Peter Rabover, CFA

Portfolio Manager
Artko Capital LP

April 25, 2017

Dear Partner,

For the 3rd fiscal and 1st calendar quarter of 2017, a partnership interest in Artko Capital LP was down 3.5%
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%, 0.4%, and 6.1%, respectively. For the nine months of our fiscal
2017, an interest in Artko Capital LP returned 18.6% net of fees, while investments in the most comparable
aforementioned market indexes were up 21.6%, 22.9%, and up 14.4%, respectively. Our monthly results
and related footnotes are available in the table at the end of this letter. Our results this quarter were
impacted by a loss on our position in Kodak warrants and general portfolio volatility, and we will focus the
letter on our process and discussing how we got there.
FY 2017 Inception Inception
2Q16 3Q16 4Q16 1Q17 1 year
YTD 7/1/2015 Annualized
Artko LP Net 5.4% 10.6% 11.2% -3.5% 18.6% 25.1% 33.9% 18.2%
Russell 2000 Index 3.8% 9.1% 8.8% 2.5% 21.6% 26.2% 13.4% 7.5%
Russell MicroCap Index 4.0% 11.3% 10.1% 0.4% 22.9% 27.8% 8.1% 4.5%
S&P 500 Index 2.5% 3.9% 3.8% 6.1% 14.4% 17.2% 18.9% 10.4%

On Investor Biases

Much like a well-built and sturdy house that eventually is affected by wear and tear, the investment
process tends to be affected by the eventual buildup of biases that, if one is not careful, may be
detrimental to future long-term performance of the portfolio. Biases can affect you by influencing you to
make unwise investments as well as preventing you from making great ones. We’ve found that in order
to minimize the buildup of our “bias risk,” self-awareness through transparency is an important device in
our investor toolkit. By discussing and overcoming our biases in our partner letters, we hope to minimize
repeating mistakes that can cause underperformance. This quarter we both succumbed to and overcame
some biases that we'll share with you below.

Overconfidence describes the tendency to overestimate the likely occurrence of a set of events.
Overconfident people make probability judgments that are more extreme than they should, given the
evidence and their knowledge. To be clear, to have confidence is an excellent trait and it certainly pays to
have more confidence than self-doubt in almost all of areas of life. In an ego-driven world of capital
markets, confidence tends to play an outsized role in driving people’s decision-making. In fact, a 2001
study of Venture Capitalists (VCs) found them to be extremely overconfident1. The results of the study
indicate that VCs are indeed overconfident (96% of the 51 participating VCs exhibited significant
overconfidence). However, that overconfidence negatively affects VC decision accuracy (the correlation
between overconfidence and accuracy was 0.70). It would not be a far stretch to imagine the same
overconfidence statistics for public market investors. As more information becomes publicly available,
people tend to believe they will make better decisions and that they are making a “more informed
decision.” However, additional information makes the decision more complex. Information factors may
contradict and relate to other information in unexpected ways. Thus, more information creates greater

1
The nature of information and overconfidence on venture capitalists' decision making – Andrew L Zacharakis and
Dean A Shepherd, July 2001 (http://www.sciencedirect.com/science/article/pii/S088390269900052X)

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confidence, but it also leads to lower decision accuracy. In other words, the more informational noise you
get, the harder it is to discern the true informational signal. Our goal is always striving to find the right
balance between not enough and too much information to make our investment decisions.

