1032-00007 · Client 1032 · Settlement

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CALDERWOOD & HARKNESS LLP 1301 K Street NW, Suite 1100 Washington, D.C. 20005

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT

MEMORANDUM

TO: Marcus Friedl, General Counsel, Halcyon Semiconductor AG Derek Tran, President, Halcyon Semiconductor Inc.

FROM: Howard Quinn, Conrad Ashby, Liam Donahue

DATE: February 18, 2026

RE: Settlement Strategy — DOJ NSD-CES-2025-04871

This memorandum constitutes privileged and confidential attorney-client communication and attorney work product prepared in anticipation of litigation and in connection with the provision of legal advice. This memorandum is intended solely for the named recipients and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. Inadvertent disclosure of this memorandum does not constitute a waiver of any applicable privilege or protection.

I. Purpose

This memorandum sets forth Calderwood & Harkness LLP's ("C&H" or the "Firm") recommended strategy for settlement negotiations with the U.S. Department of Justice, National Security Division, Counterintelligence and Export Control Section ("DOJ NSD/CES") in connection with the inquiry bearing reference number NSD-CES-2025-04871 (the "Matter"). The Matter concerns the export of certain controlled semiconductor products to Zhonghe Microelectronics Co., Ltd. ("Zhonghe"), a People's Republic of China ("PRC")-based entity that was added to the Bureau of Industry and Security ("BIS") Entity List effective June 14, 2025, and, relatedly, certain shipments to Lansheng Harborline Technologies Technologies Ltd. ("Lansheng"), also based in the PRC. The recommendations contained herein are directed to Marcus Friedl, General Counsel of Halcyon Semiconductor AG ("HSAG"), and Derek Tran, President of Halcyon Semiconductor Inc. ("HSI," and together with HSAG, the "Company" or "Halcyon").

This memorandum provides C&H's assessment of the likely resolution terms for the Matter, identifies the key areas of negotiation, and requests client authorization to negotiate on specified parameters. Our recommendations are informed by the totality of our engagement to date, including the results of C&H's internal investigation, which are set forth in our privileged findings memorandum dated January 28, 2026, and to which we refer the reader for a comprehensive discussion of the underlying facts and circumstances.

In preparing this memorandum, C&H has considered the following materials and proceedings, among others:

• The two document productions made to DOJ NSD/CES, totaling approximately 21,000 documents. The first production, comprising approximately 14,200 documents, was made on November 18, 2025. The second production, comprising approximately 6,800 documents, was made on December 9, 2025. These productions included, among other categories, trade compliance records, shipment documentation, order processing files, internal communications, and restricted-party screening records.

• The voluntary employee proffers of Ryan Oshiro, Director of Asia-Pacific Sales at HSI, and Janet Liang, Trade Compliance Analyst at HSI, which were conducted at C&H's Washington, D.C. office on January 13, 2026. Both proffers were conducted in the presence of DOJ NSD/CES Senior Trial Attorney Adrienne Kolb and Trial Attorney Jonathan Weir.

• The Phase I compliance assessment report prepared by Ashford Pennington LLC ("Ashford Pennington"), which was delivered on February 5, 2026. The Ashford Pennington report, prepared under the direction of Dr. Miriam Hecht, was commissioned at C&H's recommendation and is protected by the attorney-client privilege and work-product doctrine as it was prepared in anticipation of litigation and at the direction of counsel. The report's findings, which are summarized in relevant part below, inform our recommended compliance undertaking parameters.

The purpose of this memorandum is to present a cohesive settlement strategy, to provide quantitative analysis of the likely penalty range, to address the appropriate form of resolution, and to delineate the boundaries within which C&H requests authority to negotiate on behalf of the Company. We respectfully request that Halcyon's management and, as necessary, the Supervisory Board review and authorize the negotiation parameters set forth herein at the earliest practicable date, in light of the forthcoming resolution-in-principle discussion scheduled for February 24, 2026.

II. Current Posture

The Matter has progressed through an extended investigative and cooperative phase, and DOJ NSD/CES has signaled its readiness to proceed toward resolution. In a telephone conference on February 10, 2026, Senior Trial Attorney Adrienne Kolb expressly acknowledged Halcyon's "substantial cooperation" throughout the inquiry. This acknowledgment is significant because, under DOJ policy, the degree of a respondent's cooperation is a central factor in determining both the form and the severity of any resolution. DOJ's characterization of Halcyon's cooperation as "substantial" places the Company in a favorable posture as negotiations commence.

Based on our discussions with DOJ NSD/CES and our independent analysis, we have identified the following key negotiation points that will define the contours of any resolution:

1. Monetary penalty amount. DOJ has communicated an initial aggravated position of $5,500,000. C&H has countered at $1,800,000. The resolution of this point will depend on the weight accorded to aggravating and mitigating factors, as discussed in Section III below.

2. Whether Lansheng Harborline Technologies Technologies Ltd. violations are included. DOJ has advanced a theory that six shipments to Lansheng between April 8, 2024 and August 19, 2025 constitute violations of 15 C.F.R. § 744.21 (the military end-use rule). C&H contests the legal and factual basis for this theory, as discussed in Section VI below, and recommends resisting any inclusion of the Lansheng shipments in the penalty calculation.

3. Scope and duration of compliance undertakings. DOJ is expected to require enhanced compliance measures, including the appointment of an independent compliance monitor, annual audits, automated restricted-party screening enhancements, mandatory training programs, and periodic reporting. The scope and duration of these undertakings represent a significant cost and operational burden, and their parameters are subject to negotiation. Our analysis is presented in Section V below.

4. Form of resolution. The resolution may take the form of (a) an administrative settlement agreement, (b) a non-prosecution agreement ("NPA"), or (c) a deferred prosecution agreement ("DPA"). C&H recommends pursuing an administrative settlement agreement, as discussed in Section IV below.

As a foundation for the negotiation strategy set forth in this memorandum, we note the following key factual determinations arising from C&H's internal investigation, as set forth in the January 28, 2026 findings memorandum:

• C&H's investigation confirmed that three post-Entity-List shipments to Zhonghe Microelectronics Co., Ltd. were made on June 27, 2025 (Shipment #9), July 15, 2025 (Shipment #10), and August 3, 2025 (Shipment #11). Each of these shipments constitutes an apparent violation of 15 C.F.R. § 744.11, which prohibits exports, reexports, and transfers (in-country) of items subject to the EAR to entities on the Entity List without a license, where a license requirement applies.

• The violations were non-willful in nature, arising from systemic process and technology failures rather than from any intentional or reckless disregard of export control requirements. The specific causal chain is detailed in Section III.C below, but in summary, the violations resulted from a combination of (i) a delayed update to restricted-party screening databases by a third-party data services provider, (ii) a gap in the Company's screening protocol that did not require re-screening at the ship-confirm stage for pre-approved orders, and (iii) a character-encoding mismatch that prevented automated matching of the Entity List entry to certain transactional records.

• C&H's investigation found no evidence of violations of the regulations administered by the Office of Foreign Assets Control ("OFAC") of the U.S. Department of the Treasury.

• C&H's investigation determined that the six shipments to Lansheng Harborline Technologies Technologies Ltd. do not constitute demonstrable violations of 15 C.F.R. § 744.21. As discussed in Section VI, the legal standard for a § 744.21 violation requires that the exporter have knowledge or reason to know of military end use or a military end user, or have received an "is informed" notice from BIS. Neither condition was met with respect to any of the Lansheng shipments.

Halcyon's voluntary self-disclosure ("VSD") was filed with the BIS Office of Export Enforcement on November 4, 2025, under Reference No. OEE-VSD-2025-00319. The VSD was filed within weeks of the Company's discovery of the apparent violations, consistent with best practices and the BIS guidelines encouraging prompt disclosure. The timely filing of the VSD is expected to be a significant mitigating factor in the penalty determination, as discussed below.

III. Penalty Analysis

A. BIS Penalty Guidelines Framework

The monetary penalty for violations of the Export Administration Regulations ("EAR") is determined by reference to the penalty guidelines set forth in Supplement No. 1 to Part 766 of the EAR (the "Penalty Guidelines"). Under the Penalty Guidelines, the base penalty for each violation is calculated as the greater of (a) twice the value of the transaction giving rise to the violation, or (b) the applicable statutory maximum civil penalty per violation.

For Entity List violations under 15 C.F.R. § 744.11, the applicable statutory maximum civil penalty is subject to annual inflation adjustment pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. The current inflation-adjusted per-violation maximum for calendar year 2025 is $330,947.

Applying the Penalty Guidelines framework to the three post-Entity-List Zhonghe shipments that constitute the core violations, the base penalty calculations are as follows:

Shipment #9 (June 27, 2025): Transaction value: $412,000. Twice the transaction value: 2 × $412,000 = $824,000. Statutory maximum: $330,947. The greater of these two amounts is $824,000. Base penalty for Shipment #9: $824,000.

Shipment #10 (July 15, 2025): Transaction value: $387,000. Twice the transaction value: 2 × $387,000 = $774,000. Statutory maximum: $330,947. The greater of these two amounts is $774,000. Base penalty for Shipment #10: $774,000.

Shipment #11 (August 3, 2025): Transaction value: $398,000. Twice the transaction value: 2 × $398,000 = $796,000. Statutory maximum: $330,947. The greater of these two amounts is $796,000. Base penalty for Shipment #11: $796,000.

Aggregate base penalty: $824,000 + $774,000 + $796,000 = $2,394,000.

