Neostellar Capital Corp. (SSSS) Earnings Call Transcript

Welcome to the Neostellar Capital's Third Quarter 2026 Earnings Call. My name is Matthew, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Willy Lee, to begin today's conference.

Thank you for joining us on today's call. I'm joined today by Chairman and Chief Executive Officer of Neostellar Capital, Mark Klein; and Chief Financial Officer, Allison Green. Please note that a slide presentation corresponding to today's prepared remarks by management is available on our website at neostellar.vc under Investor Relations, Events and Presentations. Today's call is being recorded and broadcast live on our website, neostellar.vc. Replay information is included in our press release issued today. This call is the property of Neostellar Capital and the unauthorized reproduction of this call in any form is strictly prohibited. I would also like to call your attention to customary disclosures in today's earnings press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance, condition or results and involve a number of risks, estimates and uncertainties, including the impact of any market volatility that may be detrimental to our business, our portfolio companies, our industry and the global economy that could cause actual results to differ materially from the plans, intentions and expectations reflected in or suggested by the forward-looking statements. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including, but not limited to, those described from time to time in the company's filings with the SEC. To obtain copies of Neostellar Capital's latest SEC filings, please visit our website at neostellar.vc or the SEC's website at sec.gov. Now I would like to turn the call over to Mark Klein.

Thank you, Willy, and good afternoon, everyone. Today, I'll discuss our third quarter results, the completion of our transition to an externally managed structure, developments across our portfolio and our approach to capital allocation and distributions. At September 30, our net asset value was $12.64 per share compared with $13.44 a share at the end of June. The quarter included a reduction in the fair value of our WHOOP position, which I will discuss shortly. Following my remarks, Allison will review the financial results in greater detail. The third quarter marked an important period in Neostellar's evolution. We completed our transition to Neostellar Advisors in partnership with Magnetar while maintaining our focus on active portfolio management and long-term shareholder value. Before discussing these developments in detail, I want to take a moment to explain how we think about Neostellar's role today. We began in 2011 with the goal of giving everyday investors access to private companies. That remains central to our mission. Rather than replicate an index of the venture capital market, we seek to build a carefully curated portfolio of companies with the potential for meaningful growth and appreciation. That often means forming a view before an opportunity is broadly recognized and staying close to a company as its business develops. Over time, as the company executes and its markets grow, an investment that once was less known can become a significant position in our portfolio. We believe it is important to help shareholders understand the companies we own, the trends we are investing alongside and the opportunities we see developing across the portfolio. With that in mind, I will start by discussing our newly completed partnership with Magnetar and transition to Neostellar Advisors. As discussed on our August call, following shareholder approval, we completed the transition to Neostellar Advisors on July 15. This was an important milestone for our company and the result of a thoughtful review by our Board and our management team. Companies are staying private longer, raising more capital and increasingly seeking financing beyond traditional equity. We chose to partner with Magnetar because we believe its institutional capabilities can help us meet those needs. Our team brings its experience in venture-backed businesses, Magnetar brings experience across credit, structured capital and AI infrastructure. We believe that combination expands our resources for sourcing and due diligence and gives us greater flexibility to evaluate and structure investments. It also positions us to be a more valuable partner to companies as they grow. Equally important, the core investment team remains in place and our commitment to be disciplined investing and risk-adjusted returns remains unchanged. Neostellar expands what we can do while preserving the investment principles that have guided us. Our experience investing alongside Magnetar in CoreWeave and TensorWave before formalizing the relationship gives us confidence in the partnership's ability to create value. Our staged $20 million investment in TensorWave illustrates that value. The transaction combined our private growth investing experience with Magnetar's structuring and AI infrastructure expertise, allowing us to increase exposure in a staged process as the company executed. Additionally, we want to reiterate that the transition was structured with a shareholders' interests in mind. Pre-existing investments are not included in the advisor's incentive fee calculations, and we expect annual expense savings, although actual savings will depend on company's results and operating costs. Furthermore, a Magnetar affiliate provided a $20 million redeemable promissory note in July, adding liquidity and financial flexibility. Now let me turn to our portfolio. As AI adoption