Approximately 2.5% of our portfolio losses this quarter came from a loss in our Kodak warrant position as
a direct result of our overconfidence and optimism which caused us to maintain a larger portfolio position
in the warrants as they ran up in value than their risk profile otherwise suggested to be reasonable. In
March 2016, Kodak management announced its intention to sell its high-growth commercial inkjet
technology platform PROPSER and to use the proceeds to refinance its unnecessarily high-interest cost
balance sheet. A successful completion of the transaction would ostensibly prove to the market that
management was serious about monetizing its portfolio of potentially valuable assets and would drive the
stock price from ~$12.00 closer to our then-estimate of $35.00 and provide a 10X return on our
approximately $2.00/warrant investment. As this was a complicated story with a high payoff potential,
we dug deep into the weeds to figure out the true value of PROSPER and the hodgepodge of segments
and assets. As post-bankruptcy Kodak was uncovered and unloved by Wall Street, there was a good
opportunity to create value for our partners through thorough research and gathering of additional
information. As the year went on, and the sales process dragged on, more information became available
that strengthened our conviction in the story, while underestimating the probabilities of other potential
outcomes that management may not be able complete the sale and a potential deterioration in some
business segments. Additionally, an opportunistic and profitable refinance transaction led by the
reputable Southeastern Asset Management only strengthened our conviction that an announcement was
imminent. The stock price went up in anticipation of the transaction from $12.00 to $16.00, as did our
warrant position that went from a 4% portfolio position to over 7% at over $3.50 at year-end.
Unfortunately, by March 2017, the transaction has still not been completed, and the company’s reported
results showed deterioration of some of the segments. Management’s inability to complete the
transaction and missed guidance in cash flows led to a disappearance of credibility in the market and
dropped the stock to $10.50 and the warrant price to below $2.00. We’ve been sellers of the warrants
through March and April, and at the time of the publishing of this letter, we have exited the position. As
a post-mortem of this investment, the lessons learned were to pay more attention to the promotional
nature of management as well as adhering closer to the old adage that if a position is keeping you up at
night—and this one surely did—it’s too big of a position. While a cliché, it was most certainly a real one.

On the other hand, a new investment we made this past quarter was in part due to overcoming another
bias: loss aversion. Loss aversion takes hold when people recall investment declines more vividly than
gains, sometimes even when the gains are greater. In this particular case, we made an investment in a
clothing retail company discussed in detail below, despite suffering significant losses in an investment in
another clothing retailer, Chico’s FAS (CHS), a decade earlier. While in hindsight, it was clear that Chico’s
had significant fashion risk and an overconfident management that did not see the 2007 macroeconomic
headwinds clear enough to slow down spending on opening new stores, research indicated that customer
loyalty and a relatively low valuation would provide a significant enough margin of safety for this
investment. After accepting significant losses on CHS, we stayed away from investing in retail for close to
10 years, often to our detriment. While we are certainly mindful of the pitfalls and the many risks learned
firsthand in investing in clothing retail, we did not want to be held back by our own loss-based aversions
on the sector and forced ourselves to look at this investment through an unbiased lens.

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Core Portfolio Additions

● Destination XL (DXLG) – We added an initial 6% position this quarter, which we later increased to 7%,
in a small, $130mm market-cap clothing retailer, Destination XL. Today, there is no sector more
unloved than retail, and Destination XL—having sold off over 55% from the time we first looked at it
(and thought it too expensive)—is no exception. The online “Amazon” threat no doubt looms large
over the entire sector; however, the obituary for all things retail has been written too soon. From a
larger picture perspective, there will be a natural equilibrium share between online and brick and
mortar retail. It is evident, as even Amazon and Bonobos are opening up brick and mortar retail stores,
that some people will always like to shop in person. The retail environment for certain commodity
products, like diapers or toys, will likely go away almost completely; however, human nature will
always require touch, familiarity and experience before committing to a purchase for a certain subset
of products.

Enter DXLG, a retail-clothing store that caters to plus-sized men. With over 74% of U.S., adult males
considered overweight or obese, the dearth of clothing choices in retail (and online) for men’s sizes
over XL is striking. Additionally, the lack of consistency between stated sizes between brands, (an XXL
is not really a XXL) makes online shopping almost as miserable of an experience as in store for the
target customer. You may be familiar with DXLG’s original retail concepts, Casual Male and Rochester
Big & Tall, some of which are still in existence today. However, over five years ago management took
a bold step of transforming the company and closing and replacing the 400-store base with the new
and much more profitable Destination XL concept. These are not mall-based stores. These are “travel
to destination” locations, which are very popular with the target market. The newer concept stores
have excellent breath of choices and tailors on site, in addition to exclusive relationships in larger sizes
with such big brand names as Adidas, Lacoste and Brooks Brothers. Perhaps more importantly, as
we’ve found through a 20+ survey of larger men, being treated with dignity is an important part of
the shopping experience as price or choice. Of course, DXLG is not new to the online game with over
15% of its revenues coming from online, with a near term goal of increasing it to 25%. To that end,
the company just made an excellent addition to its team by hiring the Brooks Brothers digital officer
who has led a very successful transformation of the brand’s online presence, and we’re excited to see
what he will do in his new role.

