inception 51.8% 38.7% 10.7% 7.7% 12.1%

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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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