Short-Term Borrowings

Silicon Valley Bank

On September 19, 2016, the Company entered into a Credit Agreement (as amended, the “Credit Agreement”) with Silicon Valley Bank (“SVB”), as administrative agent, and the other lenders party thereto. The Credit Agreement replaces the Company’s Third Amended and Restated Loan and Security Agreement with SVB, dated March 14, 2014. On September 5, 2017, the Company entered into the Third Amendment to the Credit Agreement. The following takes into account the terms per the agreement as amended on September 5, 2017.

The Credit Agreement provides for a revolving loan commitment of $30.0 million and has a stated maturity date of September 19, 2019. The Credit Agreement includes a $10.0 million sub-limit for swingline loans and a $5.0 million sub-limit for letters of credit. The Credit Agreement also includes an accordion feature that allows the Company, at any time, to increase the aggregate revolving loan commitments by up to an additional $25.0 million, subject to the satisfaction of certain conditions, including obtaining the lenders’ agreement to participate in the increase.

Borrowings under the Credit Agreement are subject to a borrowing base, which is a formula based upon certain eligible accounts receivable plus a non-formula amount if the Company meets certain liquidity requirements. The principal amount of revolving loans and letters of credit outstanding at any time cannot exceed the lesser of (i) the revolving commitments in effect at such time, and (ii) the sum of the Borrowing Base (as defined in the Credit Agreement) and $2.5 million. Eligible accounts receivable include 85% of certain U.S. accounts receivable and 75% of certain foreign accounts receivable (85% in certain cases).

Outstanding borrowings under the revolving loan commitment bear interest at a per annum rate based upon the Company's Availability (as defined in the Credit Agreement), which means the quotient of the amount available for borrowings under the Credit Agreement divided by the lesser of the total commitment and the borrowing base, calculated as a daily average over the immediately preceding fiscal month. The Credit Agreement provides that the per annum interest rate commencing on June 30, 2017 when the Consolidated Adjusted EBITDA (as defined in the Credit Agreement) as measured on a trailing twelve-month basis for the immediately preceding fiscal quarter period is less than $8.0 million will be as follows:


•	When Availability is 70% or more, the interest rate is the prime rate (as published in Wall Street Journal) plus 0.75%;


•	When Availability is 30% or more and less than 70%, the interest rate is the prime rate plus 1.00%; and


•	When Availability is below 30%, the interest rate is the prime rate plus 1.25%.

Commencing on June 30, 2017, if Consolidated Adjusted EBITDA as measured on a trailing twelve-month basis for the immediately preceding fiscal quarter period is equal to or greater than $8.0 million, the rate per annum will be as follows:


•	When Availability is 70% or more, the interest rate is the prime rate plus 0.25%;


•	When Availability is 30% or more and less than 70%, the interest rate is the prime rate plus 0.50%; and


•	When Availability is below 30%, the interest rate is the prime rate plus 0.75%.

In addition, commencing on September 5, 2017, the applicable per annum interest rate on the revolving loans outstanding under the Credit Agreement will be increased by 0.50% until the earlier of either (i) Consolidated Adjusted EBITDA (as defined in the Credit Agreement) for two consecutive quarters is greater than or equal to $0 or (ii) the Company raises $15.0 million or more in capital from a source other than the Company or its subsidiaries.

Under the Credit Agreement, the Company is required to make interest payments monthly. The Company is further required to pay $25,000 in annual administrative fees, $82,500 in annual commitment fees and a commitment fee based on the average unused portion of the revolving credit commitment, and certain other fees in connection with letters of credit. The commitment fee is determined as follows and is payable quarterly in arrears:


•	When Availability is 70% or more, the commitment fee is 0.35% of the average unused portion of the revolving credit commitment;


•	When Availability is 30% or more and less than 70%, the commitment fee is 0.325% of the average unused portion of the revolving credit commitment; and


•	When Availability is below 30%, the commitment fee is 0.3% of the average unused portion of the revolving credit commitment.

The Company paid a total of $0.4 million loan origination (and loan modification) fees which were capitalized and will be expensed over the term of the Credit Agreement.

