On February 9, 2022, DZS Inc. (the “Company”) entered into a Credit Agreement (the “Credit Agreement”) with the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement provides for revolving loans in an aggregate principal amount of up to $30 million, up to $15 million of which is available for letters of credit. The Credit Agreement matures on February 9, 2024. The maximum amount that the Company can borrow under the Credit Agreement is subject to a borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments, plus $10 million. The Credit Agreement is guaranteed by the Company's material domestic subsidiaries. Obligations under the Credit Agreement are secured by first priority liens on substantially all of the Company's assets and those of the guarantors, including, without limitation, intellectual property, inventory, accounts receivable, bank accounts and equipment. The Company may prepay all amounts outstanding under the Credit Agreement at any time without premium or penalty (other than customary break funding costs), subject to certain notice requirements. The Credit Agreement requires mandatory prepayments of amounts outstanding thereunder if loans outstanding exceed the borrowing base. Loans under the Credit Agreement bear interest at the Company's option at (i) the prime rate plus 2.00%, (ii) the adjusted term SOFR rate plus 2.90% or (iii) the adjusted daily simple SOFR rate plus 2.90%. The Company pays a per annum fee of 2.90% on all letters of credit issued under the Credit Agreement, and pays a commitment fee of 0.25% per annum on the unused revolving credit availability under the Credit Agreement.
The Credit Agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The maximum permitted leverage ratio is 2.50 to 1.00. The minimum required liquidity is $15 million. In addition, the Credit Agreement contains various covenants that limit the Company's and its subsidiaries ability to, among other things: (i) incur or assume indebtedness, (ii) grant or assume liens; (iii) merge or make certain other fundamental changes; (iv) make investments and acquisitions; (v) sell, transfer, assign or convey assets; (vi) repurchase equity, make dividends and certain other restricted payments; and (vii) engage in transactions with affiliates. The Credit Agreement contains customary events of default. If an event of default relating to bankruptcy or other insolvency events occurs with respect to the Company, all indebtedness under the Credit Agreement will immediately become due and payable. If any other event of default exists under the Credit Agreement, the lenders may terminate their commitments to lend the Company money, accelerate the maturity of the indebtedness outstanding under the Credit Agreement and exercise other rights and remedies. In addition, if any event of default exists under the Credit Agreement, the lenders may commence foreclosure or other actions against the collateral.