Good afternoon. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trinity Capital Third Quarter 2022 Earnings Conference Call. Our hosts for today's call are Steve Brown, Chairman and Chief Executive Officer; David Lund, Chief Financial Officer; Michael Testa, Chief Accounting Officer; Gerry Harder, Chief Operating Officer; and Sarah Stanton, General Counsel. Ron Kundich, Chief Credit Officer, is also present. Kyle Brown, President and Chief Investment Officer, is out of the country and will not be joining us on today's call. Today's call is being recorded and will be made available for replay at 8:00 p.m. Eastern Time. The replay dial-in number is (800)839-7410 and no conference ID is required for access. [Operator Instructions].It is now my pleasure to turn the call over to Sarah Stanton. Please go ahead.

Thank you, Chelsea, and welcome, everyone, to Trinity Capital's earnings conference call for the third quarter of 2022. Trinity's third quarter 2022 financial results were released just after today's market close and can be accessed from Trinity's Investor Relations website at ir.trinitycap.com. A replay of the call is available on Trinity's website or by using the telephone number provided in today's earnings release.Before we begin, I would like to remind everyone that certain statements that are not based on historical facts made during this call, including any statements relating to financial guidance, may be deemed forward-looking statements under federal securities laws. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. We encourage you to refer to our most recent SEC filings for information on some of these risk factors. Trinity Capital assumes no obligation or responsibility to update any forward-looking statements. Please note that the information reported on this call speaks only as of today, November 3, 2022. Therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Now, allow me to introduce Trinity Capital's Chairman and CEO, Steve Brown.

Thank you, Sarah, and thank you to everyone joining us today. I want to begin our call by putting the current market conditions we are seeing into context. Estimated VC deal count in Q3 was the lowest since Q4 of 2020. This market volatility and investor hesitancy is impacting every sector of the private and public financial markets. Given this backdrop, it is not surprising that there have been fewer public listings and exits in 2022 after historic levels in the previous two years. We all recognize that these are tumultuous times, but this is also a period where great investment opportunity can provide strong returns to investors. Given the decline in traditional VC transactions, there is a clear and consistent market demand for financing solutions to become an attractive alternative to dilutive equity raises and down rounds as enterprise values pull back. Trinity, with its best-in-class financing platform, has the market presence and track record needed to capitalize on this environment and identify sectors of emerging innovations. It is also important to point out that VC fundraising activity was still approximately $29 billion in the third quarter and reached a record high for the first 9 months of 2022, according to Pitchbook. VC dry powder was at an all-time high at the end of the third quarter, with $290 billion of capital available to support portfolio companies and make continued investments in disruptive technologies. Although we are dealing with the complications of the current market, it is clear that investing in technology and innovation remains critical to our future. At Trinity, we have seen these markets before, going back to 2008 and 2009 and then again in 2020. In each of these periods, the BDC sector, including those investing in venture-backed growth stage companies, proved to be resilient through…

Thanks, Steve. I'd like to start my remarks today by reminding our investors that Trinity employees are rigorous and time-tested underwriting process. We maintain a dedicated portfolio of management staff whose sole function is to monitor our credit risk, stay in constant communication with our portfolio companies and their equity stakeholders. These processes have served us well and have been the driving forces behind our successful investment track record, and we will continue to follow them as we scale our business and expand our portfolio. Building on the record total fundings in the first half of the year, Trinity originated $128 million in new commitments in Q3. We funded $94 million, including $29 million in deployments to seven new portfolio companies and $65 million in gross deployments to 15 existing portfolio companies. Gross deployments were partially offset by $80 million in principal repayments, of which $49 million was from early repayments and $31 million was from normal amortization. We finished the quarter with $350 million of unfunded commitments, substantially all of which are subject to ongoing diligence and approval by our investment committee. Our pipeline remains strong despite the challenging macro environment. The composition of our portfolio remains relatively consistent with prior quarters and represents strong diversification across 21 different industries. Our debt investments are split between venture debt and equipment financings. At fair value, 75% of our debt portfolio or $751 million is comprised of secured loans, while 25% or $246 million is invested in equipment financings. The remainder of our portfolio, $45 million at fair value, is comprised of equity and warrants. I'd like to directly address some recent developments with one of our portfolio companies in the Digital Asset sector. On October 27, Core Scientific, one of the largest publicly-traded crypto mining companies in the U.S., filed…