expands, models and applications increasingly depend on critical computing and data infrastructure. We are excited about our exposure across the ecosystem through OpenAI, CoreWeave, VAST Data, ClickHouse and TensorWave, along our digital health and other technology investments, including WHOOP. I will start with OpenAI, one of the companies helping define the market for artificial intelligence. Its models and products serve consumers through ChatGPT and support developers and businesses through its APIs and enterprise offerings. This gives the company several avenues for growth as AI moves into software development and everyday business workflows. In March, OpenAI closed the financing with $122 billion in committed capital at an $852 billion post-money valuation. More recently, Reuters reported that its September annualized revenue run rate was nearly $50 billion. While that figure measures the pace of revenue rather than a full year's recognized sales, it indicates the scale the business has reached. We believe the breadth of OpenAI's distribution and its ability to bring new capabilities to consumers and enterprises are important strengths. Sustaining that growth also requires significant spending on computing infrastructure, which makes access to capital and the economics of deploying important consideration as the company scales. Recent reports point to a potential OpenAI financing at a $1.25 trillion valuation, although completion of the financing has not yet been officially confirmed. Given that our third quarter valuations are determined as of September 30, the reported financing is not reflected as a completed transaction in our Q3 valuation. Any further impact on our valuation would depend on the final transaction terms, the securities involved and our valuation process. Supporting the development and deployment of AI models are portfolio companies like VAST Data. VAST has expanded from high-performance storage into a broader platform combining data management, databases and computing orchestration. Its technology helps customers make large amounts of information available to AI systems efficiently, supporting workloads across training, inference and enterprise applications. Following its April financing at a headline valuation of $30 billion, Hyundai Motors and Kia invested in October to support their work in mobility, autonomous driving and robotics. Their investment follows production use of VAST's platform, illustrating the company's opportunity to serve industrial AI applications as well as AI laboratories and cloud providers. In September, CEO Renen Hallak described how the proliferation of AI agents creates a need to manage models alongside data, tracking how models change, governing access to information and matching workloads with available computing resources. We believe that perspective helps explain VAST's expansion into a broader software platform for AI infrastructure. Looking toward potential liquidity, Hallak told CRN earlier this year that he expected VAST to be ready for public markets later in 2026 with the company then deciding whether and when to proceed. He also said VAST was GAAP profitable and cash flow positive. These comments suggest VAST is preparing for public markets from a position of strength and flexibility. More recently, in an October 26 interview, Co-Founder Jeff Denworth, said VAST faces no pressure to go public. He indicated that receptive markets for potential Anthropic and OpenAI offerings could increase the impetus for VAST to consider its own listing. We see this as a potential path to liquidity while recognizing that readiness and a decision to launch an offering are separate milestones. Our exposure to data infrastructure also includes ClickHouse, which provides real-time analytic and database technology. We invested $9.5 million during the second quarter, recognizing the growing need to analyze large volumes of data quickly for operational analytics, observability and AI applications. In January, ClickHouse raised $400 million in a Series D financing led by Dragoneer. It also acquired Langfuse, adding tools that help developers monitor and evaluate large language model applications and introduced a native Postgres offering. Those steps broaden its role across the data infrastructure used to build and operate modern applications. In May, the company reported that its serverless cloud business has surpassed $250 million in annualized revenue run rate, more than triple the year earlier level, and its customer base had grown to 4,000. We believe that combination of adoption and product expansion supports this opportunity as enterprises demand faster analytics and better visibility into AI applications. Broader AI adoption also depends on expanding computing capacity, a need TensorWave is addressing through its AMD-powered cloud. The company provides infrastructure for training and running AI models, offering customers an alternative source of high-performance computing capacity. In June, TensorWave raised $350 million in a Series B financing led by Magnetar and AMD Ventures at a $1.55 billion post-money valuation. We completed our $20 million commitment to a Magnetar-managed vehicle in the second quarter. The company's financing supports expansion of its infrastructure and deployment of additional AMD-powered capacity. Beyond the infrastructure supporting AI, we also see opportunities in how companies in our portfolio use data to deliver more personalized products and services, WHOOP continues to be a significant investment for Neostellar and a company we have supported for many years. The company has continued to