We note that DOJ NSD/CES, in its early discussions with C&H, referenced an alternative per-violation calculation using only the statutory maximum figure. Under this alternative approach, the aggregate penalty would be $330,947 × 3 = $992,841. This lower figure appears to represent the baseline from which DOJ began its analysis before applying aggravating factors. We believe the proper starting point under the Penalty Guidelines is the $2,394,000 figure calculated above, as the "twice the transaction value" measure exceeds the statutory maximum for each of the three shipments. The distinction is relevant to our negotiation strategy because it frames the extent to which DOJ's $5,500,000 aggravated position represents a multiplier over the proper base.

B. Aggravating Factors (DOJ's Position)

DOJ NSD/CES has identified the following aggravating factors in support of its initial penalty position of $5,500,000. We present DOJ's likely arguments here so that the Company is fully apprised of the government's perspective, even where we disagree with the weight to be accorded to these factors.

Significance of the product. The products at issue in the three Zhonghe shipments are HCA-9100 series analog-to-digital converter ("ADC") chipsets manufactured by HSAG at its Reutlingen, Germany fabrication facility. These ADCs are high-performance components with sampling rates exceeding 3.6 Giga-samples per second ("Gsps"). They are classified under Export Control Classification Number ("ECCN") 3A001 on the Commerce Control List, which encompasses certain types of electronic components and integrated circuits that are controlled for national security and anti-terrorism reasons. ADCs with performance characteristics at or above the 3A001 thresholds are widely recognized as having significant military and dual-use applications, including in radar systems, electronic warfare platforms, signals intelligence equipment, and satellite communications. DOJ will argue that the controlled nature and high-performance specifications of the HCA-9100 series chipsets elevate the seriousness of the violations.

Destination. All three shipments were destined for the People's Republic of China, which is designated as a country of significant proliferation concern by the U.S. Government. China is classified in Country Groups D:1 (National Security) and D:5 (U.S. Arms Embargoed Countries) under Supplement No. 1 to Part 740 of the EAR. The PRC's designation reflects U.S. Government concerns regarding the PRC's military modernization programs and its efforts to acquire advanced semiconductor technology through illicit procurement channels. DOJ will argue that the PRC destination materially increases the national security risk associated with the violations.

Volume and pattern. The three violative shipments occurred over a span of approximately five weeks, from June 27 to August 3, 2025. DOJ has characterized this pattern as suggesting a systemic failure in the Company's export compliance controls, rather than an isolated or aberrational incident. While DOJ has not alleged that the pattern reflects willful conduct, the government will nonetheless argue that the recurrence of violations over a five-week period demonstrates that the Company's compliance infrastructure was materially deficient and that the resulting risk was correspondingly greater.

End user's Entity List status. Zhonghe Microelectronics Co., Ltd. was added to the BIS Entity List effective June 14, 2025 (90 Fed. Reg. 42,118 (June 12, 2025)). The Entity List entry specifies a "presumption of denial" as the license review policy for all items subject to the EAR. A "presumption of denial" is the most restrictive license review standard on the Entity List and indicates that BIS has determined that the entity poses a significant risk to U.S. national security or foreign policy interests. DOJ will argue that the presumption-of-denial designation underscores the severity of the violations, as it reflects a heightened government determination regarding the risks posed by Zhonghe.

Based on the foregoing aggravating factors, DOJ has communicated an initial aggravated penalty position of $5,500,000. This figure represents approximately 2.3 times the aggregate base penalty of $2,394,000, or approximately 5.55 times the alternative statutory-maximum-only baseline of $992,841 that DOJ initially referenced. In our assessment, DOJ's $5,500,000 position is inflated and represents a negotiating anchor rather than a final position. Nevertheless, the aggravating factors identified by DOJ are legitimate considerations under the Penalty Guidelines and cannot be dismissed entirely.

C. Mitigating Factors (C&H's Position)

C&H has identified and presented to DOJ the following mitigating factors, which we believe substantially reduce the appropriate penalty from DOJ's aggravated position. These factors form the basis for C&H's counter-position of $1,800,000.

Voluntary self-disclosure. Halcyon filed its voluntary self-disclosure with the BIS Office of Export Enforcement on November 4, 2025, under Reference No. OEE-VSD-2025-00319. The VSD was filed within weeks of the Company's initial discovery of the violations, which occurred in mid-October 2025 during a routine internal audit of PRC-destined shipments. Under the BIS Penalty Guidelines, a voluntary self-disclosure in a case involving non-egregious violations entitles the respondent to a reduction of up to 50% from the otherwise applicable base penalty. The timely and comprehensive nature of Halcyon's VSD should warrant a reduction at or near the maximum 50% credit. We emphasize that the VSD was filed proactively and without any prior indication from BIS or DOJ that the violations had been detected by the government.

Absence of willfulness. The violations resulted from a chain of systemic process and technology failures, not from any intentional, knowing, or reckless conduct by any Halcyon employee. Specifically, the causal chain comprised three interconnected failures:

(i) Third-party database update delay. Sentinel Compliance Data Services Ltd. ("Sentinel"), a UK-based provider headquartered in Edinburgh that supplies restricted-party screening data to Archipelago Component Solutions Pte. Ltd. ("Archipelago"), HSI's Singapore-based trade compliance solutions provider, failed to update the Zhonghe Entity List addition in its database in a timely manner. The Entity List addition became effective on June 14, 2025. Sentinel did not propagate the update to the Archipelago screening database until June 26, 2025 — a delay of 12 calendar days and 9 business days. This delay exceeded the contractual service-level agreement ("SLA") between Sentinel and Archipelago, which required updates within 5 business days of Federal Register publication. As a result, the Archipelago screening system did not flag Zhonghe as an Entity List party when the first violative shipment (Shipment #9) was processed on June 27, 2025.

(ii) Failure to re-screen pre-approved orders at ship-confirm stage. The order underlying Shipment #9 was pre-approved on June 13, 2025 — one day before the effective date of the Entity List addition. Under HSI's then-existing compliance procedures, restricted-party screening was performed at the order-entry stage but was not repeated at the ship-confirm stage for orders that had already been screened and approved. This procedural gap meant that even if the Archipelago database had been updated on June 26, 2025, the Shipment #9 order would not have been re-screened before shipment on June 27, 2025, because it had already been screened and approved at order entry on June 13, 2025.

(iii) Character-encoding mismatch. For Shipments #10 and #11, even after the Sentinel database was updated, the automated screening system failed to match the Zhonghe entry because of a character-encoding discrepancy between the simplified Chinese trade name as entered in HSI's enterprise resource planning ("ERP") system (中和微电子有限公司) and the romanized English-language name as it appeared on the Entity List entry ("Zhonghe Microelectronics Co., Ltd."). The screening algorithm relied on exact or near-exact string matching and did not incorporate transliteration or cross-language matching capabilities for Chinese-character entries. This encoding mismatch prevented the screening system from generating a hit or requiring manual review for Shipments #10 and #11.

The combined effect of these three failures was that all three violative shipments evaded the Company's restricted-party screening controls without any human decision-maker being aware that Zhonghe had been added to the Entity List. The absence of willfulness is a central mitigating factor under the Penalty Guidelines, and in our assessment, it should substantially reduce the applicable penalty.

Full cooperation. Halcyon's cooperation with DOJ throughout the investigation has been exemplary and has been acknowledged by DOJ as "substantial." The Company made two document productions totaling approximately 21,000 documents, responding to DOJ's document requests on an expedited basis. Two Halcyon employees — Ryan Oshiro (Director, Asia-Pacific Sales, HSI) and Janet Liang (Trade Compliance Analyst, HSI) — voluntarily submitted to proffers at C&H's Washington, D.C. office on January 13, 2026. Critically, neither HSAG nor HSI asserted foreign blocking statutes, data privacy restrictions (including the EU General Data Protection Regulation or the PRC Data Security Law and Personal Information Protection Law), or other legal impediments to delay or limit the productions. This is a significant point of differentiation from many multinational respondents, which frequently invoke such protections to slow the pace of cooperation or to withhold categories of documents.

Prompt remedial action. Upon discovery of the violations, Halcyon took immediate and comprehensive remedial steps. All shipments to Zhonghe were halted effective September 18, 2025. Ashford Pennington LLC was engaged as an independent compliance consultant on October 22, 2025, under the direction of Dr. Miriam Hecht, a recognized expert in U.S. export controls and sanctions compliance. Emergency manual screening procedures were implemented across all HSI sales channels pending the completion of technology upgrades to the automated screening system. HSI issued a formal directive to Archipelago, through its Managing Director Rajiv Sundaram, requiring the implementation of re-screening at the ship-confirm stage for all orders, regardless of prior screening status. These remedial actions were taken well before any DOJ request or directive, demonstrating the Company's good faith commitment to compliance.

No prior violations. Neither HSAG nor HSI has any prior history of EAR enforcement actions. Neither entity has been the subject of a BIS warning letter, a consent agreement, a denial order, or any other adverse administrative action. This is a significant mitigating factor under the Penalty Guidelines, as it indicates that the violations at issue were aberrational rather than reflective of a pattern of non-compliance.

Relative harm. C&H's investigation found no evidence that the HCA-9100 series chipsets shipped to Zhonghe were actually diverted to military end users or end uses. While the potential for such diversion is inherent in any Entity List violation involving the PRC, the absence of evidence of actual diversion reduces the gravity of the harm. Furthermore, the HCA-9100 series ADCs, while high-performance, are standard catalog items that are commercially available from multiple global suppliers, including several non-U.S. manufacturers whose products are not subject to the EAR. The practical significance of the three violative shipments to any PRC military procurement effort is therefore attenuated.

