Contract analysis

I. Purpose and Summary This letter constitutes our quarterly strategy update covering the period from approximately January 1, 2024 through March 31, 2024 (the "Reporting Period") for the declaratory judgment action styled Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., No. 1:22-cv-10147-RMB (S.D.N.Y.) (the "Action" or the "DJ Action"). As you are aware, the Action remains stayed pursuant to the Orde

II. Status of the Declaratory Judgment Action A. Procedural History WAL commenced this Action on November 28, 2022, filing a single-count Complaint under the Declaratory Judgment Act, 28 U.S.C. §§ 2201–2202. The Complaint seeks a declaration that WAL is not liable to Hargrove-Dalton Defense Systems, Inc. ("HDDS") under the indemnification provisions of the Teaming Agreement dated June 12, 2019 (the "Teaming Agreement

1. First Joint Status Report — filed July 15, 2023, reporting that the DCMA review remained pending and no COFD had been issued.

2. Second Joint Status Report — filed November 12, 2023, reporting the same status and noting that the DCMA field audit team was continuing its review of supporting cost documentation submitted by HDDS.

3. Third Joint Status Report — filed March 11, 2024, again reporting that no COFD had been issued and that the DCMA review remained ongoing. Both parties jointly requested that the stay remain in effect and that the next joint status report be filed within 120 days. Each of these reports was coordinated with Leonard Trager and Megan Forsythe at Voss, Trager & Kendall LLP ("VTK"), and the process has been cooperative

III. Status of the DCMA Administrative Review A. The Underlying Government Contract The administrative proceedings at issue arise under Prime Contract No. FA8620-19-C-0337, awarded to HDDS by the United States Air Force, Air Force Life Cycle Management Center ("AFLCMC"), Wright-Patterson Air Force Base, Ohio, for the Advanced Tactical Airframe Program ("ATAP"). Under the prime contract, HDDS serves as the prime contr

IV. WAL's Litigation Position — Recap of Key Defenses We continue to assess WAL's litigation position as strong. For completeness, and to ensure alignment among all stakeholders, we briefly recap below the principal defenses that WAL will advance if and when the stay is lifted and the litigation proceeds. A. Three Principal Defenses WAL's defense strategy rests on three interrelated arguments:

1. Section 11.4(b) Causation Requirement. The indemnification obligation set forth in Section 11.4(b) of the Teaming Agreement is expressly limited to claims that are "caused by Team Member's acts or omissions." WAL maintains that the cost overruns identified in the COPD were not caused by WAL's acts or omissions but instead resulted from factors outside WAL's control or attributable to HDDS itself. Specifically: • T

2. Overbreadth of HDDS's Demand. HDDS has demanded indemnification for the full $14,726,583 identified in the COPD, notwithstanding that $1,909,142 of the total (12.97%) is attributable to cost overruns in work packages entirely outside WAL's scope of work under the Teaming Agreement. WAL has no conceivable liability for these non-WP-4 overruns, and HDDS's inclusion of those amounts in its demand is unsupportable and

3. Prematurity. The DCMA's findings remain preliminary. The COPD is, by its nature, a preliminary assessment — not a final agency determination. No costs have been formally disallowed through a COFD. Section 11.4(b) of the Teaming Agreement contemplates indemnification in response to a "claim by the U.S. Government that costs incurred under the Prime Contract are unallowable, unreasonable, or otherwise subject to dis

V. Insurance Coverage Posture A. Tender and Policy Information WAL tendered HDDS's indemnification demand to Meridian Surety & Insurance Group ("Meridian") on September 22, 2022, seeking coverage and a defense under the following policies: B. Reservation of Rights On November 1, 2022, Meridian issued a reservation-of-rights letter in response to the tender. In its letter, Meridian reserved its rights to deny coverage

VI. Credit Facility Compliance A. The Credit Facility WAL maintains a $75 million senior secured revolving credit facility (the "Facility") with Ridgeline National Bank, N.A., as administrative agent, pursuant to the Credit Agreement dated March 15, 2021 (as amended from time to time, the "Credit Agreement"). B. Litigation-Notice Covenant