broaden its target audience and capabilities using wearable technology and personalized insights to help members understand their recovery, performance and overall health. In March, it announced a $575 million financing at a $10.1 billion valuation and reported more than 2.5 million members. At the time of its March financing, WHOOP reported 103% year-over-year growth in 2025 bookings and a year-end bookings rate of $1.1 billion. It also said it operated cash flow positive during 2025. Bookings are distinct from recognized revenue, but those disclosures provide additional context for the company's operating progress. Continued product development and international expansion reflect WHOOP's ambition to serve a broader health audience. Its recent integrations with Peloton and Zwift allow training activity to flow into WHOOP, while the Zwift connection also brings WHOOP recovery information into members' training guidance. We view these connections as useful steps toward making the platform part of members' daily routines across the services they already use. WHOOP also recently announced LeBron James as a global ambassador, building on an 11-year relationship with one of its early members. Following the March financing, Founder and CEO Will Ahmed, said he expected it to be the company's final private round with an IPO as the next step. We are encouraged by the company's continued progress and the opportunity an eventual IPO could provide to realize value for our shareholders. The investment illustrates our approach of investing before companies become widely recognized by the public market investors and participating in their growth over time. The size of our position today reflects the appreciation in our investment as the company has grown. At the same time, we recognize the size of our position and the importance of managing portfolio concentration. With that in mind, we are exploring opportunities to reduce our exposure prudently over time, and WHOOP's management is aware of our desire to monetize a portion of our investment. The timing and size of any sales will depend on available liquidity, pricing, any applicable restrictions and market conditions. Our objective is to balance continued participation in the company's development while realizing value for our shareholders. As discussed earlier in my remarks, during the third quarter, we lowered the fair value of our position in light of recent secondary activity. While the March financing provides an important reference point, it does not by itself determine the fair value of the particular securities we own. Turning now to capital allocation. Our decisions remain grounded in our commitment to our shareholders. We have always sought to manage Neostellar in a shareholder-friendly manner, and our capital return record demonstrates that commitment. Since 2017, we have repurchased approximately 14.45 million shares for approximately $85.4 million through open market repurchases and our 4 tender offers. Each tender was completed significantly below our then NAV per share. Those transactions reflected our willingness to act when we believe our stock is an attractive use of our capital. Repurchasing shares at a discount will increase NAV per share for continuing shareholders. To that end, our Board has reauthorized a $25 million share repurchase program. This authorization gives us flexibility to repurchase shares when we believe doing so is in the best interest of our shareholders. Our Board and management regularly weigh share repurchases against other uses of capital, including investing in compelling portfolio companies, making new investments and repaying debt. When determining whether and when to repurchase shares, we will weigh the price of our stock and the potential benefit to continuing shareholders against opportunities to make new investments and reduce debt. We will also consider our liquidity needs and other relevant factors. We recognize that capital available for repurchases is currently limited. However, if our shares continue to trade at a substantial discount to NAV, as we monetize other portfolio positions and capital becomes available, we intend, as we have in the past, to deploy capital aggressively towards repurchasing our stock, again, subject to our liquidity needs, debt obligations, market conditions and other applicable requirements. That focus on shareholder value also guides how we raise capital, including the shelf registration. We have filed a registration statement intended to preserve financing flexibility. Having the shelf in place is a tool for managing the business. It does not mean that we have decided to issue shares. As a business development company, we are subject to restrictions on issuing stock below our current net asset value per share. Grounded in our shareholder-friendly approach, we would only consider issuing stock where the results would be accretive to existing shareholders. In either case, our objective is to make thoughtful decisions and create long-term value for our shareholders. We are excited about the prospects for Neostellar and the companies in our portfolio. These are businesses addressing important needs in markets with significant long-term potential. Our partnership with Magnetar gives us additional resources to pursue the next generation of opportunities. At the same time, we remain focused on managing the portfolio actively, pursuing liquidity where appropriate and building long-term value for our shareholders. Thank you for your continued trust and support. With that, I will turn the call over to Allison Green to review our financial results.

