COMMENTARY

October 6, 2014

Dear Investors,

While the equity markets had recovered gradually during the summer, we have seen the averages slip anew over the last month, giving back most of these gains. Geopolitical instability has once again been the main culprit, with uncertainty regarding interest rates also a factor. Small caps in particular continue to bear the brunt of these declines, but our sense is that this cycle could finally be shifting as we remain confident that overall economic conditions continue to improve despite some of the headwinds. We are still finding attractive opportunities across many sectors, giving us confidence that we can make progress in what remains a challenging environment. For that reason, we have been taking advantage of this recent market weakness to add both new names and increase position sizes where valuations are the most attractive.

Jacob Internet Fund

The Internet fund added three new holdings in the quarter: Pandora, Cvent and Mandalay Digital. Pandora is the dominant internet radio company with close to 80% market share across a wide variety of platforms. Most recently, their ability to obtain higher prices from their ads (with more local sales) is giving them a much clearer path to profitability. Additionally, Pandora is now pre-installed in all of the top 10 selling automobiles in the US, and will likely see another step up in usage as Wi-Fi enabled cars enter the mainstream. While valuation is definitely on the higher end of companies we favor, the combination of Pandora's leadership position and its potential to displace terrestrial radio makes the stock a compelling investment.

Cvent is one of the first companies to sell event management and planning software as a cloud-based service. As companies are spending more and more of their marketing budgets on events for employees and customers, Cvent's software provides a central platform and many innovative services to make sure they're a well-organized success. We appreciate the fact they have achieved 30%+ annual revenue growth over the last several years while recording positive operating margins, a bit of a rarity among early-stage cloud software companies. Cvent is still very small versus its roughly $7 billion addressable market, giving us significant upside as company has the potential to obtain even higher rates of profitability.

Mandalay Digital is a back-end service provider for mobile carriers allowing them to monetize their large customer bases, rather than just let other 3rd-party apps accrue all of the financial benefits. These products include content management and payment services as well as a new white-label homepage software product that allows a carrier to make money by selling valuable slots on an Android phone's home screen. While Mandalay's growth has been modest over the past several years, it is this new service (DT Ignite) that clearly has the most promise. This has been best demonstrated by a pilot program with Verizon which is now being expanded to roll out to their entire network. Not only should this help significantly grow revenues over the next year, but should also be a valuable reference account for Mandalay to attract other global carrier customers; the company already signed up T-Mobile to offer certain customers its app discovery solution (DT IQ).

Jacob Small Cap Fund

Besides Cvent, which we also bought in Internet, we added two additional new holdings in Small Cap: Pacira Pharmaceuticals and Espirion Therapeutics. Pacira has an approved medicine for post-surgical pain management (Exparel) that has been quickly gaining acceptance from doctors and hospitals. Its slow release formulation has led to longer effectiveness periods and less patient reliance on opioids. Even with a higher price than widely used generics, Pacira has ramped up sales at an impressive pace and has seemed to crack the most difficult part of adoption, which is a place in hospital formularies. Also, newer indications are likely over the next year, giving them potentially a much wider market opportunity.

Another pharmaceutical company, Espirion Therapeutics is focused on the clinical development of treatments for LDL (bad) cholesterol. The company's lead product is a novel, orally available drug that has shown in early tests to significantly reduce LDL cholesterol, without certain side effects that a segment of the patient population has to statins. Subsequent to our purchase, Espirion announced very positive results from Phase 2 trials and is expecting to move to Phase 2b trials by the end of the year. Even only addressing patients that are intolerant of statins, this could still represent a multi-billion opportunity. Finally, Espirion has a well-regarded management team that has decades of history with cholesterol drugs, selling the first iteration of Espirion to Pfizer in 2004 for $1.3 billion.

Jacob Micro Cap Growth Fund

Espirion and the aforementioned Mandalay Digital were added to the Micro Cap fund over the last quarter, as well as two new restaurant holdings: Jamba Juice and Pizza Inn. Jamba Juice is a popular smoothie chain that has been adjusting its image and product to match more in line with today's increasing focus on health and fitness. Their ongoing rollout of new menu items, most notably a fresh juice offering, has led to an impressive increase in sales in those stores. The restaurant has also been expanding its presence by ramping up its franchising opportunities as well as placing a unique portable self-serve JambaGo smoothie and juice station in places such as schools and cafeterias.