Section 6.07(b) of the Credit Agreement requires WAL to provide prompt written notice to the administrative agent of any litigation, arbitration, or governmental proceeding that, if adversely determined, could reasonably be expected to result in liability to WAL in excess of $5 million. Because HDDS's indemnification demand exceeds the $5 million reporting threshold, WAL has delivered the following notices to David K

VII. Financial Statement Treatment A. ASC 450 Assessment Pinnacle Advisory Partners LLC ("Pinnacle"), WAL's independent auditor (Thomas Brennan, CPA, engagement partner), assessed the HDDS indemnification contingency in connection with WAL's fiscal year 2022 audit, which was completed on April 14, 2023. Pinnacle concluded that the contingent liability associated with the indemnification demand is "reasonably possible

VIII. Fees and Budget A. Engagement Terms Calderwood & Harkness was retained for this matter pursuant to an engagement letter dated November 1, 2022. The matter is staffed by the following attorneys at the hourly rates set forth below: B. Budget. The original estimated budget for the matter through trial, assuming full litigation without a stay, was $1,800,000 to $2,400,000. Following the entry of the stay order on M

IX. Recommended Next Steps and Strategic Considerations Based on the foregoing, we recommend the following action items and strategic considerations for the coming quarter and beyond:

1. Fourth Joint Status Report. We will prepare and file the fourth joint status report on or about July 9, 2024, consistent with the court's 120-day reporting requirement. We will coordinate with Leonard Trager and Megan Forsythe at VTK in advance of the filing deadline. Unless there has been a material development in the DCMA review by that time, we anticipate that the report will be substantially similar in content

2. DCMA Review Timeline and Potential Lift of Stay. If the COFD has not been issued by the time the fifth joint status report is due — which we estimate to be approximately November 2024 — we recommend that WAL seriously consider seeking to lift the stay and reactivate the litigation. At that point, the DCMA review will have been pending for over two years since HDDS submitted its COFD request, and the Action will ha

3. Insurance Follow-Up. As discussed in Section V above, we recommend sending a renewed formal demand to Meridian Surety & Insurance Group for a definitive coverage position. We will prepare a draft of this letter for your review and approval. Should Meridian continue to fail to respond, we will provide a memorandum analyzing the viability and advisability of a coverage action.

4. Ashford & Reeves Coordination. We recommend continuing regular check-ins with Harold Reeves and Natalie Cheng at Ashford & Reeves LLP on a monthly cadence. These check-ins provide our best source of intelligence regarding the DCMA's internal timeline and any developments in the field audit process. Catherine Soo-Hyun Park has been highly effective in this coordination role, and we appreciate her continued engageme

5. Settlement Posture. We continue to recommend that WAL defer any affirmative settlement overture to HDDS until after the COFD issues. The outcome of the COFD will significantly affect the parties' respective leverage and the settlement calculus. If the COFD substantially reduces the cost overruns allocated to WP-4, WAL's negotiating position will be materially strengthened. Conversely, if the COFD confirms or incre

6. Document Preservation. The litigation hold issued by WAL's legal department on November 2, 2022 remains in full force and effect. We recommend that WAL circulate a periodic reminder to all custodians and affected personnel reaffirming their obligation to preserve all potentially relevant documents, electronically stored information, and communications. We are happy to assist in preparing such a reminder notice if

7. Upcoming Prime Contract Milestone. We draw your attention to a significant upcoming milestone: the base period of performance for Prime Contract FA8620-19-C-0337 ends on August 31, 2024. WAL should monitor whether the Air Force exercises any option years under the prime contract. The exercise (or non-exercise) of option years could have implications for the DCMA cost-overrun analysis, the scope of WAL's work under

X. Closing We trust this update provides a comprehensive overview of the current status of the matter and the strategic considerations facing WAL. We ask that you share this letter with Marcus J. Whitmore, Chief Executive Officer, and Elaine Whitmore, Chief Financial Officer, as you deem appropriate, subject to the privilege and confidentiality protections noted herein. We are available at your convenience to schedul