Exhibit 10.2


 





COMMERCIAL SECURITY AGREEMENT


 


	Grantor:	
        Applied Optoelectronics,
        Inc.

        13115 Jess Pirtle Blvd

        Sugar Land, TX 77478
	Lender:	
        East West Bank

        Loan Servicing Department

        9300 Flair Drive, 6th Floor

        El Monte, CA 91731



 


THIS COMMERCIAL
SECURITY AGREEMENT dated July 31, 2014, is made and executed between Applied Optoelectronics, Inc. ("Grantor")
and East West Bank ("Lender").


 


GRANT OF SECURITY
INTEREST. For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness
and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other
rights which Lender may have by law.


 


COLLATERAL DESCRIPTION.
The word "Collateral" as used in this Agreement means the following described property, whether now owned or hereafter
acquired, whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest
for the payment of the Indebtedness and performance of all other obligations under the Note and this Agreement:


 


All inventory,
equipment, accounts (including but not limited to all health-care-insurance receivables), , instruments (including but not limited
to all promissory notes), letter-of-credit rights, letters of credit, documents, deposit accounts, investment property, money,
other rights to payment and performance, and general intangibles (including but not limited to all software and all payment intangibles)
excluding Borrower’s Intellectual Property; all fixtures; all timber to be cut; all attachments, accessions, accessories,
fittings, increases, tools, parts, repairs, supplies, and commingled goods relating to the foregoing property, and all additions,
replacements of and substitutions for all or any part of the foregoing property; all insurance refunds relating to the foregoing
property; all good will relating to the foregoing property; all records and data and embedded software relating to the foregoing
property, and all equipment, inventory and software to utilize, create, maintain and process any such records and data on electronic
media; and all supporting obligations relating to the foregoing property; all whether now existing or hereafter arising, whether
now owned or hereafter acquired or whether now or hereafter subject to any rights in the foregoing property; and all products
and proceeds (including but not limited to all insurance payments) of or relating to the foregoing property.


 


In addition, the
word "Collateral" also includes all the following, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:


 


(A)
All accessions, attachments, accessories, tools, parts, supplies, replacements of and additions to any of the collateral described
herein, whether added now or later.


 


(B)
All products and produce of any of the property described in this Collateral section.


 


(C)
All accounts, general intangibles, excluding Borrower’s Intellectual Property, instruments, rents, monies, payments, and
all other rights, arising out of a sale, lease, consignment or other disposition of any of the property described in this Collateral
section.


 


(D)
All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described
in this Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party's insurer,
whether due to judgment, settlement or other process.


 


(E)
All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or data on electronic media.


 


(F) all accounts and general intangibles
that consist of rights to payment from the sale, licensing or disposition of all or any part of, or rights in, the Intellectual
Property (the “Rights to Payment”).


 


The word "Intellectual
Property" means all of Borrower’s right, title, and interest in and to the following:


 


(A)
Copyrights, Trademarks and Patents;


 


(B)
Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now
or hereafter existing, created, acquired or held;.


 


(C)
Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held;


 






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(D)
Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right,
but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified
above;.


 


(E)
All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from
such use to the extent permitted by such license or rights; and


 


(F) All amendments, renewals and extensions of any of the Copyrights,
Trademarks or Patents.


 


Notwithstanding
the foregoing, if a judicial authority (including a U.S. Bankruptcy Court) holds that a security interest in the underlying Intellectual
Property is necessary to have a security interest in the Rights to Payment, then the Collateral shall automatically, and effective
as of the date of this Agreement, include the Intellectual Property to the extent necessary to permit perfection of Bank’s
security interest in the Rights to Payment.


 


CROSS-COLLATERALIZATION.
In addition to the Note, this Agreement secures all obligations, debts and liabilities, plus interest thereon, of Grantor
to Lender, or any one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now
existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether
due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated, whether Grantor
may be liable individually or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and
whether recovery upon such amounts may be or hereafter may become barred by any statute of limitations, and whether the obligation
to repay such amounts may be or hereafter may become otherwise unenforceable.


 


RIGHT OF SETOFF.
To the extent permitted by applicable law, Lender reserves a right of setoff in all Grantor's accounts with Lender (whether
checking, savings, or some other account). This includes all accounts Grantor holds jointly with someone else and all accounts
Grantor may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff
would be prohibited by law. Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums
owing on the Indebtedness against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts
to allow Lender to protect Lender's charge and setoff rights provided in this paragraph.


