Document:

Third Party Security Agreement

 Exhibit 10.20 
 THIRD PARTY 
 SECURITY AGREEMENT 
 This Third Party Security Agreement (this “Agreement”) is made and entered into as of December 30, 2005 by and between the undersigned
(“Grantor”), and SQUARE 1 BANK (the “Bank”). 
 RECITALS 
 Bank proposes to enter into a transaction with IRVINE SENSORS CORPORATION (“Borrower”), which is the parent company of Grantor, pursuant to a
Loan and Security Agreement dated as of even date herewith, as amended from time to time (the “Loan Agreement”). Grantor expects to derive economic benefit from Bank’s doing so and dealing with Borrower in accordance with the
Loan Agreement, and has entered into an Unconditional Guaranty of even date herewith with respect to the present and future obligations of Borrower to Bank (as amended from time to time, the “Guaranty”). Grantor wishes to secure
performance and payment of all obligations to Bank under the Guaranty (the “Guarantor Obligations”) with substantially all of its assets. All terms used without definition in this Agreement shall have the meaning assigned to them in
the Loan Agreement. All terms used without definition in this Agreement or in the Loan Agreement shall have the meaning assigned to them in the Uniform Commercial Code. 
 NOW, THEREFORE, Grantor and the Bank agree as follows: 
 1. Grant of Security Interest. To
secure all of the Guarantor Obligations, Grantor grants to the Bank a security interest in the property described in Exhibit A (the “Collateral”). 
 2. Grantor’s Representations and Warranties. Grantor represents and warrants as follows: 
 (a) Authorization. Grantor has authority and has obtained all approvals and consents necessary to enter into this Agreement, and Grantor’s execution, delivery and performance of this Agreement will not violate or conflict with
the terms of Grantor’s Articles or Certificate of Incorporation, Bylaws or other charter document, or any law, agreement, or other instrument or writing to which Grantor is party or by which is it bound. 
 (b) Title. The Collateral is owned by Grantor and is free of all liens, encumbrances and other security interests other than
Permitted Liens (giving effect to such definition as if Grantor were the Borrower under the Loan Agreement). 
 (c)
Solvency, Payment of Debts. Grantor and each Subsidiary is solvent and able to pay its debts (including trade debts) as they mature. 
 (d) Further Representations. Grantor further represents, warrants, and covenants that (i) neither Grantor nor any Subsidiary is in default under any agreement under which Grantor or such Subsidiary owes any
money, or any agreement, the violation or termination of which could have a material adverse effect on Grantor on a consolidated or consolidating basis; (ii) the information provided to Bank on or prior to the date of this Agreement is true and
correct in all material respects; (iii) all financial statements and other information provided to Bank fairly present Grantor’s financial condition, and there has not been a material adverse change in the financial condition of Grantor
since the date of the most recent of the financial statements submitted to Bank; (iv) Grantor and each Subsidiary is in compliance with all laws and orders applicable to it the failure to comply with which could have a material adverse effect
on Grantor on a consolidated or consolidating basis; (v) neither Grantor nor any Subsidiary is a party to any litigation or is the subject of any government investigation, and neither Grantor nor any Subsidiary has any knowledge of any pending
litigation or investigation or the existence of circumstances that reasonably could be expected to give rise to such litigation or investigation, in each case where such litigation or investigation could have a material adverse effect on Grantor on
a consolidated or consolidating basis; (vi) Grantor’s principal place of business is located at the address specified in Section 11; and (vii) no representation or other statement made by Grantor to Bank contains any untrue
statement of a material fact or omits to state a material fact necessary to make any statements made to Bank not misleading. 
  