Based on the foregoing mitigating factors, C&H's counter-position on the monetary penalty is $1,800,000. This figure represents a reduction of approximately 25% from the aggregate base penalty of $2,394,000, reflecting the combined weight of the VSD credit, the absence of willfulness, the full cooperation, the prompt remediation, the clean enforcement history, and the limited actual harm. We recognize that this counter-position is aggressive and that the ultimate resolution is likely to fall between our counter-position and DOJ's opening position.

D. Expected Resolution Range

Based on our analysis of the aggravating and mitigating factors, our review of comparable NSD and BIS settlements in recent years, and our assessment of DOJ's likely negotiating posture, we believe that a resolution of the monetary penalty in the range of $2.5 million to $3.5 million is the most probable outcome.

C&H's target in the negotiations is $3.0 million. Our assessment of the most realistic outcome, taking into account DOJ's likely resistance to concessions below a certain floor and the precedential value of comparable cases, is $3.25 million.

The comparable settlements that inform our assessment are as follows:

In re Meridian Photonics GmbH (DOJ NSD, 2024): Meridian, a German manufacturer of high-power laser components, settled for $4.1 million in connection with seven post-Entity-List-addition violations involving exports of laser diode modules to a PRC entity. Willfulness was disputed but not conclusively established. Meridian received credit for a voluntary self-disclosure. The higher penalty in Meridian relative to our expected outcome for Halcyon is attributable to the greater number of violations (seven versus three), the disputed willfulness element, and the nature of the products (laser components with more direct military applications than ADCs).

In re Cascade Dynamics Inc. (DOJ NSD, 2023): Cascade, a U.S. manufacturer of field-programmable gate array ("FPGA") chips, settled for $2.2 million in connection with two post-Entity-List-addition violations involving exports of FPGA chips to a PRC entity. The violations were determined to be fully non-willful, and Cascade received VSD credit. The Cascade settlement is highly comparable to our matter, though the lower penalty reflects the smaller number of violations (two versus three) and the lower aggregate transaction value.

In re Novus Precision Instruments AG (BIS, 2024): Novus, a Swiss manufacturer of precision measurement instruments, settled for $1.9 million in connection with four post-Entity-List-addition violations involving exports to a PRC entity. Novus was fully cooperative, and a compliance monitor was imposed as part of the settlement. The lower penalty in Novus relative to our expected outcome reflects the nature of the products (measurement instruments with lower dual-use sensitivity than ADCs) and the BIS administrative posture (as opposed to the NSD posture in our matter).

The following metrics place the expected $3.25 million resolution in context:

• The $3.25 million figure represents approximately 1.36 times the aggregate base penalty of $2,394,000, indicating a modest aggravating-factor premium over the unadjusted base.

• Relative to the aggregate transaction value of the three violative shipments ($412,000 + $387,000 + $398,000 = $1,197,000), the $3.25 million figure represents approximately 2.71 times the value of the underlying transactions.

• Relative to DOJ's opening position of $5,500,000, a resolution at $3.25 million represents a 40.9% reduction ($5,500,000 − $3,250,000 = $2,250,000 reduction; $2,250,000 ÷ $5,500,000 = 40.9%). A reduction of this magnitude is consistent with the trajectory of prior negotiations in comparable matters where substantial cooperation and VSD credit were present.

We believe the $3.25 million figure represents a fair and defensible outcome that properly accounts for the seriousness of the violations while crediting Halcyon for its voluntary disclosure, cooperation, and remediation. We recommend, however, that the Company authorize negotiations up to $3.5 million without requiring further Supervisory Board approval, as discussed in Section VIII below, to provide C&H with sufficient flexibility in the final stages of negotiation.

IV. Form of Resolution

C&H recommends that Halcyon seek an administrative settlement agreement as the form of resolution, rather than a non-prosecution agreement ("NPA") or a deferred prosecution agreement ("DPA"). This recommendation is based on the following considerations:

1. An NPA or DPA signals criminal exposure and is inappropriate in this context. While neither an NPA nor a DPA constitutes a criminal conviction, both instruments are rooted in the criminal enforcement framework and carry an inherent implication that criminal conduct was at least contemplated by the prosecuting authority. Given that C&H's investigation has conclusively established that the violations were non-willful — resulting from systemic process and technology failures rather than from any intentional or knowing conduct — the use of a criminal-framework resolution instrument is both legally inappropriate and unnecessarily stigmatizing to the Company. An administrative settlement agreement, by contrast, resolves the matter as a civil enforcement action and avoids any suggestion of criminal culpability.

2. An administrative settlement is consistent with precedent in comparable cases. The three comparable settlements cited in Section III.D — In re Meridian Photonics GmbH, In re Cascade Dynamics Inc., and In re Novus Precision Instruments AG — were all resolved through administrative settlement agreements. None of these cases involved an NPA or DPA. The use of an administrative settlement in cases involving non-willful, post-Entity-List-addition violations with substantial cooperation and VSD credit is the established norm, and we see no reason to deviate from this norm in the present matter.

3. DOJ has indicated its willingness to proceed on an administrative settlement basis. In the February 10, 2026 telephone conference, Senior Trial Attorney Adrienne Kolb stated that DOJ is prepared to resolve the matter through an administrative settlement agreement, provided that the compliance undertakings incorporated into the settlement are sufficiently robust. This indication is consistent with our understanding of DOJ's posture and with the non-willful nature of the violations. C&H does not anticipate significant resistance from DOJ on the form of resolution, provided the substantive terms are acceptable to the government.

4. An administrative settlement will mitigate adverse Board, shareholder, and market impact. An administrative settlement agreement will be significantly easier to explain to HSAG's Supervisory Board, to shareholders, and to the investment community than an NPA or DPA, both of which carry connotations of criminal jeopardy that may be misunderstood or amplified in media coverage. This consideration is particularly important given that HSAG is a publicly listed company on the Frankfurt Stock Exchange (XETRA: HCA) and is therefore subject to extensive public disclosure requirements. We note that coordination will be required with Braxton Merritt LLP (Elena Voss, partner) regarding SEC Regulation FD disclosure obligations arising from HSI's status as a U.S. subsidiary of a foreign private issuer, and with Kessler Pratt & Whitfield LLP (Dr. Tobias Engel, partner) regarding the ad-hoc disclosure requirements under Article 17 of the Market Abuse Regulation (EU) No. 596/2014 ("MAR"). An administrative settlement will simplify these disclosure processes and reduce the risk of adverse market reaction.

In addition to the form of the resolution instrument, the following points have been confirmed or are expected to be confirmed by DOJ:

No criminal prosecution. DOJ has confirmed in principle that no criminal prosecution will be pursued against HSAG, HSI, or any individual employees, provided the settlement is finalized on mutually agreed terms. This confirmation extends to all current and former employees who were involved in the matters under investigation, including but not limited to Ryan Oshiro and Janet Liang. The absence of individual criminal exposure is an important assurance for the Company's workforce and is consistent with the non-willful nature of the violations.

No denial of export privileges. DOJ is not seeking a denial order in connection with this matter. This is a significant and critically important concession. A denial of export privileges — which would temporarily or permanently prohibit Halcyon from participating in any export transaction subject to the EAR — would be catastrophic to the Company's global business. HSAG's consolidated revenue for fiscal year 2024 was €4.27 billion, of which a substantial portion is derived from the export of controlled semiconductor products. HSI's fiscal year 2024 revenue was $1.14 billion. HSAG's PRC-related revenue alone was approximately €612 million, representing approximately 14.3% of consolidated revenue. A denial order would effectively shut down these revenue streams and would have cascading effects throughout the Company's supply chain and customer relationships.

No OFAC referral. DOJ has confirmed that no referral to the Office of Foreign Assets Control has been made and that no such referral is contemplated in connection with this matter. C&H has independently confirmed, through OFAC SDN, SSI, and NS-CMIC List screening, that all PRC end users and their principals involved in the relevant transactions returned negative results. The absence of an OFAC dimension simplifies the resolution and eliminates a potential source of additional liability.

V. Compliance Undertakings

The settlement agreement is expected to include a package of compliance undertakings designed to address the systemic weaknesses that gave rise to the violations and to provide DOJ with ongoing assurance of the Company's compliance posture. Based on our discussions with DOJ and our review of compliance undertakings imposed in comparable settlements, we anticipate the following requirements and recommend the corresponding negotiating positions:

A. Undertakings Summary

B. Cost Estimate for Compliance Undertakings

C&H has prepared the following cost estimates for the compliance undertakings described above, based on our experience with comparable engagements and on preliminary discussions with potential monitor candidates and service providers. These estimates are intended to provide the Company with a realistic picture of the total financial impact of the settlement, inclusive of both the monetary penalty and the ongoing compliance costs.

Independent compliance monitor (18 months): $800,000–$1,200,000. This range reflects the typical cost of a monitor engagement of this duration, including the monitor's fees, travel expenses, and the costs associated with the Company's internal resources required to support the monitor's work. The actual cost will depend on the monitor's billing rates, the scope of the monitor's mandate, and the extent of remedial work identified during the monitorship.

Annual export compliance audits (3 years): $150,000–$250,000 per year, for a total of $450,000–$750,000 over the three-year Enhanced Compliance Period. The range reflects the variability in audit scope and the billing rates of qualified audit firms. The annual audits are expected to cover the full scope of the Company's export compliance program, including restricted-party screening, license determination, recordkeeping, and training.

