Trinity Capital Inc. quarterly report, Q2 FY2021

Trinity Capital Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2021; filed August 5, 2021. Trinity is an internally managed, non-diversified business development company and regulated investment company focused on loans, equipment financings, warrants and equity investments in growth-stage, often venture-backed, companies.

Financial Performance and Position

Metric	Three months ended June 30	Six months ended June 30
Total investment income	$19.5 million, up from $13.8 million	$36.8 million, up from $26.1 million
Total expenses	$9.4 million, up from $7.1 million	$19.5 million, up from $13.6 million
Net investment income	$10.1 million, or $0.38 per share	$17.3 million, or $0.69 per share
Net realized gains/(losses)	$2.0 million, versus $(2.0) million	$4.6 million, versus $(2.9) million
Net unrealized appreciation/(depreciation)	$12.6 million, versus $2.1 million	$28.1 million, versus $(22.2) million
Net increase/(decrease) in net assets from operations	$24.7 million, or $0.93 per share	$50.0 million, or $2.00 per share

Net investment income margin was approximately 51.8% for the quarter and 47.1% for the six months, based on investment income and total expenses.
Investment income growth reflected a larger income-producing portfolio, higher stated interest and original issue discount amortization, and increased prepayment-related fees. Prepayment penalties and related fees were $1.2 million in the quarter and $1.9 million year to date.
Net asset value increased to $379.7 million, or $14.33 per share, from $238.7 million, or $13.03 per share, at December 31, 2020.
The portfolio had fair value of $597.7 million at June 30, 2021, compared with $493.7 million at year-end 2020, across approximately 80 portfolio companies. It comprised $397.5 million of secured loans, $120.9 million of equipment financings, and $79.3 million of equity and equity-related investments.
Investment activity included approximately $209.5 million of new investments, excluding fees, and $146.9 million of sales and repayments during the first six months. Early debt repayments contributed approximately $92.0 million of proceeds.

Cash Flow, Debt and Liquidity

Operating cash flow was negative $54.9 million for the six months, primarily because investment purchases exceeded sales and repayments. Investing cash flow was negative $0.8 million and financing cash flow was positive $29.1 million.
Cash, cash equivalents and restricted cash were $34.5 million at June 30, 2021, down from $61.1 million at December 31, 2020. Restricted cash included approximately $15.3 million supporting Credit Facility covenants.
Total debt principal outstanding was $245.0 million: $70.0 million under the Credit Facility, $125.0 million of 7.00% Notes due 2025 and $50.0 million of 6.00% Convertible Notes due 2025. Debt carrying value, net of financing costs and discounts, was $237.0 million.
The Credit Facility matures January 8, 2022, unless extended, bears interest at three-month LIBOR plus 3.25%, and had approximately $88.6 million of availability at June 30, 2021. The Company was in compliance with its debt covenants.
Asset coverage was approximately 255.0%, compared with 177.0% at December 31, 2020. Management targets leverage of 1.15x to 1.35x.
Unfunded portfolio commitments were approximately $4.0 million to two companies, compared with $0.1 million at year-end 2020.

Material Changes Versus Prior Comparable Period

Six-month net investment income increased approximately 39%, while total investment income increased approximately 41%.
The Company shifted from a six-month net decrease in net assets from operations of $28.2 million in 2020 to a $50.0 million increase in 2021. The 2020 result included $15.6 million of Formation Transaction costs.
Net unrealized performance improved materially, driven principally by appreciation in Atieva, Matterport and Bowery Farming, partly offset by depreciation in Birchbox and Ology Bioservices.
Fair value exposure increased in secured loans and equity investments, while equipment financings declined modestly as a percentage of the portfolio. Manufacturing became the largest industry exposure at 28.0% of fair value.
The Company completed its initial public offering of 8,006,291 shares at $14.00 per share in February 2021, generating net proceeds primarily used to repay Credit Facility borrowings. Shares outstanding increased to 26.5 million at June 30, 2021 from 18.3 million at year-end.
Non-accrual exposure improved to two portfolio companies with fair value of approximately $0.9 million, or 0.2% of the investment portfolio, from three companies at 0.5% at year-end.

Distributions, Outlook and Risks

The Board declared quarterly distributions of $0.28 per share for the first quarter and $0.29 per share for the second quarter. The second-quarter distribution was paid July 15, 2021.
The filing does not provide formal earnings or distribution guidance. Management states that liquidity, including cash and Credit Facility availability, is expected to be sufficient for near-term operations and investment activity.
Approximately 49.3% of debt investments by principal were floating rate and 50.7% fixed rate. Management estimates that a 100-basis-point increase in applicable base rates would increase annualized net income by approximately $1.3 million, assuming no structural changes.
The Credit Facility and certain portfolio investments reference LIBOR. The expected discontinuation of LIBOR creates refinancing, contract-renegotiation and borrowing-cost risk.
Substantially all investments are Level 3 assets valued using significant unobservable inputs. Changes in market yields, revenue multiples, volatility, portfolio-company performance or liquidity could materially affect NAV and earnings.
The portfolio is concentrated in growth-stage companies with limited operating histories. The ten largest portfolio companies represented approximately 42.4% of portfolio fair value.
COVID-19 effects, portfolio-company defaults, leverage, rising rates, illiquidity, regulatory requirements, tax qualification as a RIC and maintenance of BDC status remain material risks. The filing reports no material legal proceedings.
Subsequent to quarter-end, the Chief Legal Officer and Chief Compliance Officer resigned effective August 2, 2021; Sarah Stanton was appointed Chief Compliance Officer.

Investor Verification Checklist

Verify the valuation assumptions supporting the $28.1 million of six-month unrealized appreciation, particularly Atieva, Birchbox, Ology Bioservices and other concentrated holdings.
Review Credit Facility maturity, extension terms, LIBOR replacement provisions, collateral requirements and the $88.6 million reported availability.
Assess refinancing needs for the $125.0 million 7.00% Notes and $50.0 million Convertible Notes due in 2025.
Monitor non-accrual investments, the portfolio risk-rating migration toward “Watch,” and the ability of growth-stage borrowers to obtain additional capital.
Reconcile reported distributions with taxable income, distributable earnings and potential return-of-capital treatment.
Evaluate concentration by portfolio company, industry and Level 3 valuation inputs, as well as the increase in unfunded commitments.