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 3. Covenants. 
 (a) Encumbrances. Grantor shall not grant a security interest in any of the Collateral other than (a) to Bank, or
(b) Permitted Liens (giving effect to such definition as if Grantor were the Borrower under the Loan Agreement) or execute any financing statements covering any of the Collateral in favor of any person other than Bank or a holder of a Permitted
Lien. 
 (b) Use of Collateral. The Collateral will not be used for any unlawful purpose or in any way that will void
any insurance required to be carried in connection therewith. Grantor will keep the Collateral free and clear of liens and adverse claims other than Permitted Liens and, as appropriate and applicable, will keep it in good condition and repair, and
will clean, shelter, and otherwise care for the Collateral in all such ways as are considered good practice by owners of like property. 
 (c) Indemnification. Grantor shall indemnify Bank against all losses, claims, demands and liabilities of any kind caused by the Collateral except claims, losses or liabilities resulting from the Bank’s
gross negligence or willful misconduct as determined by a final judgment of a court of competent jurisdiction. 
 (d)
Perfection of Security Interest. Grantor shall execute and deliver such documents as Bank reasonably deems necessary to create, perfect and continue the security interest in the Collateral contemplated hereby. 
 (e) Insurance of Collateral. 
 (i) Grantor, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Grantor’s business is conducted on the date hereof. Grantor shall also maintain insurance relating to Grantor’s ownership and use of the Collateral in amounts and of a type that
are customary to businesses similar to Grantor’s. 
 (ii) All such policies of insurance shall be in such form, with such
companies, and in such amounts as reasonably satisfactory to Bank. All such policies of property insurance shall contain a Bank’s loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all
liability insurance policies shall show Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Bank’s request, Grantor shall
deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. At any time after the occurrence and during the continuance of any Event of Default, all proceeds payable under any such policy
shall, at the option of Bank, be payable to Bank to be applied on account of the Guarantor Obligations. 
 (f) Inventory
and Equipment. 
 (i) Grantor shall not store its Inventory or the Equipment with a bailee, warehouseman, or other third
party unless the third party has been notified of Bank’s security interest and Bank (a) has received an acknowledgment from the third party that it is holding or will hold the Inventory or Equipment for Bank’s benefit or (b) is
in pledge possession of the warehouse receipt, where negotiable, covering such Inventory or Equipment. Grantor shall not store or maintain any Equipment or Inventory at a location other than the location set forth in Section 11 of this
Agreement. 
 (ii) Grantor shall maintain the Collateral in good and saleable condition, repair it if necessary and otherwise
deal with the Collateral in all such ways as are considered good practice by owners of like property, use it lawfully and only as permitted by insurance policies, and permit Bank to inspect the Collateral at any reasonable time. 
 (iii) Not sell, contract to sell, lease, encumber (other than Permitted Liens) (giving effect to such definition as if Grantor were the
Borrower under the Loan Agreement) or transfer the Collateral (other than Permitted Transfers) (giving effect to such definition as if Grantor were the Borrower under the Loan 

  

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Agreement) until the Obligations and the Guarantor Obligations have been paid or performed in full, even though Bank has a security interest in the proceeds
of such Collateral. 
 (g) Accounts, Chattel Paper and General Intangibles. As to Collateral which are Accounts,
Chattel Paper, General Intangibles and Proceeds, Grantor warrants, represents and agrees: 
 (i) All such Collateral is
genuine, enforceable in accordance with its terms and conditions precedent (except as disclosed to and accepted by Bank in writing). Grantor will supply Bank with duplicate invoices or other evidence of Grantor’s rights on Bank’s request.

 (ii) All persons appearing to be obligated on such Collateral have authority and capacity to contract. 
 (iii) All Chattel Paper is in compliance with applicable law as to form, content and manner of preparation and execution and has been
properly registered, recorded, and/or filed to protect Grantor’s interest thereunder. Grantor will mark conspicuously all Chattel Paper with a legend, in form and substance satisfactory to Bank, indicating that such Chattel Paper is subject to
the security interests of Bank and will, upon Bank’s request upon the occurrence of an Event of Default, deliver possession thereof to Bank. 
 (iv) Grantor agrees that following the occurrence and during the continuance of an Event of Default, Grantor shall not compromise, settle or adjust any Account or renew or extend the time of payment thereof without
Bank’s prior written consent. 
 (v) Until Bank exercises its rights to collect the Accounts pursuant hereto, Grantor
will collect with diligence all Grantor’s Accounts. Any collection of Accounts by Grantor, whether in the form of cash, checks, notes, or other instruments for the payment of money (properly endorsed or assigned where required to enable Bank to
collect same), shall be in trust for Bank. If an Event of Default has occurred and is continuing, Grantor shall keep all such collections separate and apart from all other funds and property so as to be capable of identification as the property of
Bank and deliver said collections daily to Bank in the identical form received. The proceeds of such collections when received by Bank may be applied by Bank directly to the payment of the Guarantor Obligations. Any credit given by Bank upon receipt
of said proceeds shall be conditional credit subject to collection. Returned items at Bank’s option may be charged to the Grantor. All collections of the Accounts shall be set forth on an itemized schedule, showing the name of the account
debtor, the amount of each payment and such other information as Bank may request. 
 (vi) Until Bank exercises its rights to
collect the Accounts pursuant hereto, Grantor may continue its present policies with respect to returned merchandise and adjustments. However, Grantor shall immediately notify Bank of all cases involving repossessions, and material loss or damage of
or to merchandise represented by the Accounts. 
 (h) Binding Agreement. Anything herein to the contrary
notwithstanding, (a) Grantor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had
not been executed; (b) the exercise by Bank of any of the rights granted hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral; and (c) Bank shall not have
any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall Bank be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or
enforce any claim for payment assigned hereunder. 
 (i) Instruments. Grantor will deliver and pledge to Bank all
Instruments that are part of the Collateral duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Bank. 
 (j) Records. Grantor shall prepare and keep, in accordance with generally accepted accounting principles consistently applied,
complete and accurate records regarding the Collateral and, if and when 

  

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requested by Bank, shall prepare and deliver a complete and accurate schedule of all the Collateral in such detail as Bank may reasonably require.