Screening technology upgrade: $350,000 (one-time capital expenditure) plus $85,000 per year in ongoing maintenance and licensing costs, for a total of $350,000 + $255,000 = $605,000 over the three-year period. The one-time capital expenditure covers the implementation of cross-language matching capabilities, enhanced fuzzy-logic algorithms, and integration with additional government watch-list data feeds. The ongoing costs cover maintenance, updates, and licensing fees for the enhanced screening platform.

Additional compliance full-time equivalents (2 positions): Approximately $380,000 per year on a fully loaded basis (salary, benefits, overhead), for a total of approximately $1,140,000 over the three-year Enhanced Compliance Period, assuming a partial first year. The two positions — one senior compliance officer and one compliance analyst — are necessary to support the enhanced compliance program, manage monitor and audit interactions, and provide day-to-day oversight of the automated screening system.

Training program development and delivery: Approximately $120,000 per year, for a total of $360,000 over the three-year Enhanced Compliance Period. This includes the development of training curricula, the engagement of external training providers for specialized content, the administration of training sessions, and the maintenance of training records and certification tracking.

Total estimated three-year compliance cost: $2,400,000–$3,300,000.

C. Combined Cost Analysis

The combined financial impact of the settlement, including both the monetary penalty and the estimated compliance undertaking costs, is as follows:

Combined cost = Monetary penalty ($3,250,000) + Compliance undertaking costs ($2,400,000–$3,300,000) = $5,650,000–$6,550,000.

At current exchange rates (EUR/USD 1.08), the combined cost in Euros is approximately €5,230,000–€6,065,000.

This combined cost is well below HSAG's €15 million materiality threshold for financial reporting purposes, as established by the Company's accounting policies and confirmed with the external auditor. Pinnacle Ridgeway Partners (Graham Sinclair, Lead Audit Partner) has been consulted regarding the appropriate accounting treatment under IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) for the FY 2025 audit. Based on preliminary discussions with Mr. Sinclair, we anticipate that the monetary penalty component will be accrued as a provision in the FY 2025 financial statements, as the obligation is probable and the amount can be reliably estimated. The compliance undertaking costs may be disclosed as a contingent liability to the extent they exceed amounts already budgeted.

We note separately that the total estimated professional fees for the Matter are $3,700,000–$4,300,000, comprising the following:

• Calderwood & Harkness LLP (investigation, document production, proffers, settlement negotiation, and related advisory): $2,800,000–$3,400,000

• Ashford Pennington LLC (Phase I compliance assessment: $475,000; estimated Phase II compliance assessment: approximately $180,000): $655,000

• Kessler Pratt & Whitfield LLP (MAR Article 17 advisory and German regulatory coordination): approximately €320,000 (approximately $346,000 at current exchange rates)

These professional fee estimates are exclusive of the compliance undertaking costs described above and are presented for the Company's budgeting and planning purposes.

VI. Lansheng Strategy

C&H strongly recommends that Halcyon resist any concession on the Lansheng Harborline Technologies Technologies Ltd. shipments. This recommendation is based on both the legal merits and the strategic consequences of including the Lansheng shipments in any settlement.

A. DOJ's Theory

DOJ NSD/CES has advanced a theory that six shipments made by HSI to Lansheng Harborline Technologies Technologies Ltd. (Chengdu, PRC; Managing Director: Chen Weiming) between April 8, 2024 and August 19, 2025, with an aggregate transaction value of approximately $2.42 million, constitute violations of 15 C.F.R. § 744.21. Section 744.21 imposes a license requirement for exports, reexports, and transfers (in-country) of items subject to the EAR when there is knowledge that the items are intended for a "military end use" or a "military end user" in certain countries, including the PRC. DOJ's theory is predicated on a classified intelligence assessment that allegedly identifies Lansheng as a potential procurement front for a PRC defense research institute. DOJ has not shared the underlying intelligence with C&H, citing national security classification restrictions.

B. Legal and Factual Deficiencies in DOJ's Theory

C&H's investigation, as detailed in our January 28, 2026 findings memorandum, has identified the following dispositive deficiencies in DOJ's § 744.21 theory:

Lansheng is not on the BIS Entity List, the Unverified List, or the Denied Persons List. At the time of each of the six shipments, and as of the date of this memorandum, Lansheng does not appear on any BIS restricted-party list. The Entity List, the Unverified List, and the Denied Persons List are the principal mechanisms by which BIS communicates to the exporting community that a particular entity poses a compliance risk. The absence of Lansheng from any of these lists is significant evidence that BIS itself had not determined, at the time of the shipments, that Lansheng warranted heightened scrutiny.

No evidence of knowledge or reason to know. C&H's investigation found no evidence that any HSI or HSAG employee had knowledge, or reason to know, of Lansheng's alleged military end-use connections. The investigation reviewed all internal communications (including email, instant messaging, and shared drive repositories) referencing Lansheng, all due diligence records, all customer qualification files, and all order processing records. No document or communication contained any reference to a military end use, a military end user, or any connection between Lansheng and a PRC defense research institute or military entity.

BIS did not issue an "is informed" letter. Under 15 C.F.R. § 744.21(b), BIS may inform a person that a license is required for a particular export because the item is destined for a military end use or military end user. Such notification — commonly referred to as an "is informed" letter — creates constructive knowledge on the part of the recipient. BIS did not issue an "is informed" letter or any other form of notification to HSAG or HSI regarding Lansheng prior to any of the six shipments. The absence of such notification is a critical gap in DOJ's theory.

End-user certificates stated civilian end use. Each of the six Lansheng orders was accompanied by an end-user certificate in which Lansheng represented that the products were intended for civilian telecommunications infrastructure applications. While end-user certificates are not conclusive evidence of actual end use, they are a standard element of export compliance due diligence, and the Company was entitled to rely on them in the absence of contrary information.

All shipments passed restricted-party screening. Lansheng was screened against all applicable restricted-party lists at the time of each shipment, and no hits or alerts were generated. The Company's screening procedures were consistent with industry standards and regulatory expectations.

In sum, without evidence of knowledge or reason to know of a military end use or military end user, and without an "is informed" notice from BIS, a violation of § 744.21 cannot be established as a matter of law. The mere existence of a classified intelligence assessment — which was not communicated to Halcyon in any form — is insufficient to impute knowledge to the Company.

C. Consequences of Including Lansheng in the Settlement

C&H has identified three significant adverse consequences of including the Lansheng shipments in the settlement:

1. Increased monetary penalty. Inclusion of the Lansheng shipments would add six additional violations to the penalty calculation, increasing the penalty by an estimated $1,500,000 to $2,500,000, depending on the per-violation calculation methodology and the weight accorded to aggravating and mitigating factors. This increase would bring the total monetary penalty to approximately $4,750,000 to $5,750,000, well above the resolution range we consider appropriate.

2. Adverse precedent. A settlement that includes the Lansheng shipments, even if framed as an administrative settlement rather than a finding of violation, would create an adverse precedent suggesting that companies can be held liable under § 744.21 without actual knowledge of military end use and without an "is informed" notice from BIS. This precedent would undermine the knowledge requirement that is the cornerstone of the § 744.21 framework and would expose the Company — and the broader exporting community — to enforcement risk based on classified information that is not shared with the regulated community.

3. Future exposure. If Lansheng is subsequently added to the Entity List — a possibility that cannot be ruled out given DOJ's apparent interest in the entity — the inclusion of the Lansheng shipments in the current settlement could complicate the Company's position if the prior shipments are scrutinized in the context of any future enforcement action. A settlement that concedes § 744.21 liability with respect to Lansheng would weaken the Company's ability to argue that future Lansheng-related compliance decisions were made in good faith.

D. Recommended Approach

Based on our assessment, DOJ appears willing to exclude the Lansheng shipments from the penalty calculation. DOJ's primary interest in the Lansheng shipments appears to be as context for the enhanced compliance undertakings — i.e., DOJ wishes to demonstrate that the Company's compliance program had broader deficiencies that extend beyond the Zhonghe violations and that justify the scope and duration of the compliance measures being imposed.

C&H recommends the following compromise: the settlement agreement may reference the Lansheng shipments in the factual recitals as background or context for the enhanced compliance undertakings, provided that the language of the recitals makes clear that (a) no violation of 15 C.F.R. § 744.21 is admitted or found with respect to the Lansheng shipments, (b) the Lansheng shipments are not included in the penalty calculation, and (c) the Company reserves all rights and defenses with respect to any future enforcement action relating to the Lansheng shipments. C&H will draft proposed language for the Lansheng recitals and will circulate it for client review prior to its submission to DOJ.

VII. Negotiation Timeline

The following table sets forth the anticipated timeline for the remaining stages of the settlement negotiation process:

We note that this timeline is ambitious and is contingent upon DOJ's timely circulation of a draft settlement agreement and the absence of unexpected complications in the negotiation process. We will keep the client informed of any developments that may affect the timeline.

VIII. Recommendation and Authorization Request

Based on the analysis set forth in this memorandum, C&H recommends that Halcyon authorize Calderwood & Harkness LLP to negotiate a resolution of the Matter on the following parameters:

Monetary penalty. C&H will target a monetary penalty of $3,000,000. C&H requests authority to negotiate and agree to a penalty of up to $3,500,000 without requiring further client approval. Any proposed resolution in excess of $3,500,000 will require Supervisory Board authorization before C&H may agree to the proposed amount on behalf of the Company.

Form of resolution. C&H will seek an administrative settlement agreement. C&H will resist any attempt by DOJ to impose an NPA or DPA framework.