 


GRANTOR'S REPRESENTATIONS
AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and promises to Lender that:


 


Perfection
of Security Interest. Grantor agrees to take whatever actions are requested by Lender to perfect and continue Lender's security
interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or
constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper and instruments if not delivered
to Lender for possession by Lender. This is a continuing Security Agreement and will continue in effect even though all or
any part of the Indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lender.


 


Notices
to Lender. Grantor will promptly notify Lender in writing at Lender's address shown above (or such other addresses as Lender
may designate from time to time) prior to any (1) change in Grantor's name; (2) change in Grantor's assumed business name(s);
(3) change in the management of the Corporation Grantor; (4) change in the authorized signer(s); (5) change in Grantor's principal
office address; (6) change in Grantor's state of organization; (7) conversion of Grantor to a new or different type of business
entity; or (8) change in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and
Lender. No change in Grantor's name or state of organization will take effect until after Lender has received notice.


 


No
Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which
Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this
Agreement.


 


Enforceability
of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the
Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable
laws and regulations concerning form, content and manner of preparation and execution, and all persons appearing to be obligated
on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At
the time any account becomes subject to a security interest in favor of Lender, the account shall be a good and valid account
representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions
or previously shipped or delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for
the account debtor. So long as this Agreement remains in effect, Grantor shall not, without Lender's prior written consent, compromise,
settle, adjust, or extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against
any of the Collateral, and no agreement shall have been made under which any deductions or discounts may be claimed concerning
the Collateral except those disclosed to Lender in writing.


 


Location
of the Collateral. Except in the ordinary course of Grantor's business, Grantor agrees to keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts or general intangibles, the records concerning the Collateral)
at Grantor's address shown above or at such other locations as are acceptable to Lender. Upon Lender's request, Grantor will deliver
to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations,
including without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor
is renting or leasing; (3) all storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral
is or may be located.


 






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Removal
of the Collateral. Except in the ordinary course of Grantor's business, including the sales of inventory, Grantor shall not
remove the Collateral from its existing location without Lender's prior written consent. To the extent that the Collateral consists
of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates
of title for the vehicles outside the State of Texas, without Lender's prior written consent. Grantor shall, whenever requested,
advise Lender of the exact location of the Collateral.


 


Transactions
Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, or as
otherwise provided for in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business
and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business
does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber
or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security
interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if
junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition
of the Collateral (other than in the ordinary course of business) shall be held in trust for Lender and shall not be commingled
with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition.
Upon receipt, Grantor shall immediately deliver any such proceeds to Lender.


 


Title.
Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of
all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on
file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has
specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons.


 


Repairs
and Maintenance. Grantor agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order,
repair and condition at all times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for
work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may
ever attach to or be filed against the Collateral.


 


Inspection
of Collateral. Lender and Lender's designated representatives and agents shall have the right, upon reasonable prior notice,
during Grantor’s usual business hours, to examine and inspect the Collateral wherever located.





 


Taxes,
Assessments and Liens. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation,
upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents.
Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding
to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion.
If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash,
a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge
of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of
the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement
against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings.
Grantor further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been
paid in full and in a timely manner. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good
faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral
is not jeopardized.


 


Compliance
with Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral, including
all laws or regulations relating to the undue erosion of highly-erodible land or relating to the conversion of wetlands for the
production of an agricultural product or commodity. Grantor may contest in good faith any such law, ordinance or regulation and
withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's
opinion, is not jeopardized.


 


Hazardous
Substances. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event
Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify, defend, and hold
harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation
to indemnify and defend shall survive the payment of the Indebtedness and the satisfaction of this Agreement.


 






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Maintenance
of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and
liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts,
coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor,
upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory
to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days' prior
written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance
policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act,
omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is
offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If
Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated
to) obtain such insurance as Lender deems appropriate, including if Lender so chooses "single interest insurance," which
will cover only Lender's interest in the Collateral.


 


Application
of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral if the estimated cost
of repair or replacement exceeds $10,000.00, whether or not such casualty or loss is covered by insurance. Lender may make proof
of loss if Grantor fails to do so within fifteen (15) days of the casualty.


 


Insurance
Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following: (1) the name of the insurer; (2) the risks insured; (3)
the amount of the policy; (4) the property insured; (5) the then current value on the basis of which insurance has been obtained
and the manner of determining that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by
Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the
cash value or replacement cost of the Collateral.