 (k) Inspection of Grantor’s Books. Grantor shall permit Bank or its designee at reasonable times, without
interrupting Grantor’s business and from time to time, but no more than twice a year (unless an Event of Default has occurred and is continuing) to inspect Grantor’s books, records and properties and to audit and to make copies of extracts
from such books and records. 
 (l) Fees and Costs. Grantor shall pay all reasonable expenses, including reasonable
attorneys’ fees, incurred by Bank in the preservation, realization, enforcement or exercise of any Bank’s rights under this Agreement. 
 (m) Accounts. Grantor shall maintain and shall cause each of its Subsidiaries to maintain its primary depository, operating, and investment accounts with Bank and/or Comerica Securities, Inc. 
 (n) Corporate Existence. Grantor will maintain its corporate existence and good standing and will maintain in force all licenses
and agreements, the loss of which could have a material adverse effect on Grantor’s business. Grantor will pay all taxes on or before the date such taxes are due, and will comply with all laws and orders applicable to it.; provided that Grantor
need not make any payment on account of taxes if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Grantor. 
 (o) Negative Covenants. Grantor will not and will cause each Subsidiary to not (i) make any investments in, or loans or
advances to, any person other than as permitted in Section 7.7, (ii) acquire any assets other than permitted in Section 7.3, (iii) make any distributions or pay any dividends to any person on account of Grantor’s shares
other than as permitted in Section 7.6, (iv) create, incur, assume or be or remain liable with respect to any Indebtedness other than Permitted Indebtedness, (v) move, dispose of or encumber any portion of its assets, except for
Permitted Transfers and Permitted Liens, (vi) merge or consolidate with or into any person or entity other than as permitted in Section 7.3, (vii) create, incur, assume or suffer to exist any lien with respect to any of its property
other than Permitted Liens, or assign or otherwise convey any right to receive income, including the sale of any of Grantor’s accounts, (viii) keep Inventory or Equipment at a location other than the address specified in Section 11
hereof; (ix) relocate its chief executive office or state of incorporation, (x) or maintain or invest any of its property with a Person other than Bank or permit any of its Subsidiaries to do so unless such Person has entered into an
account control agreement with Bank in form and substance satisfactory to Bank, or suffer or permit any Subsidiary to be a party to, or be bound by, an agreement that restricts such Subsidiary from paying dividends or otherwise distributing property
to Borrower, or (xi) permit the inclusion in any contract to which it becomes a party of any provisions that could restrict or invalidate the creation of a security interest in any of Grantor’s or a Subsidiary’s property. 

(p) Further Assurances. At any time and from time to time, upon the written request of Bank, and at the sole expense of Grantor,
Grantor shall promptly and duly execute and deliver any and all such further instruments and documents and take such further action as Bank may reasonably deem desirable to obtain the full benefits of this Agreement and of the rights and powers
herein granted, including, without limitation, (a) to secure all consents and approvals necessary or appropriate for the grant of a security interest to Bank in any Collateral held by Grantor or in which Grantor has any rights not heretofore
assigned, (b) filing any financing or continuation statements under the UCC with respect to the security interests granted hereby, (c) transferring Collateral to Bank’s possession (if a security interest in such Collateral can be
perfected by possession), (d) placing the interest of Bank as lienholder on the certificate of title (or other evidence of ownership) of any vehicle owned by Grantor or in or with respect to which Grantor holds a beneficial interest and
(e) using its best efforts to obtain waivers of liens from landlords and mortgagees. Grantor also hereby authorizes Bank to file any such financing or continuation statement without the signature of Grantor. If any amount payable under or in
connection with any of the Collateral is or shall become evidenced by any Instrument, such Instrument, other than checks and notes received in the ordinary course of business, shall be duly endorsed in a manner satisfactory to Bank and delivered to
Bank promptly upon Grantor’s receipt thereof. 
  

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 4. Events of Default. The occurrence of any Event of Default under the Loan Agreement, or the
failure by Grantor to perform any obligations under the Guaranty, or the breach of any representation under this Agreement, or the failure to perform any obligation under Section 3 of this Agreement, shall constitute an “Event of
Default” under this Agreement. 
 5. Remedies on Default. Upon the occurrence of an Event of Default, Bank shall have all
rights, privileges, powers and remedies provided by law, including, but not limited to, exercise of any or all of the following remedies. 
 (a) Bank may declare all amounts outstanding under the Loan Agreement and the Guaranty to be immediately due and payable, and thereupon all such amounts shall be and become immediately due and payable to the Bank.

