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July 30, 2014

2014 Q2 Partnership Letter

Dear Partner,
Our net performance for Q2 was 2.0%, bringing our YTD results to 1.9% vs. YTD indices of: 3.7% Barclay
Hedge Fund Index, 3.2% Russell 2000 and 7.1% S&P 500. Though we tracked to high single digit returns
for most of June, results were painted adversely on paper by several percent by a bizarre technical
impact in the market caused by the Russell 2000 rebalance on the last day of the month which I discuss
below. This quickly reversed itself and I look forward to providing a July update shortly. I am pleased
with our performance to date, especially given the transition period we went through earlier this year.
The second half of the year is shaping up to be a more challenging market environment with the end of
quantitative easing (finally) that should allow us to separate ourselves from the crowd meaningfully.

Russell Rebalance: Forced Selling Driving Stocks Up?
Index funds that aim to mimic the composition of the large cap S&P 500 or small cap Russell 2000 have
become increasingly popular and now manage an estimated 7% of all equity capital. Where elephants
eat, they leave crumbs. The rebalancing of these market-cap weighted indices: where growing
companies are added and shrinking companies are kicked off, has become a hunting ground for traders.
We too are interested in sources of non-economic supply and demand as thats what makes markets
mispriced. However, if there are too many mice trying to get the crumbs then things can get
strange.
As recently as five years ago, there was a fairly predictable increase in prices on the last trading day of
June (when the Russell rebalance is official) for those added and decline for those kicked off as the
mechanically forced buyers and sellers moved roughly 7% of the stocks shares. A really interesting
phenomenon occurred this year that I had never seen and supports the thesis I have shared in prior
letters that there has been a secular shift in the markets and there are few easy trades left.
The stocks that had increased over the last year and looked likely to be added to the index (it is a simple
market cap cut off) started having notable increases in buying a full two months before the end of June
while the deletes had selling pressure (and increasing short interest). Keep in mind the official list is only
announced several weeks before the end of June so there was real risk being taken by those playing this
game anticipating who would make the cut. Then on the last day of June, the deletes actually spiked UP
while the adds declined!
We have never participated systematically in this trade because it is easy and I have no interest in
participating in any kind of highly competitive race to the bottom. It would appear that a large number
of unsophisticated traders must have lost money trying to play the last day of the money and squeezed
each other.
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The effect this had on us was nothing other than to temporarily paint a good portion of our book against
us for a couple days (unfortunately right at the end of the quarter) as our target market caps tend to be
around the ~$200mm market cap range which was about the cutoff point this year. Our thesis on these
names has nothing to do with their inclusion in an index, we are short some deletes with mounting debt
that are on their way to zero So seeing this was more a curiosity but I think does highlight how
important it is now to identify truly hard-to-copy competitive advantages: the obvious or easy trades are
increasingly crowded and to be avoided.

Everyones an Activist Now
It seems like with all of the media hype around activist investors, everyone is trying to find a way to
claim the title by putting out press releases or writing letters, or perhaps thinking about activism. An
example that really counts we came across (i.e. searched for methodically using our software platform)
was an interesting case of the proxy battle that wasnt. As someone who has been very up close and
personal with what happens behind the scenes, Ken Ehrmans activism at ID Systems is quite impressive
and in line with our approach of non-disruptive, entrepreneurial-focused activism. ID Systems makes
devices and software for tracking vehicles and shipping containers, allowing more efficient maintenance
and utilization of expensive fixed assets.
Ken was #2 at IDSY, reporting to the (now former) CEO and frustrated with the attitude at the board.
Based on my reading of the compensation structure in the proxy, I can imagine the (now former) board
of directors instructing the management to simply go into their office and crank up the revenue and
profit levers while turning down the cost knob what could be simpler? Well, business is hard
Growing revenues and profits requires investment which means tough choices and depressing numbers
in the short term thats life. Not facing that reality, i.e. we cant pull over for gas because well be
late, ultimately lead to a boardroom coup where Ken managed to replace the majority of the board and
install himself as CEO. We are happy to let others do the work for us, especially when they happen to
also be the founder and the largest individual stockholder!
As an investment, ID Systems has a number of attractive characteristics. The fundamental changes
occurring at the business (and board) serve both as a business catalyst and also obfuscates the stock
from being already bid up by the market:
New BOD & CEO: mid 40s Stanford Engineer who has worked in the space his whole career,
founded the company, largest individual shareholder with 5%
Cash cushion of $10mm+ to execute new strategy without dilution
Low capital intensity business (software, device design w/ outsourced manufacturing)
High gross margins (~50%) lead to high operating leverage for new units sold
Currently subscale but shifting focus to a more recurring service-oriented model driven by
analytics (very sticky and valuable business)
Already have large blue chip customers in place, need to increase wallet share
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Under the radar of the value screens: Losing money today and sales dont appear to be
growing steadily because of a one-time project last year.
Sales are growing 20% right now, Company expects to be profitable Q1 2015
Trades at ~1.4X EV/Sales (vs 6X EV/Sales for comp buyout post-turnaround)

Hooper Holmes (HH), which we mentioned last letter, had a similar profile of fundamental change and
growth obfuscated by cleaning up the messes of the past. It has performed well for us so far this year
and is up about 50% from our cost basis in under a year. We are aiming to have 20-30 long ideas like
this at any given time and have successfully ramped up the book to capacity now that our sourcing and
research platform is fully up and running. Our experience as the cause of change makes us uniquely
able to source and understand this kind of fundamental business change that stays under the radar of
more conventional investment analysts. Having seen things up close both when they are going well and
not helps keep us out of trouble as well!