Compliance undertakings. C&H will negotiate compliance undertakings consistent with those outlined in Section V above, specifically:

• An independent compliance monitor for a period of 18 months, with the monitor possessing demonstrated export-controls expertise and selected from a DOJ-approved list with meaningful Company input.

• Annual independent export compliance audits for a period of three years (the Enhanced Compliance Period), conducted by a firm selected by the Company subject to DOJ approval.

• Automated restricted-party screening at both the order-entry and ship-confirm stages for all shipments to PRC, Russia, and other EAR Country Group D:1/D:5 destinations.

• Mandatory export compliance training for all sales and distribution personnel with PRC-facing responsibilities.

• Semi-annual (not quarterly) written reporting to DOJ on compliance program status for a period of three years.

Lansheng. C&H will resist any admission of violation with respect to the Lansheng Harborline Technologies Technologies Ltd. shipments. Factual recital references to the Lansheng shipments in the settlement agreement are acceptable, provided the language makes clear that no violation is admitted or found and that the Lansheng shipments are not included in the penalty calculation.

No criminal prosecution. This is a non-negotiable condition of any settlement. DOJ must confirm in the settlement agreement that no criminal prosecution will be pursued against HSAG, HSI, or any individual employees in connection with the matters covered by the settlement.

No denial of export privileges. This is a non-negotiable condition of any settlement. DOJ must confirm that no denial order will be sought in connection with the settlement.

No OFAC referral. DOJ's confirmation that no referral to OFAC has been or will be made should be memorialized in the settlement agreement.

We respectfully request that Halcyon's management review these parameters and confirm authorization to proceed at the earliest practicable date, in advance of the February 24, 2026 resolution-in-principle discussion. If any of the foregoing parameters require modification or if additional Supervisory Board input is needed before authorization can be given, we ask that you advise us promptly so that we may adjust our preparation accordingly.

We note for the record that Lodestar National Bank (Danielle Osborne, Relationship Manager) received a material-litigation notice on November 1, 2025 under Section 6.02(b) of the $300 million revolving credit agreement dated March 15, 2023, as amended. The anticipated resolution amount of $3,250,000 is well below the Material Adverse Effect threshold defined in the credit agreement, and we do not anticipate that the settlement will trigger any default or event of default under the credit facility. We recommend, however, that the Company provide Lodestar with an updated notice upon execution of the settlement agreement, consistent with the ongoing reporting obligations under the credit agreement.

We are available to discuss the foregoing at the client's convenience and look forward to receiving authorization to proceed.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Howard Quinn Partner Calderwood & Harkness LLP 1301 K Street NW, Suite 1100 Washington, D.C. 20005 Telephone: (202) 555-7400

Email: hquinn@calderwoodharkness.com

________________________________________

Conrad Ashby Partner Calderwood & Harkness LLP 1301 K Street NW, Suite 1100 Washington, D.C. 20005 Telephone: (202) 555-7412

Email: cashby@calderwoodharkness.com

________________________________________

Liam Donahue Associate Calderwood & Harkness LLP 1301 K Street NW, Suite 1100 Washington, D.C. 20005 Telephone: (202) 555-7438

Email: ldonahue@calderwoodharkness.com

CONFIDENTIAL TREATMENT REQUESTED: This memorandum is protected by the attorney-client privilege and the attorney work-product doctrine. It is intended solely for the named recipients and may not be disclosed, copied, or distributed to any person or entity without the prior written consent of Calderwood & Harkness LLP. If you have received this memorandum in error, please notify us immediately and destroy all copies.

Undertaking	DOJ Expected Requirement	Duration	C&H Recommended Position
Independent compliance monitor	Appointment of independent compliance monitor with authority to review and assess the Company's export compliance program	18 months within a 3-year Enhanced Compliance Period	Accept. Resist any extension beyond 18 months. The monitor should be a specialist with demonstrated expertise in export controls and sanctions compliance, not a generalist white-collar compliance monitor. The monitor should be selected from a DOJ-approved list, with the Company having meaningful input into the selection process.
Annual export compliance audits	Independent third-party audits of the Company's export compliance program	3 years (co-extensive with the Enhanced Compliance Period)	Accept. Ensure that audits are conducted by a firm selected by the Company, subject to DOJ approval of the selected firm's qualifications. This preserves the Company's ability to manage costs and to engage a firm with relevant industry expertise.
Automated restricted-party screening	Implementation of automated restricted-party screening for all shipments to PRC, Russia, and other countries in EAR Country Groups D:1 and D:5	Ongoing, with a 3-year reporting period	Accept. This requirement is already substantially in implementation since October 2025, following the emergency remedial measures that introduced re-screening at both the order-entry and ship-confirm stages. The principal remaining task is the completion of the technology upgrade to incorporate cross-language and transliteration matching capabilities.
Mandatory training	Comprehensive export compliance training for all sales and distribution personnel with PRC-facing responsibilities	Ongoing	Accept. A mandatory training program is already in implementation across HSI and relevant HSAG personnel. The program should be structured to include initial certification training and annual refresher training, consistent with industry best practices.
Periodic reporting to DOJ	Written reports to DOJ NSD/CES on the status of the Company's compliance program, including any new potential violations identified during the Enhanced Compliance Period	3 years	Accept in principle, but negotiate for semi-annual reporting rather than quarterly reporting. Quarterly reporting imposes a significant cost and administrative burden and is not justified by the nature of the violations. Semi-annual reporting is sufficient to provide DOJ with meaningful oversight and is consistent with the reporting cadence in comparable settlements.
Target Date	Action	Key Participants
February 24, 2026	Resolution-in-principle discussion with DOJ NSD/CES. This meeting is currently scheduled and will be the first substantive settlement discussion following DOJ's acknowledgment of the Company's substantial cooperation.	C&H (Quinn, Ashby, Donahue); DOJ NSD/CES (Adrienne Kolb, Senior Trial Attorney; Jonathan Weir, Trial Attorney)
Late February / Early March 2026	DOJ circulates draft settlement agreement for C&H review.	DOJ NSD/CES; C&H
March 2026	C&H prepares and submits redline of draft settlement agreement. Negotiation of final terms, including penalty amount, compliance undertakings, Lansheng recital language, and other provisions.	C&H; DOJ NSD/CES; client consultations as needed
Late March / April 2026	Execution of final settlement agreement. Presentation to and approval by HSAG Supervisory Board and/or Audit Committee, as required by corporate governance procedures.	C&H; HSAG General Counsel (Friedl); HSI President (Tran); HSAG Supervisory Board
April 2026	Public announcement of settlement, as required by applicable law and regulation. Coordination with Braxton Merritt LLP (Elena Voss) on SEC Regulation FD compliance and with Kessler Pratt & Whitfield LLP (Dr. Tobias Engel) on MAR Article 17 ad-hoc disclosure obligations.	C&H; Braxton Merritt LLP; KPW; HSAG Investor Relations