 (b) Bank may dispose of the Collateral in accordance with applicable law. 
 (c) Bank may use, operate, consume and sell the Collateral in its possession as appropriate for the purpose of performing Grantor’s
obligations with respect thereto to the extent necessary to satisfy the obligations of Grantor. 
 (d) All payments received
and amounts realized by Bank shall be promptly applied and distributed by the Bank in the following order of priority: 
 (i)
first, to the payment of all costs and expenses, including reasonable legal expenses and attorneys fees, incurred or made hereunder by Bank, including any such costs and expenses of foreclosure or suit, if any, and of any sale or the exercise of any
other remedy under this Section 5, and of all taxes, assessments or liens superior to the lien granted under this Agreement; and 
 (ii) second, to the payment to Bank of the amount then owing under the Loan Agreement. 
 6. Power of
Attorney. Grantor hereby appoints Bank, its attorney-in-fact to prepare, sign and file or record, for Grantor in Grantor’s name, any financing statements, applications for registration and like papers and to take any other action deemed by
Bank necessary or desirable in order to perfect the security interest of the Bank hereunder, to dispose of any Collateral, and, upon the occurrence and during the continuance of an Event of Default, to perform any obligations of Grantor hereunder,
at Grantor’s expense, but without obligation to do so. 
 7. Remedies Cumulative. Bank’s rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the California Uniform Commercial Code (the “UCC”), by law, or in
equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower’s or Grantor’s part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver,
election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given.

 8. Amendment of Loan Documents. Grantor authorizes Bank, without notice or demand and without affecting its liability hereunder,
from time to time to (a) renew, extend, or otherwise change the terms of any Loan Document, or any part thereof; (b) take and hold security for the payment of any Loan Document, and exchange, enforce, waive and release any such security;
and (c) apply such security and direct the order or manner of sale thereof as Bank in its sole discretion may determine. 
 9.
Grantor Waivers. Grantor waives any right to require Bank to (a) proceed against Borrower, any other guarantor or any other person; (b) proceed against or exhaust any security held from Borrower; (c) marshal any assets of
Borrower; or (d) pursue any other remedy in Bank’s power whatsoever. Bank may, at its election, exercise or decline or fail to exercise any right or remedy it may have against Borrower or any security held by 

  

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Bank, including without limitation the right to foreclose upon any such security by judicial or nonjudicial sale, without affecting or impairing in any way
the liability of Grantor hereunder. Grantor waives any defense arising by reason of any disability or other defense of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower. Grantor waives any setoff, defense
or counterclaim that Borrower may have against Bank. Grantor waives any defense arising out of the absence, impairment or loss of any right of reimbursement or subrogation or any other rights against Borrower. Until all obligations under the
Guaranty have been satisfied, Grantor shall have no right of subrogation or reimbursement, contribution or other rights against Borrower, and Grantor waives any right to enforce any remedy that Bank now has or may hereafter have against Borrower.
Grantor waives all rights to participate in any security now or hereafter held by Bank. Grantor waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance
of this Agreement and of the existence, creation, or incurring of new or additional indebtedness. Grantor assumes the responsibility for being and keeping itself informed of the financial condition of Borrower and of all other circumstances bearing
upon the risk of nonpayment of any indebtedness or nonperformance of any obligation of Borrower, warrants to Bank that it will keep so informed, and agrees that absent a request for particular information by Grantor, Bank shall have no duty to
advise Grantor of information known to Bank regarding such condition or any such circumstances. Grantor waives the benefits of California Civil Code sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850, 2899 and 3433. 
 10. Borrower Insolvency. If Borrower becomes insolvent or is adjudicated bankrupt or files a petition for reorganization, arrangement, composition
or similar relief under any present or future provision of the United States Bankruptcy Code, or if such a petition is filed against Borrower, and in any such proceeding some or all of any indebtedness or obligations under the Loan Documents are
terminated or rejected or any obligation of Borrower is modified or abrogated, or if Borrower’s obligations are otherwise avoided for insolvency, bankruptcy or any similar reason, Grantor agrees that Grantor’s liability hereunder shall not
thereby be affected or modified and such liability shall continue in full force and effect as if no such action or proceeding had occurred. This Agreement shall continue to be effective or be reinstated, as the case may be, if any payment must be
returned by Bank upon the insolvency, bankruptcy or reorganization of Borrower, Grantor, any other person, or otherwise, as though such payment had not been made. 
 11. Notices. Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and
(except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return
receipt requested, or by telefacsimile to Grantor or to Bank, as the case may be, at its addresses set forth below: 
  

			
	If to Grantor:	  	 OPTEX SYSTEMS, INC.
 c/o 3001 Red Hill Ave, Bldg.
4-108
 Costa Mesa, CA 92626
 Attn: Chief Financial
Officer
 FAX: (714)444-8773