This transformation was not cheap. The company took on $83mm in debt to reach a 200-store
conversion rate and positive cash flow inflection point and has paid down over $25mm in the last
year. Of course, investing in retail is risky, and we have certainly experienced this first hand, but we
feel confident that for the current $130mm market cap the company should generate over $40mm in
operating cash flow and $25mm to $35mm in Free Cash Flow in the next year. We expect growth in
same store sales in low single digits driven by increased spend in advertising. We also expect higher
cash flow generation levels in the intermediate future. We were impressed with a management team
that in the face of an uncertain retail environment pulled back on store growth in 2017 and is instead
allocating massive cash flow into brand awareness spend, debt paydown and stock buybacks. With
lower retail competition and less fashion risk than a typical retailer, we felt confident enough to enter
into the position between $2.50 and $3.00 per share with our estimated upside at over 100% and a
permanent capital impairment downside of around 20%.

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Enhanced Portfolio Additions

Friedman Industries (FRD) – We added a 2% position this quarter into a $43mm market-cap steel
products processor. Ordinarily, we wouldn’t look twice at a highly commoditized, 5% gross margin,
steel remanufacturer that is operating at breakeven. However, given that this particular microcap was
trading below its Net Working Capital value of $45mm and $15 million of plant equipment, including
$10mm for a brand new pipeline finishing plant in Texas, we felt our downside was limited. In other
words, this was an exceedingly rare old-school Benjamin Graham “net net” situation, i.e., buying a
company at or below its Net Working Capital liquidation value.

The company operates two segments, Coil Products and Tubular. While the Coil Products segment
has been keeping the company afloat over the last few years, the Tubular products segment has been
effectively shut down due to low domestic energy market capital expenditure levels over the last few
years, the primary users of the pipe product. We are not timing the energy market; however, our due
diligence indicated that the oversupply of pipes built up prior to the 2014 energy downturn has
worked its way through the system with some E&P executives even ordering their pipe from Europe
so far in 2017 due to shortages in the United States. While the company is currently trading at 0.7X
its book value, when the energy pipeline markets are open it usually trades between 1.5X to 2.0X its
book value. Thus, while we are expecting our downside to be rather low given the Net Working Capital
backstop, we expect our upside to be over 150% within the next few years. We are not considering
any positive moves by the current administration to force companies to only use domestically made
steel pipes as part of our thesis as we believe it’s an unlikely scenario. However, should it happen, FRD
will certainly benefit greatly.

Other Portfolio Updates

• Hudson Technologies (HDSN) – HDSN was our other big underperformer this quarter, down over 20%
and costing us approximately another 2% of underperformance. We consider the pullback in stock
temporary on unfounded fears that the new administration would rescind the Environmental
Protection Agency rules that have led to the phase out of the virgin R-22 gas and the tremendous
reclamation market opportunity for Hudson. The new head of the EPA, Scott Pruitt, has stated in his
confirmation hearings that he is committed to the Montreal Protocol to protect the ozone layer. A
repeal of those rules would not benefit anyone, as the industry wholeheartedly supports the phase
out and has already invested in the infrastructure and the new jobs that this phase out has created.
In the end, we see the repeal of those rules as a low-probability event, as it is already solidified and
popular law (Rule 21). On the other hand, during the quarter, the company confirmed early selling
season double-digit price increases in R-22 gas and is slated to begin recognizing revenue from its
substantial Department of Defense contract in 2017. More importantly, we loved seeing the company
get better in working capital management with lower inventory on hand versus a year ago, despite
the near doubling of R-22 prices. As we expect the company to earn close to $1.00/share within next
few years from $0.31 in 2016 and have over 150% upside, we felt the $6.25 price was a great
opportunity to add to the position. We’ve invested an additional 2% of portfolio capital in the stock
to bring it back up to a fully invested 9% position.

