AUGUST PERFORMANCE SUMMARY AND LOOKING AHEAD TO SEPTEMBER

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Portfolio Highlights For August:

- EVOL was the largest winner in the portfolios for the month, posting a gain of 18.48% for the month of August. This was a position that was just initiated in July, making for a significantly positive start for the investment.

This company proved to be an attractive candidate when I initially discovered it due to several factors that only seem to be strengthening in the short time the company has been in the portfolios:

1. As shareholder friendly a company as you will find in the sub-$500 million market cap space, with an aggressive attitude towards returning value to shareholders in the form of dividends and buybacks

2.An extremely steady history of generating cash flow through a very difficult market environment over the past several years

In August, EVOL announced earnings that had a number of positive aspects. DSA bookings were up 48% year over year. In the conference call it was already noted that Q3 is off to a strong start. The company is generating plenty of cash with cash on hand increasing 51% since the beginning of the year. This allowed EVOL to announce an increase in the dividend the company pays, which now gives EVOL a 5% yield.

Furthermore, the company has gross margins of 71%, highlighting the efficiency of the operation. During the call, they announced their first enterprise wide-licensing agreement in DSA with one of the world's top 5 carriers.

I don't think the market, as a whole, has caught onto the potential of EVOL, given their leadership position in the emerging market wireless space. As continued wins and the relevancy of their DSA technology comes to light, the appreciation in the shares should be substantial.

- WMIH managed to finish the month of August with a 13% gain. The most important aspect of this gain was the fact that WMIH is now trading above $1 per share. In fact, the break of $1 came early in the month, with WMIH barely looking back since retaking this important technical milestone.

Typically, when a stock breaks out over an important number, such as 1, 10 or 100, there is an increased level of attention from sellers. These numbers represent an area where individuals feel comfortable tapering off positions a bit. This is why you see increased volatility around these numbers, as traders step up their activity.

The interesting and bullish part about WMIH's break of $1 is that volatility has actually decreased since the break took place. The stock is now simply hovering above $1 in what is the narrowest one month range we have seen in sometime. Furthermore, there was a noticeable uptick in volume throughout the trading month as this contraction in the daily range for the stock took place.

From a technical point of view, this is extremely bullish behavior, suggesting higher prices in the months ahead.

- CIDM lost 2% for the month of August, but I will list it a highlight since I see a lot to like here. The company released earnings during the month of August. They were fairly putrid in nature, but not unexpectedly so. The market very much factored in lackluster earnings over the past few months. So much so, in fact, that when they were announced, the next day CIDM traded very little volume and garnered even less attention.

What is important to note is that with the reaction of the stock price and the commentary from management, we may very well be seeing a trough in the stock at these levels. In fact, management during their August conference call specifically stated that the company was in the initial stage of a “content distribution ramp up” over the coming months and years.

You have to look at CIDM like this: They have essentially been expending capital the last couple years to build up a business that was non-existent previously. These investments in content are essentially dry ammunition that hasn't been fired off to create the explosion in revenues and profitability.

The company is on the cusp of becoming more offensive minded. All the meanwhile, the market is essentially valuing their non-deployment (new business that distributes content) business at next to nothing. What you are paying for at these prices is a moderate price for their legacy deployment business, involved in setting up digital theater technology. The non- deployment business is just an added gift wrapped bonus for coming along for the ride.

It can end up becoming quite the bonus if management leverages their contacts in the industry, as well as making prudent decisions as to the content they bring in.

Anytime I can get a new business that is being developed on the back of an old, successful business for next to nothing, I am a taker. IWSY below $1 was much the same. You were getting this new biometrics business for next to nothing, which was supported by their legacy business. CIDM is the IWSY of entertainment.

Portfolio Lowlights For August

- HMPR provided a steady leak in price as the company dropped 10% during the month. It should be noted, however, that HMPR did post a gain of close to 32% in July, making this type of give back perfectly acceptable in the grand scheme of the move higher. The volume accompanying the drop in HMPR was the lowest monthly volume since August of 2012. Certainly a good sign given the steep appreciation in price that took place in July.

I continue to see an impressive amount of insider buying across the regional banking sector. The numerous insiders that are taking part in this buying spree are seeing concrete proof that their institutions are recovering healthily from the banking disaster that marked the periods from 2008-2012.

What they see is pretty obvious to anyone who looks into any regional bank name that was devastated over the past several years. Balance sheets are recovering, led by the fact that problem loans are disappearing and lending is increasing, as the real estate market firms.

In the case of a company like HMPR, the risk in the share price at these levels leaves a lot of room for upside surprises in the future. The shares continue to trade at a worst case scenario valuation for the banking sector over the next several years. Even in a negative economic scenario, shares of the company are being valued at such a depressed price - due primarily to the 2012 rights offering, which amounted to a give away of the company to private equity – that downside is minimal.

What I see HMPR as is a call option on the regional banking sector with no time decay. A bet that is very appealing.

- SPNS provided a spin cycle of activity for the portfolios during the month of August. Shortly after being reinitiated as a position in July, the company was sold out of the portfolios, starting at about mid-month, for a roughly 7% loss.

I have been involved with a lot of Israeli technology companies over my career in the markets. One thing I have noticed is that the path towards value creation that the companies face is often times much slower than U.S. based technology firms. I'm not sure what the dynamic is that slows the process. I can assure you, however, that if SPNS was a U.S. based company the shares would be trading, at least, 50% higher than current levels.