		
	If to Bank:	  	 Square 1 Bank
 406 Blackwell Street, Suite 240

Crowe Building
 Durham, NC 27701
 Attn: Manager
 FAX: (919)314-3080

		
	with a copy to:	  	 Square 1 Bank
 12481 High Bluff Dr., Ste. 350

San Diego, CA 9213
 Michael Berrier, Senior Vice President
 FAX: (858)436-3501

  

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 The parties hereto may change the address at which they are to receive notices hereunder, by notice in
writing in the foregoing manner given to the other. 
 12. Choice of Law and Venue; Jury Trial Waiver. 
 This Guaranty shall be governed by the laws of the State of California, without regard to conflicts of laws principles. GUARANTOR WAIVES ANY RIGHT TO A
JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY OR ANY TRANSACTION CONTEMPLATED THEREIN, INCLUDING CLAIMS BASED ON CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER COMMON LAW OR STATUTORY BASES. Guarantor submits to
the exclusive jurisdiction of the state and federal courts located in the County of San Diego, State of California. If the jury waiver set forth in this Section is not enforceable, then any dispute, controversy or claim arising out of or relating to
this Guaranty or any of the transactions contemplated herein will be finally settled by binding arbitration in San Diego, California in accordance with the then-current Commercial Arbitration Rules of the American Arbitration Association by one
arbitrator appointed in accordance with said rules. The arbitrator shall apply California law to the resolution of any dispute, without reference to rules of conflicts of law or rules of statutory arbitration. Judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. Notwithstanding the foregoing, the parties may apply to any court of competent jurisdiction for preliminary or interim equitable relief, or to compel arbitration in accordance with
this paragraph. The expenses of the arbitration, including the arbitrator’s fees and expert witness fees, incurred by the parties to the arbitration, may be awarded to the prevailing party, in the discretion of the arbitrator, or may be
apportioned between the parties in any manner deemed appropriate by the arbitrator. Unless and until the arbitrator decides that one party is to pay for all (or a share) of such expenses, both parties shall share equally in the payment of the
arbitrator’s fees as and when billed by the arbitrator. 
 13. General Provisions. 
 13.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns
of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Grantor without Bank’s prior written consent, which consent may be granted or withheld in Bank’s sole discretion. Bank shall
have the right without the consent of or notice to Grantor to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank’s obligations, rights and benefits hereunder. 
 13.2 Indemnification. Grantor shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against:
(a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Grantor whether under this Agreement, or otherwise (including without limitation reasonable attorneys’ fees and expenses), except for
losses caused by Bank’s gross negligence or willful misconduct. 
 13.3 Time of Essence. Time is of the essence
for the performance of all obligations set forth in this Agreement. 
 13.4 Severability of Provisions. Each provision
of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 
 13.5 Amendments in Writing, Integration. This Agreement cannot be amended or terminated orally. All prior agreements,
understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. 
  

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 13.6 Counterparts. This Agreement may be executed in any number of counterparts
and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 
 13.7 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long
as any Obligations remain outstanding, any Guarantor Obligations remain outstanding, or Bank has any obligation to make Credit Extensions to Borrower. The obligations of Grantor to indemnify Bank with respect to the expenses, damages, losses, costs
and liabilities described in Section shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. 
 IN WITNESS WHEREOF, the parties have executed this Agreement on the date set forth above. 
  

									
	GRANTOR:	 		 	BANK:
			
	 OPTEX SYSTEMS, INC.
	 		 	 SQUARE 1 BANK

					
	 By:
	 	 /s/ John J. Stuart, Jr.
	 		 	 By:
	 	 /s/ Michael Berrier

	 Name:
	 	 John J. Stuart, Jr.
	 		 	 Name:
	 	 Michael Berrier

	 Title:
	 	 Chief Financial Officer
	 		 	 Title:
	 	 Senior Vice President and Regional Manager

  

