July 17, 2017

Investing in small/micro cap companies and special situations within a concentrated portfolio

Artko Capital LP 2Q 2017 Partner Letter

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.

P a g e

Peter Rabover, CFA

Portfolio Manager

Artko Capital LP

July 16

, 2017

Dear Partner,

For the 4

fiscal and 2

calendar quarter of 2017, a partnership inter

est 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

%, respective

ly. For the

months of our

fiscal 2017, an interest in Artk

o 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 2

0.4

internal rate of return (

IRR

)

for our partners

s always

, we

are thankful for

your long

term commitment to the

partnership’s

success.

3Q16

4Q16

1Q17

2Q17

CY 2017

YTD

1 year

Inception

7/1/2015

Inception

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%

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 Capit

al (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

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 boug

ht for $10 on

any

website and

$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

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

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

usinesses tend to already trade at justifiably high valuations.

hile

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

hat show how to calculate various definitions of ROICs or Economic Value Added (EVA) and even

showing

theoretical

value of a company based on

its

growth and

ROICs

Nevertheless,

a simple

truth holds:

company that is expanding its ROICs is going to expand its valuation multiples and value.

other words, the little girl’s business would be worth more if she could make more th

an $60 using

same table and

lemonade mix the following week.

P a g e

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 advan

tage

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 requir

ements 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 regulat

ion

If our friend had cheape

st 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,

fit

the narrative of simple, high incremental ROIC opportunity companies and a majority of our

investment

theses

will continue to focus on inv

esting in companies with high sustainable ROICs.

Core Portfolio Additions

●

Spartan Motors (SPAR

)

–

We added an initial 6% position this quarter, which we la

ter increased to 8

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

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

val

uation levels accounts for the entire value of the company,

we believe

the rea

l opportunity

lies in the turnaround of

bigger

emergency vehicles s

egment by the

reputable CEO Dar

yl Adams.

When

Adams joined the company two years ago, he found a historica

lly

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 i

improving operations in

every segment. In our exp

erience of investing in

turnarounds of

small

industrial manufact

urers

we believe

the company’s problems are easily f

ixable

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 a

mong some

of the

easy fixes

are

consolidating

facilities and purchasing depar

tments, investing in hereto non

existent Enterprise Resource Planning

software, implementing a culture of

ean

anufac

turing

and compensating

the

new slate of

impressive managers on

ROIC enhancing metrics

such as operating income growth and working

capital improvement

We expect SPA

R’s EBITDA to grow from $30 million in 2016 to over $90 million by 2019 and with low

additional

capital investment requirements a

nd 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 l

single digits to potentia

20%

or higher

we expect the valuation

multipl

es 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 valuat

ion

of at least 100% higher than today’s

stock price

and a CEO willing to monetize the company as

sets for the right price,

provide

the right

margin

of safety for this investment.

P a g e

Core Po

rtfolio Sales

•

CSW Industrials (CSWI) and Graham Corporation (GHM)

–

We sold our combined

% 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 investmen

ts each earning over

20% during

our

two

year

holding period. However, with our expectation

going forward of l

double

digit returns from the

se investments

they just did not meet our hurdle for staying

the

portfolio

as we generally look for at least a 100%

potential upside from our invest

ments

. 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 safet

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 Port

folio 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

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 under

performer this quarter

swinging

wildly

fro

m $2.85 to $1.95 back up t

$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 1

quarter results came in

line with our

and the company

expectations

of flat revenues, by April 2017 the comp

any 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 expen

ditures 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

addin

g 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 impac

t of

macro

economic

uncertainty factors

discuss

in our

Market Outlook section.

)

•

State National Companies

(SNC)

–

We could

n’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 continu

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 a

nnounced two

big contract wins

totaling

$200 million in

P a g e

nnualized premiums

which

significantly boost

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

the stock, we believe that at current valuation levels th

is excellent operator

with high in

cremental

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, continu

ed its progress to

ward

developing its

pipeline of geothermal projects in

the

Western United States. While the company

currently has approximately 40 m

egawatts (MW) of ge

othermal 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 goo

news

that came out during the quarter and

pushed the

stock up 15%

, is that the Nevada project, Sam

Emidio II, has increased its prove

n reserve estimate from 10MWs a

year ago to 47MW today.

At this

point, the company is in the

process of bidding for Pow

er 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

ree

ash

low

generation

hould 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 expo

sure to changes in

the economy, is why it contin

s 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 st

ock prices

So far

they have both work

out well contributing approximately

.5% to portfolio performance this quarter.

Market Outlook and Commentary

The most popular T

V show in the United States

throughout this bull market cycle

has be

the HBO

bas

fantasy drama “Game

f 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 pa

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 econom

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 m

anagers 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 historical

low volatility in the markets today.

Since we wrote

our first letter

to you

two years ago, the broad market index, S&P 50

0 has returned 22.6%.

In mid

2015

the expected

2016 S&P earnings were $130 and 2017 earnings

expectations

were around

$146. Looking

the same earnings

expectations today, 2017 earnings are expected to

$131.5

and

2018 earnings

expectations

are

$147.

In other words, while the market

and market

multiples are

climbing, from 15.6x Forward Twelve Months (FTM) in 2015 to 17.6x toda

y, 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

P a g e

such as the energy sector getting hit or the dollar getting stronger resulting in negative earnings revisions

economy continued to grow at a d

ecent clip of over 2% during

that time, interest rates were low and

investment choices for real returns relative to the U

tock 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 t

years,

that spread, the equity risk premium, has gone from

approximately

to closer to 4%

on higher market valuations, and moving in

line with historical averages.

This analysis

also required

to believe that earnings expectations will be cor

rect

;

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 o

f the yield

curve.

While the 10

year T

reasury has remained consistently in place at around 2.35%

the short

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 impli

ed 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

eserve overshoots on macro policy c

reate

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 anticipa

tion of better investment opportunities at lower prices

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 th

is 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

r next fund openings will be August

, 2017, and

, 2017

. Please reach out for updated

offering documents and presentations at

info@artkocapital.com

or 415.531.2699

P a g e

Appendix: Performance Statistics Table

Artko LP Gross

Artko LP Net

Russell 2000 Index

Russell MicroCap

Index

S&P 500 Index

Jul-15

2.1%

1.7%

-1.2%

-3.2%

2.1%

Aug-15

-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%

3.8%

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%

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%

1.1%

1.0%

May-17

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%

Monthly St Deviation

4.4%

3.8%

4.5%

4.8%

3.1%

Correlation w Net

1.00

0.80

0.75

0.62

P a g e

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 f

uture. 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 compa

rison 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

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 secu

rities

(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 am

ong 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 Gene

ral 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 investor

s 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 informa

tion 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 Partners

hip.