Arquitos Capital Management 4910 Sunset Lane Annandale, VA 22003

Phone: (571) 766-8089 Fax: (571) 297-8993 www.arquitos.com

October 16, 2014

Learning how to think really means learning how to exercise some control over how
and what you think. It means being conscious and aware enough to choose what
you pay attention to and to choose how you construct meaning from experience.
David Foster Wallace

Dear Partner:

Arquitos Capital Partners returned 15.8% net of fees and expenses in the third quarter of 2014, bringing
the year to date return to 41.0%. The fund has cumulatively returned 121.6% since inception on April 10,
2012 through the end of Q3 2014.

Fundamentally investing is about decision-making. Analytical research provides the foundation to
properly inform decisions, but research by itself isnt enough. After research provides necessary
information, judgment must be applied.

Better research helps, of course, but the bigger challenge is to learn how to become a better decision-
maker. The proper environment is important. That means not paying attention to the commotion from
CNBC or the opinions of superficial thinkers. Ignore the day-to-day noise. Intellectual honesty is crucial.
Without it, how can we learn the right lessons? Being more self-aware helps as well. What are our
strengths and weaknesses? Are we humble enough to review past decisions without emotional
baggage?

Its particularly difficult to become a better decision maker as an investor, because in investing it is
particularly easy to reach the wrong conclusions. The feedback loop is often skewed. On occasion we
can be right, but lose money, and on other occasions we can be wrong, but make money.

We can only control the inputs: The conclusions reached from the research and the decision to buy or
not. We cant control the price. The stock of a company may be overvalued, but it can, and often does,
get pricier. There was no mistake to pass on the purchase of that company despite the fact that it would
have made money. Alternatively, there may be a company that is cheap and has good prospects where
something beyond the control of the investor, and even management, can cause the end results to be
negative.

We have to play the odds that over the long term the underlying investment philosophy will succeed
despite occasional short-term hiccups or irrationalities. The partnership has had a very, very nice run
since inception, but the nature of the markets makes it inevitable that there will be difficult periods.
Measure our results over a three to five year period, and dont get caught up in the monthly or quarterly
results, good or bad.

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Because we can only control the inputs and not the results, it helps significantly if we can trust the
decision-makers at the company we are invested in. We can improve our odds of success if there is
confidence that the decision-makers are likely to make good decisions. We can also improve our odds of
success if proper incentives are in place for them to make good decisions.

As investors, we are outsiders and as much as we try to learn how the day-to-day operations at a
company are going, we dont fully know. We dont know all of the threats to that business, or their
opportunities. We have to rely on the managers to, first, not do anything stupid and, only after that,
take advantage of opportunities or protect against threats by properly allocating the companys capital.

SWK Holdings (Ticker: SWKH) is a company that encapsulates this well. Its another of our holdings that
has a significant amount of Net Operating Losses (NOLs). These NOLs offset the companys tax liability
and when properly understood are a very important asset. NOLs not only allow more cash to
accumulate, they also provide the incentive to the company to focus on proper capital allocation.

SWK has $433 million of NOLs that will shield future income from taxation. This is a massive amount of
NOLs for a company that has a current market cap of about $150 million.

Following our earlier models with ALJJ and SDOI, SWK was also previously taken over by an activist
investor, Carlson Capital. They shuttled off what was left of the old, money-losing operations in the fall
of 2009 and began pursuing a different, profitable business model. Demonstrating that this process is
not easy, it took the company more than two and half years to hit on a new business model. In May
2012, the company announced that Brett Pope and Winston Black were joining SWK to implement a
strategy to provide funding through things like royalty purchases, licensing, loans, etc. to companies in
the life science sector. This was something that Pope ad Black had extensive experience doing, and the
last few years have proven to be very successful.

The company has been so successful that earlier this year Carlson Capital, which at the time owned
about 30% of the company, offered to provide a substantial amount of new funding so SWK could
expand. Ultimately, an agreement was reached in August between SWK and Carlson Capital where
Carlson would, at that time, put in about $77 million into the company.

This was significant for a few reasons: Carlson Capital decided to increase its stake in SWK from about
30% to nearly 70% while paying a premium to the stock price at the time. Carlson put in this capital at
$1.37 per share when the stock was trading for $1.13. This large of a premium happens very rarely and
shows how badly Carlson wanted to put money to work in SWK. Michael Weinberg is SWKs chairman
and a representative of Carlson Capital. Clearly he saw a tremendously profitable opportunity from his
insider vantage point. On the other side of the deal, this investment also demonstrates that SWKs
leadership believes that increased scale will be beneficial to the company.

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Our average purchase price is $1.19 and shares currently trade for $1.45. The icing on the cake is that
SWK is waiting on approval by the SEC to do a rights offering where current shareholders will be eligible
to purchase additional shares at 86 cents. We will subscribe to our full allocation.

SWK has proven the business model over the past two and half years, providing creative financing to a
range of life science companies. SWK makes a great return through royalties, debt financings and other
products. They also make a management fee by regularly syndicating larger deals amongst other
investors. SWK also typically get a lottery ticket in the form of warrants from the companies it provides
financing solutions to. Many of these warrants will not have very much value, but some will, and one or
two could prove to be substantial in the future. And, remember, they dont have to pay taxes on more
than $400 million of income. At todays price, the market is clearly not recognizing the value of SWK.

This isnt a company youll hear about on CNBC or even read about in The Wall Street Journal. There are
no analysts covering it. Its returns should not be dependent on the overall markets. SWK is simply a
growing company providing a valuable service, with proper incentives, where the insiders are very
bullish on its future prospects. We were fortunate to purchase shares at a great price. We cant control
the end results, but it has all of the characteristics of a tremendous investment for us.

Outside of our traditional holdings, I am currently working with another fund on a creative situation that
I believe will be a tremendous long term investment for the partnership. I look forward to sharing more
details with you over the next few months. If youre a current partner and would like general
information on the idea, please let me know.

Thank you for following along. Please dont hesitate to contact me if you have any questions. I can be
reached at (571) 766-8089 or steven.kiel@arquitos.com. I look forward to hearing from you.
Best regards,


Steven L. Kiel
Arquitos Capital Management

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This letter is for informational purposes only and does not reflect all of the positions bought, sold, or held
by Arquitos Capital Partners. Any performance data is historical in nature and is not an indication of
future results. All investments involve risk, including the loss of principal. Arquitos Capital Partners
disclaims any duty to provide updates or changes to the information contained in this letter.

Performance returns for Arquitos Capital Partners reflect the funds total return, net of fees and
expenses. They are net of the high water mark and the 20% performance fee, applied after a 4% hurdle,
as detailed in the confidential private offering memorandum.

Performance returns for 2014 are estimated by our third party administrator, pending the year-end
audit. Actual returns may differ from the returns presented. Positions reflected in this letter do not
represent all the positions held, purchased or sold.

This letter in no way constitutes an offer or solicitation to buy an interest in Arquitos Capital Partners
or any of Arquitos Capital Managements other funds or affiliates. Such an offer may only be made
pursuant to the delivery of an approved confidential private offering memorandum to an investor
from Arquitos Capital Partners.