 8Subordination Agreement

 Exhibit 10.21 
 SUBORDINATION AGREEMENT 
 This Subordination Agreement (this “Agreement”) is made as of
December 30, 2005 by and between the undersigned (collectively, “Creditor”), and Square 1 Bank (“Bank”). 
 Recitals 
 A. Irvine Sensors Corporation, a Delaware- corporation (“Borrower”), has requested and/or obtained
certain loans or other credit accommodations from Bank which are or may be from time to time secured by assets and property of Borrower. 
 B. Creditor has extended loans or other credit accommodations to Borrower, and/or may extend loans or other credit accommodations to Borrower from time to time. 
 C. In order to induce Bank to extend credit to Borrower and, at any time or from time to time, at Bank’s option, to make such further loans, extensions of credit, or other accommodations to or for the account of
Borrower, or to purchase or extend credit upon any instrument or writing in respect of which Borrower may be liable in any capacity, or to grant such renewals or extension of any such loan, extension of credit, purchase, or other accommodation as
Bank may deem advisable, Creditor is willing to subordinate (on the terms set forth in this Agreement): (i) all of Borrower’s indebtedness and obligations to Creditor pursuant to the Series 1 and/or Series 2 Senior Subordinated Secured
Convertible Notes issued by Borrower on December 30, 2005 to Creditor (the “Subordinated Notes”), whether presently existing or arising in the future (the “Subordinated Debt”) to the Senior Debt (as defined below); and
(ii) all of Creditor’s security interests, if any, in the Borrower’s property, to all of Bank’s security interests in the Borrower’s property. 
 NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS: 
 1. Creditor subordinates to Bank, on the terms set forth in
this Agreement, any security interest or lien that Creditor may have in any property of Borrower. Notwithstanding the respective dates of attachment or perfection of the security interest of Creditor and the security interest of Bank, the security
interest of Bank in the Collateral, as defined in that certain Loan and Security Agreement between Borrower and Bank, dated as of the date hereof, as amended from time to time (the “Loan Agreement”), shall at all times, while any
Senior Debt or commitment by Bank to lend is outstanding, be prior to the security interest of Creditor. Capitalized terms not otherwise defined herein shall have the same meaning as in the Loan Agreement. 
 2. All Subordinated Debt is subordinated, on the terms set forth in this Agreement, in right of payment to all obligations of Borrower to Bank now
existing or hereafter arising, together with all costs of collecting such obligations (including attorneys’ fees), including, without limitation, all interest accruing after the commencement by or against Borrower of any bankruptcy,
reorganization or similar proceeding, and all obligations under the Loan Agreement (the “Senior Debt”). For the avoidance of doubt, for the purposes of the Loan Agreement, the Subordinated Debt is Permitted Indebtedness, and the security
interests of Creditor in Borrower’s assets are Permitted Liens. 
 3. Except as otherwise set forth in this Agreement, Creditor will not
demand or receive from Borrower (and Borrower will not pay to Creditor) all or any part of the Subordinated Debt, by way of payment, prepayment, setoff, lawsuit or otherwise (other than payments of Excluded Items (as defined below)), nor will
Creditor exercise any remedy with respect to the Collateral, nor will Creditor commence, or cause to commence, prosecute or participate in any administrative, legal or equitable action against Borrower, for so long as any portion of the Senior Debt
remains outstanding. Notwithstanding the foregoing, and except as set forth in the next paragraph, Creditor shall be entitled to receive from Borrower (and Borrower shall be entitled to pay to Creditor) each regularly scheduled payment of interest
and principal, and all other amounts due in accordance with the terms of the Subordinated Debt. 
 4. Notwithstanding anything to the
contrary herein, upon (i) the occurrence and during the continuance of an Event of Default under the Loan Agreement and (ii) written notice of such Event of Default to 
  