 


Financing Statements. Grantor authorizes Lender to file a UCC financing
statement, or alternatively, a copy of this Agreement to perfect Lender's security interest. At Lender's request, Grantor additionally
agrees to sign all other documents that are necessary to perfect, protect, and continue Lender's security interest in the Property.
Grantor will pay all filing fees, title transfer fees, and other fees and costs involved unless prohibited by law or unless Lender
is required by law to pay such fees and costs. Grantor irrevocably appoints Lender to execute documents necessary to transfer
title if there is a default. Lender may file a copy of this Agreement as a financing statement.


 


GRANTOR'S RIGHT
TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor
may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner
not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use
shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security
interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts.
If an Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments
directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether before
or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the
Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall
deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure
to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral
against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness.


 


LENDER'S EXPENDITURES.
If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Grantor fails
to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor's failure to discharge
or pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor's
behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging
or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral
and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender
for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date
of repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable
on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become
due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as
a balloon payment which will be due and payable at the Note's maturity. The Agreement also will secure payment of these amounts.
Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default.


 






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DEFAULT.
Each of the following shall constitute an Event of Default under this Agreement:


 


Payment
Default. Grantor fails to make any payment when due under the Indebtedness.


 


Other
Defaults. Grantor fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement
or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any
other agreement between Lender and Grantor.


 


Default
in Favor of Third Parties. Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement,
or any other agreement, in favor of any other creditor or person that may materially affect any of Grantor's property or ability
to perform Grantor's obligations under this Agreement or any of the Related Documents.


 


False
Statements. Any warranty, representation or statement made or furnished to Lender by Grantor or on Grantor's behalf under
this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished
or becomes false or misleading at any time thereafter.


 


Defective
Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure
of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.


 


Insolvency.
The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a
receiver for any part of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the
commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor.


 


Creditor
or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any governmental agency against any collateral securing the
Indebtedness. This includes a garnishment of any of Grantor's accounts, including deposit accounts, with Lender. However, this
Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim
which is the basis of the creditor or forfeiture proceeding and if Grantor gives Lender written notice of the creditor or forfeiture
proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined
by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.


 


Events
Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation
party of any of the Indebtedness or guarantor, endorser, surety, or accommodation party dies or becomes incompetent or revokes
or disputes the validity of, or liability under, any Guaranty of the Indebtedness.


 


Adverse
Change. A material adverse change occurs in Grantor's financial condition, or Lender believes the prospect of payment or performance
of the Indebtedness is impaired.


 


Cure Provisions. If any default, other than a default in payment, is curable and if Grantor
has not been given a notice of a breach of the same provision of this Agreement within the preceding twelve (12) months, it may
be cured if Grantor, after Lender sends written notice to Grantor demanding cure of such default: (1) cures the default within
thirty (30) days; or (2) if the cure requires more than thirty (30) days, immediately initiates steps which Lender deems in Lender's
sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.


 


RIGHTS AND REMEDIES
ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of
a secured party under the California Uniform Commercial Code. In addition and without limitation, Lender may exercise any one
or more of the following rights and remedies only after Grantor has exhausted all remedies under the Cure Provisions section as
referenced above:


 


Accelerate
Indebtedness. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required
to pay, immediately due and payable, without notice of any kind to Grantor.


 


Assemble
Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates
of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available
to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take
possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession,
Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after
repossession.


 






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Sell
the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof
in Lender's own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral
threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor, and
other persons as required by law, reasonable notice of the time and place of any public sale, or the time after which any private
sale or any other disposition of the Collateral is to be made. However, no notice need be provided to any person who, after Event
of Default occurs, enters into and authenticates an agreement waiving that person's right to notification of sale. The requirements
of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All
expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring,
preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be
payable on demand, with interest at the Note rate from date of expenditure until repaid.


 


Appoint
Receiver. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Collateral,
with the power to protect and preserve the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect
the rents from the Collateral and apply the proceeds, over and above the cost of the receivership, against the Indebtedness. The
receiver may serve without bond if permitted by law. Lender's right to the appointment of a receiver shall exist whether or not
the apparent value of the Collateral exceeds the Indebtedness by a substantial amount. Employment by Lender shall not disqualify
a person from serving as a receiver.


 


Collect
Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues
from the Collateral. Lender may at any time in Lender's discretion transfer any Collateral into Lender's own name or that of Lender's
nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or
apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists
of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender
may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine,
whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor,
receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse
notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly
to Lender.





 


Obtain
Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency
remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided
in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of
accounts or chattel paper.