CALDERWOOD & HARKNESS LLP 1301 K Street NW, Suite 1100 Washington, D.C. 20005
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Marcus Friedl, General Counsel, Halcyon Semiconductor AG Derek Tran, President, Halcyon Semiconductor Inc.
FROM: Howard Quinn, Conrad Ashby, Liam Donahue
DATE: February 18, 2026
RE: Settlement Strategy — DOJ NSD-CES-2025-04871
This memorandum constitutes privileged and confidential attorney-client communication and attorney work product prepared in anticipation of litigation and in connection with the provision of legal advice. This memorandum is intended solely for the named recipients and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. Inadvertent disclosure of this memorandum does not constitute a waiver of any applicable privilege or protection.
I. Purpose
This memorandum sets forth Calderwood & Harkness LLP's ("C&H" or the "Firm") recommended strategy for settlement negotiations with the U.S. Department of Justice, National Security Division, Counterintelligence and Export Control Section ("DOJ NSD/CES") in connection with the inquiry bearing reference number NSD-CES-2025-04871 (the "Matter"). The Matter concerns the export of certain controlled semiconductor products to Zhonghe Microelectronics Co., Ltd. ("Zhonghe"), a People's Republic of China ("PRC")-based entity that was added to the Bureau of Industry and Security ("BIS") Entity List effective June 14, 2025, and, relatedly, certain shipments to Lansheng Harborline Technologies Technologies Ltd. ("Lansheng"), also based in the PRC. The recommendations contained herein are directed to Marcus Friedl, General Counsel of Halcyon Semiconductor AG ("HSAG"), and Derek Tran, President of Halcyon Semiconductor Inc. ("HSI," and together with HSAG, the "Company" or "Halcyon").
This memorandum provides C&H's assessment of the likely resolution terms for the Matter, identifies the key areas of negotiation, and requests client authorization to negotiate on specified parameters. Our recommendations are informed by the totality of our engagement to date, including the results of C&H's internal investigation, which are set forth in our privileged findings memorandum dated January 28, 2026, and to which we refer the reader for a comprehensive discussion of the underlying facts and circumstances.
In preparing this memorandum, C&H has considered the following materials and proceedings, among others:
• The two document productions made to DOJ NSD/CES, totaling approximately 21,000 documents. The first production, comprising approximately 14,200 documents, was made on November 18, 2025. The second production, comprising approximately 6,800 documents, was made on December 9, 2025. These productions included, among other categories, trade compliance records, shipment documentation, order processing files, internal communications, and restricted-party screening records.
• The voluntary employee proffers of Ryan Oshiro, Director of Asia-Pacific Sales at HSI, and Janet Liang, Trade Compliance Analyst at HSI, which were conducted at C&H's Washington, D.C. office on January 13, 2026. Both proffers were conducted in the presence of DOJ NSD/CES Senior Trial Attorney Adrienne Kolb and Trial Attorney Jonathan Weir.
• The Phase I compliance assessment report prepared by Ashford Pennington LLC ("Ashford Pennington"), which was delivered on February 5, 2026. The Ashford Pennington report, prepared under the direction of Dr. Miriam Hecht, was commissioned at C&H's recommendation and is protected by the attorney-client privilege and work-product doctrine as it was prepared in anticipation of litigation and at the direction of counsel. The report's findings, which are summarized in relevant part below, inform our recommended compliance undertaking parameters.
The purpose of this memorandum is to present a cohesive settlement strategy, to provide quantitative analysis of the likely penalty range, to address the appropriate form of resolution, and to delineate the boundaries within which C&H requests authority to negotiate on behalf of the Company. We respectfully request that Halcyon's management and, as necessary, the Supervisory Board review and authorize the negotiation parameters set forth herein at the earliest practicable date, in light of the forthcoming resolution-in-principle discussion scheduled for February 24, 2026.
II. Current Posture
The Matter has progressed through an extended investigative and cooperative phase, and DOJ NSD/CES has signaled its readiness to proceed toward resolution. In a telephone conference on February 10, 2026, Senior Trial Attorney Adrienne Kolb expressly acknowledged Halcyon's "substantial cooperation" throughout the inquiry. This acknowledgment is significant because, under DOJ policy, the degree of a respondent's cooperation is a central factor in determining both the form and the severity of any resolution. DOJ's characterization of Halcyon's cooperation as "substantial" places the Company in a favorable posture as negotiations commence.
Based on our discussions with DOJ NSD/CES and our independent analysis, we have identified the following key negotiation points that will define the contours of any resolution:
1. Monetary penalty amount. DOJ has communicated an initial aggravated position of $5,500,000. C&H has countered at $1,800,000. The resolution of this point will depend on the weight accorded to aggravating and mitigating factors, as discussed in Section III below.
2. Whether Lansheng Harborline Technologies Technologies Ltd. violations are included. DOJ has advanced a theory that six shipments to Lansheng between April 8, 2024 and August 19, 2025 constitute violations of 15 C.F.R. § 744.21 (the military end-use rule). C&H contests the legal and factual basis for this theory, as discussed in Section VI below, and recommends resisting any inclusion of the Lansheng shipments in the penalty calculation.
3. Scope and duration of compliance undertakings. DOJ is expected to require enhanced compliance measures, including the appointment of an independent compliance monitor, annual audits, automated restricted-party screening enhancements, mandatory training programs, and periodic reporting. The scope and duration of these undertakings represent a significant cost and operational burden, and their parameters are subject to negotiation. Our analysis is presented in Section V below.
4. Form of resolution. The resolution may take the form of (a) an administrative settlement agreement, (b) a non-prosecution agreement ("NPA"), or (c) a deferred prosecution agreement ("DPA"). C&H recommends pursuing an administrative settlement agreement, as discussed in Section IV below.
As a foundation for the negotiation strategy set forth in this memorandum, we note the following key factual determinations arising from C&H's internal investigation, as set forth in the January 28, 2026 findings memorandum:
• C&H's investigation confirmed that three post-Entity-List shipments to Zhonghe Microelectronics Co., Ltd. were made on June 27, 2025 (Shipment #9), July 15, 2025 (Shipment #10), and August 3, 2025 (Shipment #11). Each of these shipments constitutes an apparent violation of 15 C.F.R. § 744.11, which prohibits exports, reexports, and transfers (in-country) of items subject to the EAR to entities on the Entity List without a license, where a license requirement applies.
• The violations were non-willful in nature, arising from systemic process and technology failures rather than from any intentional or reckless disregard of export control requirements. The specific causal chain is detailed in Section III.C below, but in summary, the violations resulted from a combination of (i) a delayed update to restricted-party screening databases by a third-party data services provider, (ii) a gap in the Company's screening protocol that did not require re-screening at the ship-confirm stage for pre-approved orders, and (iii) a character-encoding mismatch that prevented automated matching of the Entity List entry to certain transactional records.
• C&H's investigation found no evidence of violations of the regulations administered by the Office of Foreign Assets Control ("OFAC") of the U.S. Department of the Treasury.
• C&H's investigation determined that the six shipments to Lansheng Harborline Technologies Technologies Ltd. do not constitute demonstrable violations of 15 C.F.R. § 744.21. As discussed in Section VI, the legal standard for a § 744.21 violation requires that the exporter have knowledge or reason to know of military end use or a military end user, or have received an "is informed" notice from BIS. Neither condition was met with respect to any of the Lansheng shipments.
Halcyon's voluntary self-disclosure ("VSD") was filed with the BIS Office of Export Enforcement on November 4, 2025, under Reference No. OEE-VSD-2025-00319. The VSD was filed within weeks of the Company's discovery of the apparent violations, consistent with best practices and the BIS guidelines encouraging prompt disclosure. The timely filing of the VSD is expected to be a significant mitigating factor in the penalty determination, as discussed below.
III. Penalty Analysis
A. BIS Penalty Guidelines Framework
The monetary penalty for violations of the Export Administration Regulations ("EAR") is determined by reference to the penalty guidelines set forth in Supplement No. 1 to Part 766 of the EAR (the "Penalty Guidelines"). Under the Penalty Guidelines, the base penalty for each violation is calculated as the greater of (a) twice the value of the transaction giving rise to the violation, or (b) the applicable statutory maximum civil penalty per violation.
For Entity List violations under 15 C.F.R. § 744.11, the applicable statutory maximum civil penalty is subject to annual inflation adjustment pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. The current inflation-adjusted per-violation maximum for calendar year 2025 is $330,947.
Applying the Penalty Guidelines framework to the three post-Entity-List Zhonghe shipments that constitute the core violations, the base penalty calculations are as follows:
Shipment #9 (June 27, 2025): Transaction value: $412,000. Twice the transaction value: 2 × $412,000 = $824,000. Statutory maximum: $330,947. The greater of these two amounts is $824,000. Base penalty for Shipment #9: $824,000.
Shipment #10 (July 15, 2025): Transaction value: $387,000. Twice the transaction value: 2 × $387,000 = $774,000. Statutory maximum: $330,947. The greater of these two amounts is $774,000. Base penalty for Shipment #10: $774,000.
Shipment #11 (August 3, 2025): Transaction value: $398,000. Twice the transaction value: 2 × $398,000 = $796,000. Statutory maximum: $330,947. The greater of these two amounts is $796,000. Base penalty for Shipment #11: $796,000.
Aggregate base penalty: $824,000 + $774,000 + $796,000 = $2,394,000.
We note that DOJ NSD/CES, in its early discussions with C&H, referenced an alternative per-violation calculation using only the statutory maximum figure. Under this alternative approach, the aggregate penalty would be $330,947 × 3 = $992,841. This lower figure appears to represent the baseline from which DOJ began its analysis before applying aggravating factors. We believe the proper starting point under the Penalty Guidelines is the $2,394,000 figure calculated above, as the "twice the transaction value" measure exceeds the statutory maximum for each of the three shipments. The distinction is relevant to our negotiation strategy because it frames the extent to which DOJ's $5,500,000 aggravated position represents a multiplier over the proper base.
B. Aggravating Factors (DOJ's Position)
DOJ NSD/CES has identified the following aggravating factors in support of its initial penalty position of $5,500,000. We present DOJ's likely arguments here so that the Company is fully apprised of the government's perspective, even where we disagree with the weight to be accorded to these factors.
Significance of the product. The products at issue in the three Zhonghe shipments are HCA-9100 series analog-to-digital converter ("ADC") chipsets manufactured by HSAG at its Reutlingen, Germany fabrication facility. These ADCs are high-performance components with sampling rates exceeding 3.6 Giga-samples per second ("Gsps"). They are classified under Export Control Classification Number ("ECCN") 3A001 on the Commerce Control List, which encompasses certain types of electronic components and integrated circuits that are controlled for national security and anti-terrorism reasons. ADCs with performance characteristics at or above the 3A001 thresholds are widely recognized as having significant military and dual-use applications, including in radar systems, electronic warfare platforms, signals intelligence equipment, and satellite communications. DOJ will argue that the controlled nature and high-performance specifications of the HCA-9100 series chipsets elevate the seriousness of the violations.