Portfolio Update
Our largest position, InfuSystem reported strong Q1 numbers with revenue up double digits. The major
regulatory risk from CMS competitive bidding was clarified in a highly favorable direction just two weeks
ago with infusion pumps being dropped from Round 2 as abruptly as it was added the week we
assumed control of the board in April 2012. This doesnt change our behavior but is certainly nice to
have some clouds part as the foot is on the floor under CEO Eric Steens excellent leadership,
transforming the company into a true growth company.
Lucas Energy has weighed on our results year to date but thankfully has shrunk down to being a smaller
position where it cannot contribute further pain. I finish what I start and from the current lower
valuation it is still an attractive investment as we work with our bankers. Going forward our efforts are
much more productive for understanding and causing change at operating businesses where there are
not large external forces beyond our control. The experience at Lucas has ironically been invaluable to
our expertise and profitability on the short side and as Warren Buffett says, You dont have to make it
back the same way you lost it.
Odyssey Marine Exploration continues its daily march towards the absorbing barrier and likely has only
about two weeks of cash remaining in the bank. With mounting debt and no prospects for revenues in
the near future we expect to see some fundamental business changes in the coming month. It has been
a long journey that I could write a book about but will wait until the dust has settled before saying too
much.
Going forward our activist positions, where we assume illiquidity as insiders, will represent a smaller
portion of the portfolio. After this transition period, I am happy with the structure of the portfolio now
and given our new ability to systematically source many more ideas than previously, I believe we can
have the same or higher return expectations with a fraction of the risk and volatility. This would not be
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possible without the massive upfront investment over the last 18 months to develop our software
sourcing platform to quickly identify and evaluate businesses that are under the radar of conventional
crowded stock screens. I am particularly looking forward to the rest of the year and ideally a declining
market where it will be easier to demonstrate the differentiating power of this new integrated
approach.

Being Market Agnostic at a Time When it Really Matters
We continue to see data indicating the market is at or near all-time high valuations which means low
return expectations for the average investor going forward say 5-10 years. We have spent the last 5
years building a cumulative framework to be anything but average, with occasional demonstrations
amid the process. Im proud of our high single digit performance to date and very excited about our
positioning to make above average returns regardless of the overall market environment.
We have a robust book and deep pipeline on both the long and short side and welcome a market
environment that I expect will create discomfort for less well equipped investors. Please email me at
rmorris@mesoncapital.com or call at 607-279-5382 if you have any questions or are interested in
investing. As always, thank you for reading.


Sincerely,

Ryan J. Morris

President
Meson Capital Partners LLC




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Disclosure:
The information contained in this document is confidential and is being provided for information
purposes only to a limited number of financially sophisticated persons who have expressed an interest
in the matters described herein.
This is not an offering or the solicitation of an offer to purchase an interest in Meson Capital LP (the
Fund) or any affiliate thereof. Any such offer or solicitation will only be made to qualified investors by
means of a confidential private placement memorandum and only in those jurisdictions where
permitted by law.
The views, opinions, and assumptions expressed in this presentation are as of the date printed on the
first page, are subject to change without notice, may not come to pass and do not represent a
recommendation or offer of any particular security, strategy or investment.
An investment in the fund is speculative and involves a high degree of risk. Opportunities for
withdrawal, redemption and transferability of interests are restricted, so investors may not have access
to capital when it is needed. There is no secondary market for the interests and none are expected to
develop. The fees and expenses charged in connection with this investment may be higher than the fees
and expenses of other investment alternatives and may offset profits. No assurance can be given that
the investment objective will be achieved or that an investor will receive a return of all or part of his or
her investment. Investment results may vary substantially over any given time period.
Results are compared to the performance of the S&P 500 Index for informational purposes only. The
Funds investment program does not mirror the S&P 500 Index and the volatility of the Funds
investment program may be materially different. The performance figures include the reinvestment of
any dividends and other earnings, unless otherwise noted. Past performance is not necessarily indicative
of future results. The holdings identified in this letter do not represent all of the securities purchased or
sold in the Fund.
Performance results for individual investors will be different from the performance results of Meson
Capital LP depending on their timing of capital contributions and withdrawals. Meson Capital Partners,
LLC or affiliated entities (Meson) is not responsible for any liabilities resulting from errors contained in
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