 


Other
Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform
Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights
and remedies it may have available at law, in equity, or otherwise.


 


Election of Remedies. Except as may be prohibited by
applicable law, all of Lender's rights and remedies, whether evidenced by this Agreement, the Related Documents, or by any other
writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor
under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its
remedies.


 


CHOICE OF VENUE. If
there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, State
of California.


 


JUDICIAL REFERENCE.
If the waiver of the right to a trial by jury is not enforceable, the parties hereto agree that any and all disputes or controversies
of any nature between them arising at any time shall be decided by a reference to a private judge, mutually selected by the parties
or, if they cannot agree, then any party may seek to have a private judge appointed in accordance with California Code of Civil
Procedure §§ 638 and 640 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive
jurisdiction of the federal courts). The reference proceedings shall be conducted pursuant to and in accordance with the provisions
of California Code of Civil Procedure §§ 638 through 645.1, inclusive. The private judge shall have the power, among
others, to grant provisional relief, including without limitation, entering temporary restraining orders, issuing preliminary
and permanent injunctions and appointing receivers. All such proceedings shall be closed to the public and confidential and all
records relating thereto shall be permanently sealed. If during the course of any dispute, a party desires to seek provisional
relief, but a judge has not been appointed at that point pursuant to the judicial reference procedures, then such party may apply
to the Court for such relief. The proceeding before the private judge shall be conducted in the same manner as it would be before
a court under the rules of evidence applicable to judicial proceedings. The parties shall be entitled to discovery which shall
be conducted in the same manner as it would be before a court under the rules of discovery applicable to judicial proceedings.
The private judge shall oversee discovery and may enforce all discovery rules and orders applicable to judicial proceedings in
the same manner as a trial court judge. The parties agree that the selected or appointed private judge shall have the power to
decide all issues in the action or proceeding, whether of fact or of law, and shall report a statement of decision thereon pursuant
to California Code of Civil Procedure § 644(a). Nothing in this paragraph shall limit the right of any party at any time
to exercise self-help remedies, foreclose against collateral, or obtain provisional remedies. The private judge shall also determine
all issues relating to the applicability, interpretation, and enforceability of this paragraph.


 






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The parties agree
that time is of the essence in conducting the referenced proceedings. The parties shall promptly and diligently cooperate with
one another and the referee, and shall perform such acts as may be necessary to obtain prompt and expeditious resolution of the
dispute or controversy in accordance with the terms hereof. The costs shall be borne equally by the parties.


 


MISCELLANEOUS
PROVISIONS. The following miscellaneous provisions are a part of this Agreement:


 


Amendments.
This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as
to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in
writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.


 


Attorneys'
Fees; Expenses. Grantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and
Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to
help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's
attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court.


 


Caption
Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define
the provisions of this Agreement.


 


Governing
Law. This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the
laws of the State of California without regard to its conflicts of law provisions. This Agreement has been accepted by Lender
in the State of California.


 


Preference
Payments. Any monies Lender pays because of an asserted preference claim in Grantor's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Grantor as provided in this Agreement.


 


No
Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in
writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of
such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver
of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior
waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or
of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement,
the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such
consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.


 


Notices.
Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered,
when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight
courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid,
directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this
Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's
address. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address. Unless otherwise
provided or required by law, if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice
given to all Grantors.


 


Power
of Attorney. Grantor hereby appoints Lender as Grantor's irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect, amend, or to continue the security interest granted in this Agreement or to demand termination of filings
of other secured parties. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic
or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse
Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral.


 


Waiver
of Co-Obligor's Rights. If more than one person is obligated for the Indebtedness, Grantor irrevocably waives, disclaims and
relinquishes all claims against such other person which Grantor has or would otherwise have by virtue of payment of the Indebtedness
or any part thereof, specifically including but not limited to all rights of indemnity, contribution or exoneration.


 


Severability.
If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to
any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance.
If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending
provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality,
invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of
any other provision of this Agreement.


 






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Successors
and Assigns. Subject to any limitations stated in this Agreement on transfer of Grantor's interest, this Agreement shall be
binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested
in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor's successors with reference to this Agreement
and the Indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability
under the Indebtedness.


 


Survival
of Representations and Warranties. All representations, warranties, and agreements made by Grantor in this Agreement shall
survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect
until such time as Grantor's Indebtedness shall be paid in full.


 


Time
is of the Essence. Time is of the essence in the performance of this Agreement.