I continue to like what the company is doing within the financial sector. However, due to the illiquidity of the shares, along with the confusing nature of path forward, I may simply have to overlook this name in the future.

Overall, the company did net out a 35% gain from inception in June 2012. Far below what I expected, but acceptable.

- IWSY also falls in the spin cycle category, as my focus turned to raising cash in the portfolios as a defensive measure towards mid-month. Shortly after being reinitiated as a position within the portfolios, IWSY was sold for a 3% loss.

The unpredictable, volatile nature of the shares makes it a difficult portfolio component to maintain during uncertain periods where my core focus is on reducing risk.

IWSY did announce a corporate update during August. The report was highlighted by the fact that the company has entered a pilot program for their biometric security management with a major financial institution.

Companies like IWSY don't have a quantifiable component from which one can judge the future viability of the company. If such a dynamic was in place, then it would be easy for analysts of all types to pick out the next 200, 300 or 500 percent gainers. What makes these types of gains possible is the unquantifiable nature of the process leading to a sudden realization that the market either (a) never got it or (b) got it all wrong.

IWSY is very close to a tipping point in the fundamental transformation of the company. I think they are one or two big customers away from being recognized as a company that is making its mark within the wireless/cloud biometric space. With that recognition comes a certain buzz factor that create a premium in the valuation of the shares.

I certainly don't have an idea of what the revenue picture for the company will look like 12, 24 or 36 months from now. I don't think the CEO can even provide that guesstimate due to the newness of the business, along with the unpredictability of what is in store for the cloud/wireless biometric space.

What I do know is how technology cycles and their influence on valuation tend to work within bull markets. It has nothing to do with rationality or modeling and everything to do with forward looking, emotionally driven response to a new technology that is unquantifiable in nature. How do you value such an entity?

You don't attempt to assign a value to it, as much as you are attempting to determine the perception of the market with respect to the place of the company within the technology cycle.

Yes, it's true, abstract concepts along with the opportunities they bring are often times the most profitable on Wall Street.

I will be looking at IWSY again the months to come.

Looking Ahead To September

With increased levels of cash comes the desire to discover opportunities that can provide a cozy home for your resources. There is no magic bullet that will determine the appropriate time to deploy those assets. However, the decision of timing can make the difference between a fruitful year and a dreadful year. This becomes especially true as the markets of the past several years have been prone to isolated periods of distress- filled declines that are precipitous in nature.

With respect to current market conditions, we have a couple of issues at hand that may be pointing to patience in deployment of cash superseding opportunistic, aggressive behavior:

1. Seasonality: One of the more obvious truisms that exists in the markets. Seasonality is very real and there is no way around it, but to tread lightly. This becomes especially true as the hors d'oeuvres leading to main course of seasonality - that goes by the name of August – weakens in a dramatic fashion, taking out important points of support across numerous important averages.

Seasonality, led by August weakness, followed up (or perhaps influenced by?) macro uncertainty in the form of a shifting asset allocation picture is not something to run away from with your hair in flames, half naked. It is, however, something to start tiptoeing around, until it becomes more certain what is sleeping beneath.

Barring a dramatic turnaround in the markets that demands an increased allocation to the long side, I can't see any decisive action taking place in September with respect to allocation. In fact, if anything, odds are weighted towards a continuing decrease in net exposure, with the eventual goal of moving to a 50% cash position.

Increasing trepidation with respect to the investment requirement does not, however, equal a decrease in hunting opportunities. I have discovered a new opportunity during August that I will be adding to the portfolios and promptly following up with a research report over the next couple of months. Once this position is profiled, it will mark the eighth profiled opportunity and investment for 2013.

The time frames with which I am approaching investments continues to increase as the long-term environment for equity investment becomes more friendly in nature. If we are indeed at the beginnings of a long-term secular bull market, as I believe to be the case, then there will be no better return than that of investing long-term and allowing the market to work its magic over the portfolio. Jumping around from place to place simply isn't an efficient method in such an environment.

Furthermore, there is a certain wisdom in sticking to the terrain with which one is familiar. I don't simply mean investing in technology if this is where your expertise lies. Or investing in small-cap names if this is the sector with which you are most familiar. It goes deeper than this.

An investor only needs a handful of stocks that they are familiar with in order to prosper each year. The fallacy of massive diversification is a method of risk management that is no method at all. All diversification does is hand the ability to control risk to the market average most closely tailored to your sectoral preference. Your risk profile converges with that of the marketplace, and therefore, everybody that is in it. In other words, you are not controlling risk at all, only handing it off, essentially deferring the liability.

Truly being able to understand only a handful of companies that come across one's path each year serves the primary purpose of separating one from the diversification meme crowd. Immediately, net returns will diverge from the herd, as your results become influenced by two factors: (1) Your ability to understand the risks in the company (2) Your ability to understand the catalysts that exist for the company. The direction of the divergence, whether negative or positive relative to your benchmark, depends on your ability and experience. If your ability is below average then this anti- diversification methodology will only serve to amplify your deficiencies. If, on the other hand, your methodology has merit, then the attributes will shine.

This is an environment where familiarity and consistency can result in tremendous success for those who decide to put their money to work. There is no need, at all, to become familiar with every new opportunity that seems to have a spotlight brighter than the rest. The only need is to be familiar with a select number of names that an investor is familiar with and able to navigate a favorable terrain with over a period of years, not months or weeks.

Regards,

Ali Meshkati