Thank you, Mark. I would like to follow Mark's update with a review of our portfolio company realizations during the third quarter, a high-level review of our investment portfolio as of quarter end, including the investment theme breakdown and a more detailed review of our third quarter financial results, including our liquidity as of September 30. I'll also touch on notable items during the third quarter, including the effectiveness of our externalization and the receipt of $20 million under the Magnetar 6.5% redeemable promissory note due 2029 and our Board of Directors' authorization of an extension to our share repurchase program. There were no new investments made during the quarter. However, on July 10, we exercised 86,076 common warrants of Shogun Enterprises, Inc. doing business as Hearth, acquiring 86,076 shares of Class A common stock for an aggregate exercise price of approximately $861. During the quarter, we sold 143,665 shares of GrabAGun Digital Holdings at an average net price per share of $3.12. These sales resulted in net proceeds of approximately $448,000 and a realized gain of approximately $295,000. As of September 30, we hold 308,964 remaining common shares or approximately 30% of our original position. We also received a distribution of approximately $31,000, reflecting a full exit from our investment in Aventine Property Group, Inc., resulting in a realized loss of approximately $2.5 million. During the quarter, we received a distribution from CW Opportunity 2 LP of approximately $2 million in net proceeds. CW 2 Opportunity LP is a special purpose vehicle for which the Class A interest is solely invested in the Class A common shares of CoreWeave. We are invested in the Class A common shares of CoreWeave through our investment in the Class A interest of CW Opportunity 2 LP. The distribution was categorized as approximately $600,000 return of capital and $1.4 million realized gain. In this instance, realized gain is calculated based on the current reporting by the SPV and may be subject to change or adjustment due to the impact of performance fees. The return of capital represented approximately 3.8% of our $15 million investment in CW Opportunity 2 LP. The distributions received to date represent approximately 48% of our investment. Additionally, we fully exited our investment in Learneo, Inc. for $9.4 million, resulting in a $5.6 million realized loss. Finally, we abandoned our investment in CTN Holdings, Inc., doing business as Catona Climate and formerly known as Aspiration Partners. This resulted in a realized loss of approximately $1.3 million. Subsequent to September 30 through today, there have been no new investments or exits. I would like to turn to our portfolio as of quarter end. Our top 5 positions as of September 30 were WHOOP, OpenAI, VAST Data, TensorWave and Blink Health. These positions accounted for approximately 72% of the investment portfolio at fair value. Additionally, as of September 30, our top 10 positions accounted for approximately 87% of our investment portfolio. Segmented by 7 general investment themes, the top allocations of our investment portfolio at September 30 were to consumer goods and services, representing approximately 42% of the investment portfolio at fair value, and artificial intelligence infrastructure and applications at 36%. Software-as-a-Service was the third largest category with approximately 9% of our portfolio. The logistics and supply chain segment accounted for approximately 5% and the financial technology and services category accounted for approximately 4%. SuRo Sports and education technology each accounted for 2% of the portfolio as of September 30. We ended the third quarter of 2026 with a net asset value of approximately $334.7 million or $12.64 per share, which is consistent with our financial reporting. The decrease in NAV per share from $13.44 at the end of Q2 2026 was primarily driven by a $0.36 per share decrease from the net change in unrealized appreciation of our investments during the quarter, a $0.29 per share decrease resulting from net realized loss from portfolio investments during the quarter and a $0.15 per share decrease due to net investment loss. At September 30, there were 26,473,222 shares of the company's common stock outstanding. Turning to liquidity. We ended the quarter with approximately $42.2 million of liquid assets, including approximately $40.9 million in cash and approximately $1.3 million in unrestricted public securities. Not included in our unrestricted public securities are approximately $15.2 million of public securities subject to lockup or other sales restrictions as of quarter end. This represents our remaining investment in CoreWeave via our Class A interest of CW Opportunity 2 LP and our common shares in Neutron Holdings, Inc. doing business as Lime, which we anticipate being