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Creditor from Bank (a “Payment Blockage Notice”), Creditor may not exercise any remedy with respect to Borrower nor receive any payment (other than
in respect of Excluded Items) from Borrower for each period (each a “Payment Blockage Period”) commencing on the date of the Payment Blockage Notice and ending on the earliest to occur of the following events: 
 (a) such Event of Default has been cured or has been waived by Bank in writing; 
 (b) 120 days have passed from the date of such Payment Blockage Notice, unless Bank has commenced a judicial proceeding or non-judicial
actions to collect or enforce the Senior Debt or foreclose on the Collateral, or a case or proceeding by or against Borrower is commenced under any bankruptcy or insolvency law or laws relating to the relief of debtors, in which case Creditor may
exercise any remedy with respect to Borrower but Creditor may not receive any payments from Borrower during the continuance of such actions or proceedings; or 
 (c) the Senior Debt has been discharged or paid in full and Bank’s commitment, if any, to make credit extensions under the Loan
Agreement has been terminated; 
 immediately after which Creditor may exercise such remedies and Borrower may make all payments due and owing to Creditor
(including, without limitation, any amounts in arrears by reason of such Payment Blockage Period), subject at all times to the first priority security interest of Bank and the requirement that any amounts received by Creditor be turned over to Bank
so long as any Senior Debt remains outstanding. Notwithstanding the foregoing, Bank may not deliver more than two (2) Payment Blockage Notices in any 365-day period; provided that no two (2) consecutive Payment Blockage Notices during any
365-day period may be imposed with respect to the same Event of Default, unless such Event of Default is waived or cured prior to the expiration of the relevant Payment Blockage Period. 
 5. Creditor shall promptly deliver to Bank in the form received (except for endorsement or assignment by Creditor where required by Bank, and any
Excluded Items) for application to the Senior Debt any payment, distribution, security or proceeds received by Creditor with respect to the Subordinated Debt other than in accordance with this Agreement. 
 6. Notwithstanding the foregoing or anything to the contrary contained in this Agreement, Subordinated Debt shall not include any obligations of Borrower
arising under or in connection with any of the Excluded Items, as defined hereafter. “Excluded Items” means: (a) warrants issued by Borrower to Creditor pursuant to which Creditor may purchase equity securities of Borrower or
agreements exclusively governing the rights of the holders of equity securities of Borrower; and (b) any equity securities of Borrower held by or paid or otherwise delivered to Creditor including those issued or issuable upon exercise of or in
connection with any warrants and including, without limitation, those issued or issuable by Borrower to Creditor in connection with or as a result of the conversion or as payment in respect of any Subordinated Debt. 
 7. In the event of Borrower’s insolvency, reorganization or any case or proceeding under any bankruptcy or insolvency law or laws relating to the
relief of debtors, these provisions shall remain in full force and effect, and Bank’s claims against Borrower and the estate of Borrower shall be paid in full before any payment is made to Creditor. 
 8. For so long as any of the Senior Debt remains unpaid, Creditor irrevocably appoints Bank as Creditor’s attorney in fact, and grants to Bank a
power of attorney with full power of substitution, in the name of Creditor or in the name of Bank, for the use and benefit of Bank, without notice to Creditor, to perform at Bank’s option the following acts in any bankruptcy, insolvency or
similar proceeding involving Borrower, to file the appropriate claim or claims in respect of the Subordinated Debt on behalf of Creditor if Creditor does not do so prior to 20 days before the expiration of the time to file claims in such proceeding
and if Bank elects, in its sole discretion, to file such claim or claims. Creditor shall retain all rights to vote and otherwise act in any bankruptcy, insolvency or similar proceeding (including, without limitation, the right to vote to accept or
reject any plan of reorganization, composition, arrangement or liquidation) to the extent provided by applicable law, provided that Creditor shall not initiate, prosecute or join in any claim or action in any such proceeding challenging (x) the
validity or enforceability of the Senior Debt, this Agreement or any liens or security interests securing the Senior Debt, or (y) the intent or effect of this Agreement. 
  

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 9. Creditor shall promptly affix a legend to the Subordinated Notes stating that the instruments are
subject to the terms of this Agreement. No amendment of the documents evidencing or relating to the Subordinated Debt shall modify the provisions of this Agreement in any manner which might terminate or impair the subordination of the Subordinated
Debt or the subordination of the security interest or lien that Creditor may have in any property of Borrower, as provided in this Agreement. Without limiting the foregoing, such instruments shall not be amended to (i) increase the rate of
interest with respect to the Subordinated Debt, or (ii) accelerate the payment of the principal or interest or any other portion of the Subordinated Debt. 
 10. This Agreement shall remain effective for so long as the Bank has any obligation to make credit extensions to Borrower or Borrower owes any amounts to Bank under the Loan Agreement or otherwise. If, at any time
after payment in full of the Senior Debt any payments of the Senior Debt must be disgorged by Bank for any reason (including, without limitation, the bankruptcy of Borrower), this Agreement and the relative rights and priorities set forth herein
shall be reinstated as to all such disgorged payments as though such payments had not been made and Creditor shall immediately pay over to Bank all payments received with respect to the Subordinated Debt to the extent that such payments would have
been prohibited hereunder. At any time and from time to time, without notice to Creditor, Bank may take such actions with respect to the Senior Debt as Bank, in its sole discretion, may deem appropriate, including, without limitation, terminating
advances to Borrower, increasing the principal amount (but not to exceed Eight Million Dollars ($8,000,000) of Senior Debt), extending the time of payment, increasing applicable interest rates, renewing, compromising or otherwise amending the terms
of any documents affecting the Senior Debt and any collateral securing the Senior Debt, and enforcing or failing to enforce any rights against Borrower or any other person; provided that such action will not terminate or impair Creditor’s
rights as provided herein. No such action or inaction shall impair or otherwise affect Bank’s rights hereunder. Creditor waives the benefits, if any, of California Civil Code Sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850, 2899 and
3433. 
 11. This Agreement shall bind and benefit any successors or assignees of Creditor and Bank. This Agreement is solely for the benefit
of Creditor and Bank and not for the benefit of Borrower or any other party. Creditor further agrees that if Borrower is in the process of refinancing a portion of the Senior Debt with a new lender, and if Bank makes a request of Creditor, Creditor
shall agree to enter into a new subordination agreement with the new lender on substantially identical terms and conditions as this Agreement. 
 12. Creditor represents and warrants to Bank that the terms and conditions of this Agreement have been authorized by all necessary action on the part of the Creditor, and that the individuals signing on behalf of Creditor have all necessary
approval and authority to do so. 
 13. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original
and all of which together shall constitute one instrument. 
 14. This Agreement shall be governed by, and construed in accordance with, the
internal laws of the State of California, without regard to principles of conflicts of law. THE PARTIES HERETO HERBY WAIVE ANY RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREIN, INCLUDING CLAIMS BASED ON CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER COMMON LAW OR STATUTORY BASES. Creditor submits to the exclusive jurisdiction of the state and federal courts located in the County of San Diego, State of
California, for any claim or cause of action based upon or arising out of this agreement or any transaction contemplated herein, including claims based on contract, tort, breach of duty and all other common law or statutory bases. If the jury waiver
set forth in this Section is not enforceable, then any dispute, controversy or claim arising out of or relating to this Agreement or any of the transactions contemplated herein will be finally settled by binding arbitration in San Diego, California
in accordance with the then-current Commercial Arbitration Rules of the American Arbitration Association by one arbitrator appointed in accordance with said rules. The arbitrator shall apply California law to the resolution of any dispute, without
reference to rules of conflicts of law or rules of statutory arbitration. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Notwithstanding the foregoing, the parties may apply to any court of
competent jurisdiction for preliminary or interim equitable relief, or to compel arbitration in accordance with this paragraph. The expenses of the arbitration, including the arbitrator’s fees and expert witness fees, incurred by the parties to
the arbitration, may be awarded to the prevailing party, in the discretion of the arbitrator, or may be apportioned between the parties in any manner deemed appropriate by the arbitrator. Unless and until the arbitrator decides that one party is to
pay for 