Pizza Inn is an old-school company - its first restaurant opened in Texas in the 1950s - that is seeing strong early results with its new Pie Five fast casual pizza chain. Pie Five offers small personalized gourmet pizzas prepared fresh in under five minutes and for about seven dollars. The concept, which is designed to mimic the success of chains like Subway and Chipotle, has inspired a lot of competition throughout the country from big-name restaurateurs, but Pie Five's solid execution to date and regional focus in the South/Southeast has given it a leg up as management works to expand the chain through a number of new franchise agreements.

Jacob Wisdom Fund

We added one new stock to the portfolio last quarter, Gilead Sciences. The company is best known as the dominant purveyor of drugs that treat HIV/Aids sufferers worldwide. An important breakthrough was achieved late last year, when the company launched a new drug in the U.S. called Sovaldi to treat hepatitis C. Sovaldi, in combination with the legacy interferon treatment, went on to rack up $5.8 billion in sales in the first six months of this year -the biggest drug launch in history and more than half of Gilead's sales for the period. The market for this drug is huge, with worldwide estimates of sufferers to be on the order of 150 million and growing. With the expected introduction of a new drug (Ledipasvir) this month, to be used in combination with Sovaldi, Gilead will have the first all-oral regimen on the market to attack the hepatitis C virus.

With the Sovaldi/Ledipasvir pill regimen being rolled out worldwide, and the many other promising compounds for a variety of diseases in the pipeline, Gilead could grow revenues at well above normal rates for a number of years to come. The company has rock-solid finances, a talented and shareholder-friendly management team, and sells at a very reasonable price relative to both current metrics and future potential.

Ryan Jacob
Portfolio Manager
Jacob Internet Fund
Jacob Small Cap Growth Fund

Darren Chervitz
Portfolio Manager
Jacob Micro Cap Growth Fund

Frank Alexander
Portfolio Manager
Jacob Wisdom Fund

www.jacobmutualfunds.com

Mutual fund investing involves risk. Principal loss is possible. There are specific risks inherent in investing in the Internet area, particularly with respect to smaller capitalized companies and the high volatility of internet stocks. All four funds may invest in foreign securities, which involve greater volatility and political, economic and currency risks, and differences in accounting methods. These risks are greater in emerging markets. The Small Cap Fund, Internet Fund and Wisdom Fund will invest in smaller companies, which involve additional risks, such as limited liquidity and greater volatility. The Wisdom Fund may invest in Real Estate Investment Trusts (REITs) which may be affected by economic, legal, cultural, environmental or technological factors that affect property values, rents or occupancies of real estate related to the Fund's holdings. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. The market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. In addition, convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality.

Investments in micro capitalization companies may involve greater risks, as these companies tend to have limited product lines, markets and financial or managerial resources. Micro cap stocks often also have a more limited trading market, such that the Adviser may not be able to sell stocks at an optimal time or price. In addition, less frequently-traded securities may be subject to more abrupt price movements than securities of larger capitalized companies.

Any tax or legal information provided is merely a summary of our understanding and interpretation of some of the current income tax regulations and is not exhaustive. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation. Neither the Fund nor any of its representatives may give legal or tax advice.

The information provided herein represents the opinion of Jacob Mutual Funds and is not intended to be a forecast of future events, a guarantee of future results, nor investment advice.

Please refer to the prospectus located at www.jacobmutualfunds.com/pdfs/Prospectus_All.pdf for more complete information including risks, fees and expenses.

Click here to view the holdings for the Jacob Internet Fund, as of August 31, 2014.
Click here to view the holdings for the Jacob Small Cap Growth Fund, as of August 31, 2014.
Click here to view the holdings for the Jacob Micro Cap Growth Fund, as of August 31, 2014.
Click here to view the holdings for the Jacob Wisdom Fund, as of August 31, 2014.

Please note that these holdings are subject to change and should not be considered a recommendation to buy or sell any security.

Must be preceded or accompanied by a prospectus.

Quasar Distributors, LLC, Distributor 10/14