Thank you, Gerry, and thank you to everyone listening in today. Our differentiated investment approach, financial discipline and strong balance sheet are proving out the strength of our investment strategy as we delivered strong results for the third quarter, even in a disrupted market. Turning to our third quarter financial results. We delivered record total investment income of $38.7 million, a 15.5% increase over the $33.5 million of total investment income recorded during the second quarter of 2022, and an increase of 77.5% compared to the same period of 2021. This increase from the prior quarter was attributable to higher interest and fee income of $3.1 million on a larger loan portfolio, coupled with a higher average interest rate. The increase was also driven by $2.1 million of higher fee and accelerated income from early loan repayments. Our effective yield on the portfolio for Q3 was 15.2%, an increase from 13.8% in the second quarter primarily driven by the increase in fee income, which fluctuates based on the investment activity and early repayment activity. Our core yield, which excludes non-recurring fee income, increased to 13.5% from 12.9% in the prior quarter due to the rise in base rates on our floating rate loans. Our debt portfolio continues to be well positioned ahead of the anticipated rate hikes, with 61.9% of our debt investments at floating rates. On the borrowing side, approximately 75.9% of our outstanding debt at the end of the third quarter was at fixed rates. As we disclosed in our 10-Q filed today, a 100 basis point increase in the prime rate would have the net effect of increasing our income by $4.8 million. We incurred a total of $9.3 million of total interest expense and amortization of deferred financing costs on our various debt facilities as compared…

Thanks, Steve. Starting with credit quality. Our portfolio of companies continued to perform well in the third quarter of 2022, with approximately 97% of our portfolio performing at costs. At the end of the third quarter, we had 5 portfolio companies on nonaccrual with a cost basis of $35.9 million and a fair value of $13.9 million, representing just 1.3% of the fair value of investment portfolio. Our average credit rating for the third quarter stood at 2.9 based on our one to five rating scale, with 5 indicating strong performance. This remains consistent with our average credit rating of 3.0 in Q2 and reflects a relatively stable performance of our portfolio companies that we continue to closely monitor. Moving to liquidity. During Q3, we expanded the availability under our credit facility to $350 million, enabling us to strengthen our liquidity position. As of September 30, we had total liquidity of approximately $247 million, comprised of approximately $213 million of undrawn capacity under our credit facility and $34 million in unrestricted cash and cash equivalents. We continue to be active in the capital markets, completing an accretive equity offering in August which generated $57 million in gross proceeds. We reopened our 7% notes through 2025 and successfully sold [ 57.5 million ] of additional notes. As a reminder, the 7% notes, including this recent addition, are callable by Trinity beginning on January 2023 and are treated on NASDAQ under trading symbol TRINL.As of September 30, 76% of our debt was at fixed rates, with the majority of our investments at floating rates. We expect further base rate increases to positively impact our net interest margin. Our net leverage ratio, which represents principal debt outstanding plus cash on hand, decreased to 1.1x from 1.3x. Our strong balance sheet was leveraged on…

Thanks, Mike. So I want to leave you with 4 points that highlight why Trinity represents an attractive investment opportunity for current and prospective investors. First, Trinity stock is trading at a meaningful discount to our NAV per share. Based on where Trinity is trading and based on our most recently stated regular dividend, Trinity stock is currently yielding nearly 16%. When including our supplemental dividend of $0.15, our stock is yielding over 21%. Second, our regular dividend is fully supported by consistent net investment income coverage. Third, as mentioned previously, we have approximately $67 million of capital gain spillover that allows us to offset potential capital losses, continue to invest for the benefit of our shareholders or distribute the gains as supplemental dividends. And finally, with 97% of our portfolio performing, with our current liquidity position, we believe we are in a strong position to continue to grow revenues and earnings. This is something we have delivered on consistently since going public. Trinity is strong. Our portfolio is healthy. We are excited to continue to execute our investment strategy going forward. Our team will maintain the highest standards in the last few months of 2022 and into the new year. And with that, operator, we would be happy to open the line for questions.

[Operator Instructions]. Our first question will come from Christopher Nolan with Ladenburg Thalmann.

Was there a nonaccrual investment which left the portfolio this quarter?

No, I don't believe so.

Okay. And then I guess we're coming in with this Core Scientific. It's sort of -- we may see a situation where you might actually have to take possession of the assets. Are you prepared to do that, and is that something which -- do you think you can get a recovery on if it gets to that?

As with all our equipment financings, our collateral is the financed equipment. In the case of Core Scientific, we completed equipment audits earlier this year within the last several months. The equipment is tagged, it's in four locations. We know where those are. And if that becomes the best outcome for our shareholders, then we're certainly prepared to do that.

Our next question will come from Ryan Lynch with KBW.

First one, I just want to make sure I understood this correctly. It looked like you guys had about $18 million of unrealized losses in your debt portfolio. How much was representative from FemTec and Core Scientific? And then what was the nature of the remaining write-downs in the debt portfolio? Was it -- were they credit related, mark-to-market related, or what was kind of the breakdown if you had to kind of estimate for the remaining write-downs outside of Core and FemTec?

Yes, Ryan, this is Gerry. Thanks for the question. I think the FemTec markdown is approximately $7 million, I think. I'm sorry -- on the loan, yes. So we also have an equity position with FemTec. That was a complicated transaction. They actually acquired a former portfolio company that we had underwritten in 2017, so that -- we took $7 million unrealized on the loan, and I think approximately the same amount on the equity for FemTec. And then Core Scientific was about $4 million unrealized.

