COMMENTARY

April 15, 2015

Dear Investors,

After a rocky start to the year, February saw a meaningful turn, with most major averages rebounding and ending the quarter in slightly positive territory. Lessening geopolitical worries, somewhat stabilizing energy prices and the continued positive performance from the U.S. economy are the main reasons for the more sanguine investor sentiment. We are pleased to see that smaller companies, particularly within the technology sector, have been acting noticeably better than what we've experienced in the last few years. While it's hard to know for certain if these trends will continue, we are optimistic about the return potential for small to mid-cap names this year. Across the board, valuations among smaller- to mid-size companies appear less demanding on a relative basis than their larger counterparts, especially when factoring in their significantly higher growth potential. We continue to search for new holdings to help position the funds to take advantage of these discrepancies.

Jacob Internet Fund

The Internet fund had only one new name in the quarter: Castlight Health. An initial public offering (IPO) from last March, Castlight Health is a fast-growing cloud-based software company that helps reduce healthcare costs for businesses, while also providing transparency to employees so they can make more informed medical choices. With most large companies still struggling with ever-increasing healthcare costs, Castlight Health's products can help steer their employees to significant savings and/or a higher quality of care, allowing businesses to share in some of those savings as well. Although the company is still a few years from profitability, Castlight's vast market potential - combined with a small market capitalization - in our opinion make the opportunity well worth the risks.

Jacob Small Cap Fund

Besides also purchasing Castlight Health in the quarter, Small Cap added two more positions as well: Intersect ENT and Pacific Sunwear of California. With an estimated 1 in 8 Americans suffering from chronic sinusitis (blocked nasal passageways), Intersect ENT has an approved implant (Propel) that helps reduce post-surgery swelling. With its approved Propel product already gaining traction in the market, Intersect ENT also has a pipeline of new products for patients to avoid recurrence of blockages (Resolve) and even implants for milder cases or those who don’t want to undergo the surgery (Nova). Because both of these potential products can be implanted in an office/clinic setting, they could widen the market considerably and result in a long runway of future growth.

Pacific Sunwear of California is a teen-oriented retailer that emphasizes exclusive brand deals in order to distinguish itself in the market. Although it has been a presence in malls for well over 20 years, the company has gone through some difficult times with multiple restructurings during that period. In the last three years, company management has shown some success in executing a more focused strategy while slimming down the store base in order to get closer to profitability. With rising sales comps and strong cash flow growth expected this year, PacSun is poised to regain a valuation more in line with its peers, giving us the potential for significant upside to the current stock price.

Jacob Micro Cap Growth Fund

In addition to adding Intersect ENT, Castlight Health and Pacific Sunwear, Micro Cap invested in several other new companies: Top Image Systems, Geeknet and USA Technologies.

Top Image Systems is a leading provider of automated document capture and information recognition software and systems. Its eFLOW platform technology allows companies to record, classify and exploit information residing within key corporate documents, such as purchase orders, invoices and customer correspondence. Last year, the company made a key acquisition to expand its relatively modest U.S. presence as well as increase its focus on the financial services industry. We believe the company's offerings are extremely solid and that a number of secular tailwinds - such as the rising importance and complexities of regulatory compliance - exist that will provide Top Image with tremendous opportunity in the years ahead. The fact that the company's main competitor (Kofax) was recently purchased for $1 billion - and at multiples far exceeding Top Image's current valuation - further validates that investment thesis.

Geeknet is a fun and innovative online retailer of various products that are designed to appeal to a technologically inclined audience. The company has a tremendously loyal and passionate customer base but has stumbled badly of late with a number of operational and execution issues. Still, we like management, we believe they know and serve their particular audience very well, and we believe their strategy of increasing their focus on exclusive and internally designed products should begin to boost margins. It doesn't hurt that Geeknet's valuation is extremely compelling right now - the company trades at a market cap which is less than the cash it holds on its balance sheet - or that a decent portion of its sales comes from a merchandising partnership with the Star Wars franchise, which is preparing to re-enter our movie galaxy starting this holiday season with a much-anticipated slate of three new sequels.

USA Technologies operates wireless payment processing technology for one of the nation's largest independent network of vending machines and other self-retail equipment. More than a quarter-million devices currently use the company's cashless ePort platform, which is expected to handle more than 200 million transactions in the coming year. The company's modest success to date should only accelerate as more people get comfortable using mobile payment solutions, such as the newly launched Apple Pay. In addition, a new leasing program started by USA should help ease of one of the biggest impediments to its growth in recent years - the inability of its customers, most of which are small mom-and-pop vending companies, to afford widespread deployment of the ePort technology.

Jacob Wisdom Fund

The Wisdom fund added two new holdings in the quarter: Kraft and CF Industries. Kraft recently announced that it will be merging with Heinz to form the fifth-largest packaged food-and-beverage company in the world. Kraft has been a troubled North American business for the last few years with relatively sluggish growth and profit margins below industry norms. Heinz, on the other hand, was taken private in 2012 by an equal partnership of Warren Buffett's Berkshire Hathaway and the Brazilian firm, 3G Capital. Heinz's worldwide distribution network should provide a vehicle for Kraft to grow its business in international markets, which it is not doing currently. More importantly, it will bring the 3G management team to Kraft, hopefully leading to significant improvement in their profit margins. Accelerating growth with higher margins makes us optimistic about their return potential.

CF Industries is the largest producer of nitrogen fertilizers in North America and the second largest worldwide. Worldwide demand for nitrogen-based fertilizers is expected to grow at 2% or greater due to the need to maximize yields per planted acre to feed a growing worldwide population. Additionally, their primary feedstock for the production of its nitrogen products is natural gas, which due to its recent abundance and falling prices has enhanced CF Industries’ position as the world's low-cost producer. Finally, the company's soon-to-be-completed facilities expansion will increase by 25% its overall North American production capacity, which should be very cost competitive with current imports. CF Industries has a history of being shareholder-friendly and management has already stated that a large portion of future free-cash flow will be used to buy back stock and increase the cash dividend to shareholders.

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.

Market Cap is the market price of an entire company, calculated by multiplying the number of shares outstanding by the price per share.

Cash flow measures the cash generating capability of a company by adding non-cash charges (e.g. depreciation) and interest expense to pretax income.

Earnings before interest, taxes, depreciation and amortization (EBITDA) is an approximate measure of a company’s operating cash flow based on data from the company’s income statement. EBITDA is calculated by looking at earnings before the deduction of interest expenses, taxes, depreciation, and amortization.

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 February 28, 2015.
Click here to view the holdings for the Jacob Small Cap Growth Fund, as of February 28, 2015.
Click here to view the holdings for the Jacob Micro Cap Growth Fund, as of February 28, 2015.
Click here to view the holdings for the Jacob Wisdom Fund, as of February 28, 2015.

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 4/15