  

 -3- 

 
all (or a share) of such expenses, both parties shall share equally in the payment of the arbitrator’s fees as and when billed by the arbitrator.

 15. This Agreement represents the entire agreement with respect to the subject matter hereof, and supersedes all prior negotiations,
agreements and commitments. Creditor is not relying on any representations by Bank or Borrower in entering into this Agreement, and Creditor has kept and will continue to keep itself fully apprised of the financial and other condition of Borrower.
This Agreement may be amended only by written instrument signed by Creditor and Bank. 
 16. In the event of any legal action to enforce the
rights of a party under this Agreement, the party prevailing in such action shall be entitled, in addition to such other relief as may be granted, all reasonable costs and expenses, including reasonable attorneys’ fees, incurred in such action.

 [Balance of Page Intentionally Left Blank] 
  

 -4- 

 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.

  

																	
	PEQUOT PRIVATE EQUITY FUND III, L.P.	 		 	PEQUOT OFFSHORE PRIVATE EQUITY PARTNERS III, L.P.
					
	By:	 	 Pequot Capital Management, Inc.,
 its Investment Manager
	 		 	By:	 	 Pequot Capital Management, Inc.,
 its Investment Manager

							
		 	By:	 	 /s/ Aryeh Davis
	 		 		 	 By:
	 	 /s/ Aryeh Davis

		 		 	 Name:
	 	 Aryeh Davis
	 		 		 		 	 Name:
	 	 Aryeh Davis

		 		 	Title:	 	 COO & General Counsel
	 		 		 		 	 Title:
	 	 COO & General Counsel

			
	 Address for Notice:
	 		 	 Address for Notice:

			
	 Pequot Private Equity Fund III, L.P.
 c/o
Pequot Capital Management, Inc.
 500 Nyala Farm Road
 Westport,
CT 06880
 Facsimile No.: 203-429-2400
 Attn.: Aryeh Davis; Carlos
Rodrigues
	 		 	 Pequot Offshore Private Equity Partners III, L.P.
 c/o Pequot Capital Management, Inc.
 500 Nyala Farm Road
 Westport, CT 06880
 Facsimile No.: 203-429-2400
 Attn.:
Aryeh Davis; Carlos Rodrigues

			
	 With a copy to:
	 		 	 With a copy to:

			
	 Proskauer Rose LLP
 1585 Broadway

New York, NY 10036-8299
 Facsimile No.: (212) 969-2900
 Attn: Adam J. Kansler, Esq.
	 		 	 Proskauer Rose LLP
 1585 Broadway

New York, NY 10036-8299
 Facsimile No.: (212) 969-2900
 Attn: Adam J. Kansler, Esq.

			
		 		 	 “Bank”

			
		 		 	 SQUARE 1 BANK

				
		 		 	 By:
	 	 /s/ Michael Berrier

				
		 		 	 Title:
	 	 Senior Vice President and Regional Manager

		
	 The undersigned approves of the terms of this Agreement.
	 	
			
		 		 	 “Borrower”

			
		 		 	 IRVINE SENSORS CORPORATION

				
		 		 	 By:
	 	 /s/ John J. Stuart, Jr.

				
		 		 	 Title:
	 	 Sr. VP & Chief Financial Officer

 [Signature Page to Subordination Agreement]

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