The Credit Agreement requires that the Company comply with financial covenants requiring the Company to maintain a minimum monthly Liquidity Ratio (as defined in the Credit Agreement), measured as of the last day of the applicable month, as follows:



Month Ended	Minimum Liquidity Ratio
8/31/2017	1.50:1.00
1/31/2018	1.35:1.00
3/31/2018	1.50:1.00
4/30/2018	1.35:1.00
6/30/2018	1.50:1.00

Additionally, the Credit Agreement requires the Company to maintain a minimum trailing twelve months Consolidated Adjusted EBITDA in the third and fourth quarter of fiscal year 2017 and each quarter of fiscal year 2018 as follows:



Quarter Ending	Minimum Consolidated Adjusted EBITDA
9/30/17	($4,500,000)
12/31/17	($5,500,000)
3/31/18	($5,000,000)
6/30/18	($5,000,000)
9/30/18	$0
12/31/18	$2,000,000

The Credit Agreement also provides limits for the add-back of certain restructuring costs on a trailing twelve month basis in the calculation of Consolidated Adjusted EBITDA as follows:



12 Month Period Ended	Restructuring Costs
9/30/17	$10,786,000 (inclusive of the quarter ending 9/30/17 non-cash inventory write down)
12/31/17	$10,471,000
3/31/18	$12,235,000
6/30/18	$11,000,000
9/30/18	$3,000,000
12/31/18	$2,000,000

The Credit Agreement also provides that following fiscal year 2017, SVB, as administrative agent, and the required lenders under the Credit Agreement will re-set the required minimum Consolidated Adjusted EBITDA levels for the periods tested in fiscal year 2019.

All obligations under the Credit Agreement are unconditionally guaranteed by the Company's wholly owned subsidiary, Radisys International LLC. The obligations under the Credit Agreement are secured by a first priority lien on the assets of the Company and the subsidiary guarantor. If the Company acquires or forms a material U.S. subsidiary, then that subsidiary will also be required to guarantee the obligations under the Credit Agreement and grant a first priority lien on its assets.

As of December 31, 2017 and 2016, the Company had outstanding balances of $16.0 million and $25.0 million issued on its behalf under the Credit Agreement.

As part of the Company’s efforts to improve its liquidity, subsequent to December 31, 2017, Radisys entered into new financing arrangements with Hale Capital Partners and CIDM LendCo, LLC. Refer to Note 19 - Subsequent Events, whereby on January 3, 2018, Radisys extinguished the aforementioned Credit Agreement with SVB and entered into a new credit agreement with Marquette Business Credit, LLC as well as issued new senior notes, which significantly improved the Company’s gross cash position. As the previous agreement with SVB has been extinguished, the Company did not complete covenants for the period ended December 31, 2017 and subsequently has excluded disclosure of unused availability under that agreement.

Liquidity Outlook

Over the past several quarters, the Company has experienced significant operating losses and more recently consumed significant cash from operations resulting from a material decline in its DCEngine product line. Given the uncertainty of future business from the DCEngine product line, the Company began taking action in the fourth quarter of 2017 to significantly reduce its overhead and operating expenses moving forward aimed at enabling the Company to return to profitability and free cash flow generation. These actions also included closing the new financing arrangements subsequent to December 31, 2017, which positioned the Company to implement its expense reduction actions as well as committed inventory purchases through the first half of 2018.

A return to profitability and free cash flow generation is based on certain assumptions and projections, including growth from the Company’s Software-Systems business. If the Company is unable to attain certain levels of revenue growth, or meet its cost reduction targets, the Company may be out of compliance with covenants associated with the new financing arrangements which may have a material adverse effect on the Company’s liquidity.

At December 31, 2017, the Company’s cash and cash equivalents amounted to $8.1 million. The Company believes its current cash and cash equivalents, the proceeds from the sale of the Notes, cash expected to be generated from operations, available borrowings under ABL Credit Agreement and availability, if required, under the Company’s $100.0 million unallocated shelf registration statement will satisfy the Company’s short and long-term expected working capital needs, capital expenditures, acquisitions, stock repurchases, and other liquidity requirements associated with the Company’s present business operations. If the Company is unable to comply with various covenants under the ABL Credit Agreement and the Note Purchase Agreement due to the timing of orders and shipments from the Company’s Software-Systems customers, delays in payment of accounts receivable or other adverse business conditions that impact the Company’s operating plans, without an amendment or waiver, the Company’s liquidity outlook could be materially and adversely affected. The Company continues to pursue a number of actions to improve its cash position including (i) minimizing capital expenditures, (ii) effectively managing working capital, (iii) seeking amendments or waivers from lenders and (iv) improving cash flows from operations. These efforts continue in earnest and the Company is considering all available strategic alternatives and financing possibilities, including, without limitation, the issuance of additional equity, the incurrence of additional secured indebtedness and the exchange or refinancing of existing obligations.