Destination. All three shipments were destined for the People's Republic of China, which is designated as a country of significant proliferation concern by the U.S. Government. China is classified in Country Groups D:1 (National Security) and D:5 (U.S. Arms Embargoed Countries) under Supplement No. 1 to Part 740 of the EAR. The PRC's designation reflects U.S. Government concerns regarding the PRC's military modernization programs and its efforts to acquire advanced semiconductor technology through illicit procurement channels. DOJ will argue that the PRC destination materially increases the national security risk associated with the violations.
Volume and pattern. The three violative shipments occurred over a span of approximately five weeks, from June 27 to August 3, 2025. DOJ has characterized this pattern as suggesting a systemic failure in the Company's export compliance controls, rather than an isolated or aberrational incident. While DOJ has not alleged that the pattern reflects willful conduct, the government will nonetheless argue that the recurrence of violations over a five-week period demonstrates that the Company's compliance infrastructure was materially deficient and that the resulting risk was correspondingly greater.
End user's Entity List status. Zhonghe Microelectronics Co., Ltd. was added to the BIS Entity List effective June 14, 2025 (90 Fed. Reg. 42,118 (June 12, 2025)). The Entity List entry specifies a "presumption of denial" as the license review policy for all items subject to the EAR. A "presumption of denial" is the most restrictive license review standard on the Entity List and indicates that BIS has determined that the entity poses a significant risk to U.S. national security or foreign policy interests. DOJ will argue that the presumption-of-denial designation underscores the severity of the violations, as it reflects a heightened government determination regarding the risks posed by Zhonghe.
Based on the foregoing aggravating factors, DOJ has communicated an initial aggravated penalty position of $5,500,000. This figure represents approximately 2.3 times the aggregate base penalty of $2,394,000, or approximately 5.55 times the alternative statutory-maximum-only baseline of $992,841 that DOJ initially referenced. In our assessment, DOJ's $5,500,000 position is inflated and represents a negotiating anchor rather than a final position. Nevertheless, the aggravating factors identified by DOJ are legitimate considerations under the Penalty Guidelines and cannot be dismissed entirely.
C. Mitigating Factors (C&H's Position)
C&H has identified and presented to DOJ the following mitigating factors, which we believe substantially reduce the appropriate penalty from DOJ's aggravated position. These factors form the basis for C&H's counter-position of $1,800,000.
Voluntary self-disclosure. Halcyon filed its voluntary self-disclosure with the BIS Office of Export Enforcement on November 4, 2025, under Reference No. OEE-VSD-2025-00319. The VSD was filed within weeks of the Company's initial discovery of the violations, which occurred in mid-October 2025 during a routine internal audit of PRC-destined shipments. Under the BIS Penalty Guidelines, a voluntary self-disclosure in a case involving non-egregious violations entitles the respondent to a reduction of up to 50% from the otherwise applicable base penalty. The timely and comprehensive nature of Halcyon's VSD should warrant a reduction at or near the maximum 50% credit. We emphasize that the VSD was filed proactively and without any prior indication from BIS or DOJ that the violations had been detected by the government.
Absence of willfulness. The violations resulted from a chain of systemic process and technology failures, not from any intentional, knowing, or reckless conduct by any Halcyon employee. Specifically, the causal chain comprised three interconnected failures:
(i) Third-party database update delay. Sentinel Compliance Data Services Ltd. ("Sentinel"), a UK-based provider headquartered in Edinburgh that supplies restricted-party screening data to Archipelago Component Solutions Pte. Ltd. ("Archipelago"), HSI's Singapore-based trade compliance solutions provider, failed to update the Zhonghe Entity List addition in its database in a timely manner. The Entity List addition became effective on June 14, 2025. Sentinel did not propagate the update to the Archipelago screening database until June 26, 2025 — a delay of 12 calendar days and 9 business days. This delay exceeded the contractual service-level agreement ("SLA") between Sentinel and Archipelago, which required updates within 5 business days of Federal Register publication. As a result, the Archipelago screening system did not flag Zhonghe as an Entity List party when the first violative shipment (Shipment #9) was processed on June 27, 2025.
(ii) Failure to re-screen pre-approved orders at ship-confirm stage. The order underlying Shipment #9 was pre-approved on June 13, 2025 — one day before the effective date of the Entity List addition. Under HSI's then-existing compliance procedures, restricted-party screening was performed at the order-entry stage but was not repeated at the ship-confirm stage for orders that had already been screened and approved. This procedural gap meant that even if the Archipelago database had been updated on June 26, 2025, the Shipment #9 order would not have been re-screened before shipment on June 27, 2025, because it had already been screened and approved at order entry on June 13, 2025.
(iii) Character-encoding mismatch. For Shipments #10 and #11, even after the Sentinel database was updated, the automated screening system failed to match the Zhonghe entry because of a character-encoding discrepancy between the simplified Chinese trade name as entered in HSI's enterprise resource planning ("ERP") system (中和微电子有限公司) and the romanized English-language name as it appeared on the Entity List entry ("Zhonghe Microelectronics Co., Ltd."). The screening algorithm relied on exact or near-exact string matching and did not incorporate transliteration or cross-language matching capabilities for Chinese-character entries. This encoding mismatch prevented the screening system from generating a hit or requiring manual review for Shipments #10 and #11.
The combined effect of these three failures was that all three violative shipments evaded the Company's restricted-party screening controls without any human decision-maker being aware that Zhonghe had been added to the Entity List. The absence of willfulness is a central mitigating factor under the Penalty Guidelines, and in our assessment, it should substantially reduce the applicable penalty.
Full cooperation. Halcyon's cooperation with DOJ throughout the investigation has been exemplary and has been acknowledged by DOJ as "substantial." The Company made two document productions totaling approximately 21,000 documents, responding to DOJ's document requests on an expedited basis. Two Halcyon employees — Ryan Oshiro (Director, Asia-Pacific Sales, HSI) and Janet Liang (Trade Compliance Analyst, HSI) — voluntarily submitted to proffers at C&H's Washington, D.C. office on January 13, 2026. Critically, neither HSAG nor HSI asserted foreign blocking statutes, data privacy restrictions (including the EU General Data Protection Regulation or the PRC Data Security Law and Personal Information Protection Law), or other legal impediments to delay or limit the productions. This is a significant point of differentiation from many multinational respondents, which frequently invoke such protections to slow the pace of cooperation or to withhold categories of documents.
Prompt remedial action. Upon discovery of the violations, Halcyon took immediate and comprehensive remedial steps. All shipments to Zhonghe were halted effective September 18, 2025. Ashford Pennington LLC was engaged as an independent compliance consultant on October 22, 2025, under the direction of Dr. Miriam Hecht, a recognized expert in U.S. export controls and sanctions compliance. Emergency manual screening procedures were implemented across all HSI sales channels pending the completion of technology upgrades to the automated screening system. HSI issued a formal directive to Archipelago, through its Managing Director Rajiv Sundaram, requiring the implementation of re-screening at the ship-confirm stage for all orders, regardless of prior screening status. These remedial actions were taken well before any DOJ request or directive, demonstrating the Company's good faith commitment to compliance.
No prior violations. Neither HSAG nor HSI has any prior history of EAR enforcement actions. Neither entity has been the subject of a BIS warning letter, a consent agreement, a denial order, or any other adverse administrative action. This is a significant mitigating factor under the Penalty Guidelines, as it indicates that the violations at issue were aberrational rather than reflective of a pattern of non-compliance.
Relative harm. C&H's investigation found no evidence that the HCA-9100 series chipsets shipped to Zhonghe were actually diverted to military end users or end uses. While the potential for such diversion is inherent in any Entity List violation involving the PRC, the absence of evidence of actual diversion reduces the gravity of the harm. Furthermore, the HCA-9100 series ADCs, while high-performance, are standard catalog items that are commercially available from multiple global suppliers, including several non-U.S. manufacturers whose products are not subject to the EAR. The practical significance of the three violative shipments to any PRC military procurement effort is therefore attenuated.
Based on the foregoing mitigating factors, C&H's counter-position on the monetary penalty is $1,800,000. This figure represents a reduction of approximately 25% from the aggregate base penalty of $2,394,000, reflecting the combined weight of the VSD credit, the absence of willfulness, the full cooperation, the prompt remediation, the clean enforcement history, and the limited actual harm. We recognize that this counter-position is aggressive and that the ultimate resolution is likely to fall between our counter-position and DOJ's opening position.
D. Expected Resolution Range
Based on our analysis of the aggravating and mitigating factors, our review of comparable NSD and BIS settlements in recent years, and our assessment of DOJ's likely negotiating posture, we believe that a resolution of the monetary penalty in the range of $2.5 million to $3.5 million is the most probable outcome.
C&H's target in the negotiations is $3.0 million. Our assessment of the most realistic outcome, taking into account DOJ's likely resistance to concessions below a certain floor and the precedential value of comparable cases, is $3.25 million.
The comparable settlements that inform our assessment are as follows:
In re Meridian Photonics GmbH (DOJ NSD, 2024): Meridian, a German manufacturer of high-power laser components, settled for $4.1 million in connection with seven post-Entity-List-addition violations involving exports of laser diode modules to a PRC entity. Willfulness was disputed but not conclusively established. Meridian received credit for a voluntary self-disclosure. The higher penalty in Meridian relative to our expected outcome for Halcyon is attributable to the greater number of violations (seven versus three), the disputed willfulness element, and the nature of the products (laser components with more direct military applications than ADCs).
In re Cascade Dynamics Inc. (DOJ NSD, 2023): Cascade, a U.S. manufacturer of field-programmable gate array ("FPGA") chips, settled for $2.2 million in connection with two post-Entity-List-addition violations involving exports of FPGA chips to a PRC entity. The violations were determined to be fully non-willful, and Cascade received VSD credit. The Cascade settlement is highly comparable to our matter, though the lower penalty reflects the smaller number of violations (two versus three) and the lower aggregate transaction value.