 


Waive
Jury. To the extent permitted by applicable law, all parties to this Agreement hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by any party against any other party.


 


Oral Agreements Not Effective. This Agreement
embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes
all prior oral or written negotiations, agreements and understandings of the parties with respect to the subject matter hereof
and shall remain in full force and effect in accordance with its terms and conditions.  Moreover, any subsequent oral statements,
negotiations, agreements or understandings of the parties shall not be effective against Lender unless (i) expressly stated in
writing, (ii) duly approved and authorized by an appropriate decision making committee of Lender on such terms and conditions
as such committee shall deem necessary or appropriate in the committee’s sole and absolute opinion and judgment and (iii)
executed by an authorized officer of Lender.  Borrower shall not rely or act on any oral statements, negotiations, agreements
or understandings between the parties at anytime whatsoever, including before or during any Lender approval process stated above. 
Borrower acknowledges and agrees that Borrower shall be responsible for its own actions, including any detrimental reliance on
any oral statements, negotiations, agreements or understandings between the parties and that Lender shall not be liable for any
possible claims, counterclaims, demands, actions, causes of action, damages, costs, expenses and liability whatsoever, known or
unknown, anticipated or unanticipated, suspected or unsuspected, at law or in equity, originating in whole or in part in connection
with any oral statements, negotiations, agreements or understandings between the parties which the Borrower may now or hereafter
claim against the Lender.  Neither this Agreement nor any other Related Document, nor any terms hereof or thereof may be
amended, supplemented or modified except in accordance with the provisions of this section.  Lender may from time to time,
(a) enter into with Borrower written amendments, supplements or modifications hereto and to the Related Documents or (b) waive,
on such terms and conditions as Lender may specify in such instrument, any of the requirements of this Agreement or the Related
Documents or any Event Default and its consequences, if, but only if, such amendment, supplement, modification or waiver is (i)
expressly stated in writing, (ii) duly approved and authorized by an appropriate decision making committee of Lender on such terms
and conditions as such committee shall deem necessary or appropriate in the committee’s sole and absolute opinion and judgment
and (iii) executed by an authorized officer of Lender.  Then such amendment, supplement, modification or waiver shall be
effective only in the specific instance and specific purpose for which given.


 


DEFINITIONS.
The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically
stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words
and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require.
Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial
Code:


 


Agreement.
The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended
or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time
to time.


 


Borrower.
The word "Borrower" means Applied Optoelectronics, Inc. and includes all co-signers and co-makers signing the Note
and all their successors and assigns.


 


Collateral.
The word "Collateral" means all of Grantor's right, title and interest in and to all the Collateral as described
in the Collateral Description section of this Agreement.


 


Default.
The word "Default" means the Default set forth in this Agreement in the section titled "Default".


 


Environmental
Laws. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances
relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments
and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of
Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or federal laws, rules,
or regulations adopted pursuant thereto.


 






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Event
of Default. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default
section of this Agreement.


 


Grantor.
The word "Grantor" means Applied Optoelectronics, Inc..


 


Guaranty.
The word "Guaranty" means the guaranty from guarantor, endorser, surety, or accommodation party to Lender, including
without limitation a guaranty of all or part of the Note.


 


Hazardous
Substances. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical,
chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when
improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous
Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances,
materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes,
without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.


 


Indebtedness.
The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal
and interest together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement
or under any of the Related Documents. Specifically, without limitation, Indebtedness includes all amounts that may be indirectly
secured by the Cross-Collateralization provision of this Agreement.


 


Lender.
The word "Lender" means East West Bank, its successors and assigns.


 


Note.
The word "Note" means the Note dated July 31, 2014 and executed by Applied Optoelectronics, Inc. in the principal
amount of $5,000,000.00, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and
substitutions for the note or credit agreement.


 


Property.
The word "Property" means all of Grantor's right, title and interest in and to all the Property as described in
the "Collateral Description" section of this Agreement.


 


Related Documents. The words "Related Documents"
mean all promissory notes, credit agreements, loan agreements, environmental agreements, security agreements, mortgages, deeds
of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter
existing, executed in connection with the Indebtedness.


 


GRANTOR HAS READ
AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED July
31, 2014.


 


GRANTOR:


 


 


APPLIED OPTOELECTRONICS,
INC.


 


By: /s/ Chih-Hsiang
(Thompson) Lin


Chih-Hsiang (Thompson) Lin, CEO of Applied Optoelectronics, Inc.


 


 






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