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• For the most part, the rest of our portfolio was flat to modestly up for the quarter with various
positions being up or down within 5% of the year-end 2016 close. The lack of significant event
announcements has kept the performance somewhat muted so far this year.

Market Outlook and Commentary

Since year-end 2016, the small-cap markets continued to trade sideways to marginally up without a
substantial narrative to drive them significantly in either direction. The market’s view of the hope and
hype of the potential for the new administration to drive substantial corporate earnings growth via less
regulation, infrastructure spending and corporate tax cuts has taken a more cautious view in the wake of
a failure to pass healthcare reform in 1Q 2017. At the same time, the U.S. economy continues to increase
at a steady clip of approximately 4% nominal growth per year. Combined with a lack of alternative higher
yielding investments, with the U.S. 10 year treasuries offering almost no real returns, the larger U.S. equity
markets, which have a forward earnings yield of over 5% and expected to grow in high single digits,
continue to offer the best domestic public investment opportunities in the intermediate future.

Parsing down the markets even lower, it is important to observe that a historically larger pool of money
supply is chasing only 5,700 public domestic stocks today, down from 9,100 in 1997. Add in a massive
cyclical shift from active management strategies to passive and a much larger performance disparity is
likely to emerge between widely held index stocks and those left on the outside. Of course, in an eventual
market downturn this trend will only exacerbate the forced selling of those stocks, which is why we try to
minimize our exposure to indexable securities. The potential larger macroeconomic and fiscal policy shifts
of higher interest rates, inflation and potential corporate tax reform should be more favorable to small
caps, which have historically performed well during times of rising inflation. Over 30% of companies in
the Russell 2000 are loss making so-called “public venture” companies, which have been supported by
ultra-low interest rates. Rate normalization should shift investments from long duration loss making
companies to profitable companies which should benefit the most from higher inflation and tax cuts. Of
course, in full disclosure while we keep an eye on macro developments and market valuations we are not
macro economic wizards or market timers and our process will continue to focus on finding high quality
profitable companies in the small and microcap markets at great prices.

Partnership Updates

We’ve welcomed 3 new partners to the partnership this year bringing our total to 15. We are excited
about the continued partnership growth and look forward to seeing you at our annual partner event on
July 17th in San Francisco. Please be on the look out for the invitations. We’ve also successfully completed
our first partnership audit for calendar years 2015 and 2016. If you did not receive your audited
statements please contact us so that we may resend them to you.

Next Fund Opening

Our next fund openings will be May 1st, 2017, and June 1st, 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%

YTD -3.3% -3.5% 2.5% 0.4% 6.1%

1 Year 32.4% 25.1% 26.2% 27.8% 17.2%
Inception 46.8% 33.9% 13.4% 8.1% 18.9%

Average 2.0% 1.5% 0.8% 0.6% 0.9%

Standard Deviation 4.6% 4.0% 4.7% 5.1% 3.3%
Correlation w Net - 1.00 0.81 0.75 0.64

Footnote: Returns and average annual return calculated shown as a geometric monthly mean. The formula is as
follows: Average Annual Return = (geometric mean of monthly return) ^ number of months since inception and
Return = (geometric mean of monthly return)

Due to significant asset inflows into the partnership and positive performance throughout 2016, the year end 2016
geometric monthly mean calculated inception performance number of 38.7% was different than the 2015 and 2016
audited performance number of 43.1%. The audited number which uses Generally Accepted Accounting Principles
(GAAP) calculates net partnership returns using the actual incentive fee earned at year end versus a pro-forma
assumed incentive fee at each month end. Using the year end audited numbers and aforementioned 1Q2017
unaudited returns the inception net return would be 38.1% and 20.3% annualized. However, we believe the
geometric mean method better represents the returns that a partner in our partnership would have received since
inception and we’ll continue to report the geometric mean average with audited returns in the footnotes.

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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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