And Brian, this is Dave. The other portion really was related to interest rate impact on our fixed rate loans that are the equipment because those are fixed rates, and we did have rising rates. But this is not really performance related to the rest of the portfolio.

And from a practical standpoint, we believe we will get that back over time as the market recovers.

Okay. And then on Core Scientific, I understand this is -- it's a tough question to try to answer because I know it's a very fluid process. But -- and it sounds like you guys are still waiting on so more information from that company. But how did you guys arrive at your guys' current fair value mark?

Yes. For the September 30, and we're keeping in mind, their announcement was on October 27. But we -- the 9/30 mark was using a discounted cash flow. It was clear at September 30 that the company was going to be liquidity challenged through, at least, the first quarter of 2023. That was a known, so we had the company on our watch list and increased the discount rate accordingly. So that's how we did the mark-to-market that was appropriate from a GAAP standpoint.

And I would also say that we discussed the valuation with our third-party valuation firm and our approach to it, and they felt it was the appropriate manner to approach the valuation as well.

[Operator Instructions] Our next question will come from Casey Alexander with Compass Point.

Yes, just to clarify that last point. If you valued it as of September 30 using a discounted cash flow analysis. And now, it's on nonaccrual, would that lead us to suspect that there's a further markdown coming on the Core Scientific loan in the fourth quarter? All things being equal, how they stand right now?

Yes. I think it's a little early to say that, Casey, right? We're exploring all possible options with respect to debt financing. The company has indicated that they expect to communicate a plan to all their lenders. We don't know what that is yet or what that looks like, so it's a little too early to call what's going to happen. We don't want to give that forward-looking statement, right? We -- there's a forced liquidation value out there, we know that. And we hope that that's not the outcome, but we're going to work toward the best outcome that we can.

We just felt it was prudent to put it on nonaccrual given the uncertainty with regards to that particular investment.

Yes, I certainly understand that and agree with your decision there. Do you know -- I mean, these machine prices are generally fungible. There's transactions that take place in the market. Where do you think that your loan-to-value on that stands right now?

Yes. If it comes to a forced liquidation based on the latest market transaction data that we've seen, the value of that equipment in an FLV is probably in the $9 million to $11 million range.

Our next question will come from Bryce Rowe with B. Riley.

Guess I wanted to start just on the balance sheet and leverage. Obviously, you saw leverage come down quarter-over-quarter. And just wanted to get a feel for how you expect to manage balance sheet leverage, especially now that we see the valuation below NAV and really probably limits your ability to raise equity capital here. So if you could just speak to how we should expect a balance sheet leverage to kind of play out over the next several quarters and how you expect to manage it?

Yes, this is Dave. We've always indicated that we would be comfortable operating in a 1.2 to 1.35 range on our debt-to-equity. I think we're still within that bound very comfortably. We are taking on other initiatives that we -- are in process right now that we will discuss at a later date, but we are coming up with the alternatives to that funding mechanism.

Okay. And then -- maybe I wanted to just hit on the expense side. Any kind of forward look from an expense perspective in terms of new hires? I think you guys have ramped the team fairly aggressively over the last 12 to 18 months, and just wanted to get a feel for where you stand now. Obviously, being internally managed, you've got a huge competitive advantage to try to capture operating leverage as you do grow the balance sheet.

Yes, this is Steve. We're going to continue to judiciously add to the team. We've been doing that. And it has paid dividends literally, but it certainly helped us continue to grow revenues, and so we'll do that judiciously and we're excited to do that. I mentioned in the prepared remarks, we added a new personnel to our Life Sciences team there in the Raleigh-Durham area, and we're excited about that. So we'll continue to do that judiciously.

Okay. And then maybe one more for me, and this is more of a modeling question. But Dave, was there any reversed interest in the quarter tied to the addition of the nonaccruals?

No. Yes.

Our next question will come from Jordan Wathen with Wells Fargo Securities.

Just one question to follow-up on Core Scientific. Can you tell us if that equipment when it was purchased that it was purchased new condition?

Yes, it was.

[Operator Instructions] We have no further questions in the queue at this time. So I would like to turn the floor back to Steve Brown, Chief Executive Officer, for closing remarks.

Thank you, Chelsea, and thanks to everyone for joining the call again today. One final note, we will be participating with both the Jefferies BDC Summit on November 16 and the KBW Midtown Mark on December 14, both of which are taking place in New York. If you'd like to arrange a meeting with Trinity management team, please contact each of the financial institutions mentioned directly or through Prosek, our Investment Relations firm. We look forward to reporting fourth quarter and year-end results in 2023. Thank you.

Thank you, ladies and gentlemen. This does conclude Trinity Capital Third Quarter 2022 Earnings Conference Call. We appreciate your participation, and you may disconnect at any time.