freely tradable in December. A portion of our cash balance will be used to repay the 6% notes due December 30, 2026, upon maturity or earlier through open market purchases as available. On October 29, 2025, the company's Board of Directors approved an extension of the discretionary note repurchase program, which allows the company to repurchase up to an additional $40 million for the remaining aggregate principal amount of our 6% notes due 2026 through open market purchases, including block purchases in such manner as we comply with the provisions of the Investment Company Act of 1940 as amended and the Securities Exchange Act of 1934 as amended. During the quarter, we repurchased an additional 1,984 of the 6% notes under the note repurchase program. As of September 30, we had repurchased 1,568,791 of the 6% notes under the note repurchase program. The aggregate principal dollar amount of 6% notes that may yet be repurchased by the company under the note repurchase program is approximately $35.8 million or the remaining aggregate principal amount of the 6% notes. As Mark mentioned, on April 2, our Board of Directors, including all of our independent directors, unanimously approved the company's transition from an internally managed BDC to an externally managed structure through an investment advisory agreement with Neostellar Advisors LLC, an entity jointly owned by certain members of the former SuRo Capital management team and Magnetar Holdings LLC, an affiliate of Magnetar's multi-strategy alternative investment platform. Following stockholder approval on June 10, the externalization became effective on July 15, and Neostellar Advisors became the company's investment adviser. The company continues to trade on the NASDAQ Global Select Market under the ticker symbol NSLR and continues to be led by Mark Klein, Chairman, President and Chief Executive Officer; and myself as Chief Financial Officer, Treasurer and Corporate Secretary. In addition, Erik Falk, Partner and Head of Strategy at Magnetar, joined our Board of Directors in connection with the externalization. During the quarter, on July 17, we received $20 million in gross proceeds from the issuance of a redeemable promissory note to a Magnetar-affiliated entity. The Magnetar redeemable promissory note bears interest at 6.5% per year, has a 3-year maturity and is mandatorily redeemable through the issuance of our common stock upon the completion of a qualifying equity financing, resulting in the issuance of at least $230 million of common equity. Additional details are set forth in the company's current report on Form 8-K filed with the SEC on July 21. Next, I'd like to provide more detail on the recent Board-approved update to the share repurchase program. As Mark mentioned earlier, the company is committed to initiatives that enhance shareholder value. As such, on October 28, our Board of Directors authorized an extension of the company's discretionary share repurchase program until the earlier of October 31, 2027, or the repurchase of $64.3 million in aggregate amount of the company's common stock, of which $25 million remains. Since the inception of the share repurchase program in August 2017, we have repurchased a total of over 6 million shares of our common stock for a total deployment of approximately $39.3 million of the $64.3 million authorized by the Board. Please note, this does not include approximately $46.1 million deployed via tender offers since 2019. Approximately $25 million remain authorized under the share repurchase program now set to expire on October 31, 2027. That concludes my comments. We would like to thank you for your interest and support of Neostellar Capital. Now I will turn the call over to the operator to start the Q&A session. Operator?

[Operator Instructions] Your first question is coming from Alex Paris from Barrington Research.

It was very thorough script, but I have a few questions that I would like to get more color on. The new investment pipeline and dry powder. I mean, you got over $40 million in liquid assets, but you also have the 6% notes coming due at the end of the year. How should we think about new investment opportunities and the dry powder in which to complete them?

Thanks, Alex. I appreciate it. Thank you for your question. We do have $40-some-odd million, and we have securities that will be freely tradable by the end of the year. Retiring the debt is obviously paramount, and we intend to do that by December 31. Our pipeline remains amazingly strong. We are spending time in the AI development tool area, physical AI area, robotics and agentic AI, including personal agents and are seeing a lot of opportunities. And it is a combination of the right company, right time, right price as we make our ongoing investment decisions.

Your next question is coming from Chris Muller from Citizens Capital.