In re Novus Precision Instruments AG (BIS, 2024): Novus, a Swiss manufacturer of precision measurement instruments, settled for $1.9 million in connection with four post-Entity-List-addition violations involving exports to a PRC entity. Novus was fully cooperative, and a compliance monitor was imposed as part of the settlement. The lower penalty in Novus relative to our expected outcome reflects the nature of the products (measurement instruments with lower dual-use sensitivity than ADCs) and the BIS administrative posture (as opposed to the NSD posture in our matter).
The following metrics place the expected $3.25 million resolution in context:
• The $3.25 million figure represents approximately 1.36 times the aggregate base penalty of $2,394,000, indicating a modest aggravating-factor premium over the unadjusted base.
• Relative to the aggregate transaction value of the three violative shipments ($412,000 + $387,000 + $398,000 = $1,197,000), the $3.25 million figure represents approximately 2.71 times the value of the underlying transactions.
• Relative to DOJ's opening position of $5,500,000, a resolution at $3.25 million represents a 40.9% reduction ($5,500,000 − $3,250,000 = $2,250,000 reduction; $2,250,000 ÷ $5,500,000 = 40.9%). A reduction of this magnitude is consistent with the trajectory of prior negotiations in comparable matters where substantial cooperation and VSD credit were present.
We believe the $3.25 million figure represents a fair and defensible outcome that properly accounts for the seriousness of the violations while crediting Halcyon for its voluntary disclosure, cooperation, and remediation. We recommend, however, that the Company authorize negotiations up to $3.5 million without requiring further Supervisory Board approval, as discussed in Section VIII below, to provide C&H with sufficient flexibility in the final stages of negotiation.
IV. Form of Resolution
C&H recommends that Halcyon seek an administrative settlement agreement as the form of resolution, rather than a non-prosecution agreement ("NPA") or a deferred prosecution agreement ("DPA"). This recommendation is based on the following considerations:
1. An NPA or DPA signals criminal exposure and is inappropriate in this context. While neither an NPA nor a DPA constitutes a criminal conviction, both instruments are rooted in the criminal enforcement framework and carry an inherent implication that criminal conduct was at least contemplated by the prosecuting authority. Given that C&H's investigation has conclusively established that the violations were non-willful — resulting from systemic process and technology failures rather than from any intentional or knowing conduct — the use of a criminal-framework resolution instrument is both legally inappropriate and unnecessarily stigmatizing to the Company. An administrative settlement agreement, by contrast, resolves the matter as a civil enforcement action and avoids any suggestion of criminal culpability.
2. An administrative settlement is consistent with precedent in comparable cases. The three comparable settlements cited in Section III.D — In re Meridian Photonics GmbH, In re Cascade Dynamics Inc., and In re Novus Precision Instruments AG — were all resolved through administrative settlement agreements. None of these cases involved an NPA or DPA. The use of an administrative settlement in cases involving non-willful, post-Entity-List-addition violations with substantial cooperation and VSD credit is the established norm, and we see no reason to deviate from this norm in the present matter.
3. DOJ has indicated its willingness to proceed on an administrative settlement basis. In the February 10, 2026 telephone conference, Senior Trial Attorney Adrienne Kolb stated that DOJ is prepared to resolve the matter through an administrative settlement agreement, provided that the compliance undertakings incorporated into the settlement are sufficiently robust. This indication is consistent with our understanding of DOJ's posture and with the non-willful nature of the violations. C&H does not anticipate significant resistance from DOJ on the form of resolution, provided the substantive terms are acceptable to the government.
4. An administrative settlement will mitigate adverse Board, shareholder, and market impact. An administrative settlement agreement will be significantly easier to explain to HSAG's Supervisory Board, to shareholders, and to the investment community than an NPA or DPA, both of which carry connotations of criminal jeopardy that may be misunderstood or amplified in media coverage. This consideration is particularly important given that HSAG is a publicly listed company on the Frankfurt Stock Exchange (XETRA: HCA) and is therefore subject to extensive public disclosure requirements. We note that coordination will be required with Braxton Merritt LLP (Elena Voss, partner) regarding SEC Regulation FD disclosure obligations arising from HSI's status as a U.S. subsidiary of a foreign private issuer, and with Kessler Pratt & Whitfield LLP (Dr. Tobias Engel, partner) regarding the ad-hoc disclosure requirements under Article 17 of the Market Abuse Regulation (EU) No. 596/2014 ("MAR"). An administrative settlement will simplify these disclosure processes and reduce the risk of adverse market reaction.
In addition to the form of the resolution instrument, the following points have been confirmed or are expected to be confirmed by DOJ:
No criminal prosecution. DOJ has confirmed in principle that no criminal prosecution will be pursued against HSAG, HSI, or any individual employees, provided the settlement is finalized on mutually agreed terms. This confirmation extends to all current and former employees who were involved in the matters under investigation, including but not limited to Ryan Oshiro and Janet Liang. The absence of individual criminal exposure is an important assurance for the Company's workforce and is consistent with the non-willful nature of the violations.
No denial of export privileges. DOJ is not seeking a denial order in connection with this matter. This is a significant and critically important concession. A denial of export privileges — which would temporarily or permanently prohibit Halcyon from participating in any export transaction subject to the EAR — would be catastrophic to the Company's global business. HSAG's consolidated revenue for fiscal year 2024 was €4.27 billion, of which a substantial portion is derived from the export of controlled semiconductor products. HSI's fiscal year 2024 revenue was $1.14 billion. HSAG's PRC-related revenue alone was approximately €612 million, representing approximately 14.3% of consolidated revenue. A denial order would effectively shut down these revenue streams and would have cascading effects throughout the Company's supply chain and customer relationships.
No OFAC referral. DOJ has confirmed that no referral to the Office of Foreign Assets Control has been made and that no such referral is contemplated in connection with this matter. C&H has independently confirmed, through OFAC SDN, SSI, and NS-CMIC List screening, that all PRC end users and their principals involved in the relevant transactions returned negative results. The absence of an OFAC dimension simplifies the resolution and eliminates a potential source of additional liability.
V. Compliance Undertakings
The settlement agreement is expected to include a package of compliance undertakings designed to address the systemic weaknesses that gave rise to the violations and to provide DOJ with ongoing assurance of the Company's compliance posture. Based on our discussions with DOJ and our review of compliance undertakings imposed in comparable settlements, we anticipate the following requirements and recommend the corresponding negotiating positions:
A. Undertakings Summary
B. Cost Estimate for Compliance Undertakings
C&H has prepared the following cost estimates for the compliance undertakings described above, based on our experience with comparable engagements and on preliminary discussions with potential monitor candidates and service providers. These estimates are intended to provide the Company with a realistic picture of the total financial impact of the settlement, inclusive of both the monetary penalty and the ongoing compliance costs.
Independent compliance monitor (18 months): $800,000–$1,200,000. This range reflects the typical cost of a monitor engagement of this duration, including the monitor's fees, travel expenses, and the costs associated with the Company's internal resources required to support the monitor's work. The actual cost will depend on the monitor's billing rates, the scope of the monitor's mandate, and the extent of remedial work identified during the monitorship.
Annual export compliance audits (3 years): $150,000–$250,000 per year, for a total of $450,000–$750,000 over the three-year Enhanced Compliance Period. The range reflects the variability in audit scope and the billing rates of qualified audit firms. The annual audits are expected to cover the full scope of the Company's export compliance program, including restricted-party screening, license determination, recordkeeping, and training.
Screening technology upgrade: $350,000 (one-time capital expenditure) plus $85,000 per year in ongoing maintenance and licensing costs, for a total of $350,000 + $255,000 = $605,000 over the three-year period. The one-time capital expenditure covers the implementation of cross-language matching capabilities, enhanced fuzzy-logic algorithms, and integration with additional government watch-list data feeds. The ongoing costs cover maintenance, updates, and licensing fees for the enhanced screening platform.
Additional compliance full-time equivalents (2 positions): Approximately $380,000 per year on a fully loaded basis (salary, benefits, overhead), for a total of approximately $1,140,000 over the three-year Enhanced Compliance Period, assuming a partial first year. The two positions — one senior compliance officer and one compliance analyst — are necessary to support the enhanced compliance program, manage monitor and audit interactions, and provide day-to-day oversight of the automated screening system.
Training program development and delivery: Approximately $120,000 per year, for a total of $360,000 over the three-year Enhanced Compliance Period. This includes the development of training curricula, the engagement of external training providers for specialized content, the administration of training sessions, and the maintenance of training records and certification tracking.
Total estimated three-year compliance cost: $2,400,000–$3,300,000.
C. Combined Cost Analysis
The combined financial impact of the settlement, including both the monetary penalty and the estimated compliance undertaking costs, is as follows:
Combined cost = Monetary penalty ($3,250,000) + Compliance undertaking costs ($2,400,000–$3,300,000) = $5,650,000–$6,550,000.
At current exchange rates (EUR/USD 1.08), the combined cost in Euros is approximately €5,230,000–€6,065,000.
This combined cost is well below HSAG's €15 million materiality threshold for financial reporting purposes, as established by the Company's accounting policies and confirmed with the external auditor. Pinnacle Ridgeway Partners (Graham Sinclair, Lead Audit Partner) has been consulted regarding the appropriate accounting treatment under IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) for the FY 2025 audit. Based on preliminary discussions with Mr. Sinclair, we anticipate that the monetary penalty component will be accrued as a provision in the FY 2025 financial statements, as the obligation is probable and the amount can be reliably estimated. The compliance undertaking costs may be disclosed as a contingent liability to the extent they exceed amounts already budgeted.
We note separately that the total estimated professional fees for the Matter are $3,700,000–$4,300,000, comprising the following:
• Calderwood & Harkness LLP (investigation, document production, proffers, settlement negotiation, and related advisory): $2,800,000–$3,400,000
• Ashford Pennington LLC (Phase I compliance assessment: $475,000; estimated Phase II compliance assessment: approximately $180,000): $655,000
• Kessler Pratt & Whitfield LLP (MAR Article 17 advisory and German regulatory coordination): approximately €320,000 (approximately $346,000 at current exchange rates)
These professional fee estimates are exclusive of the compliance undertaking costs described above and are presented for the Company's budgeting and planning purposes.
VI. Lansheng Strategy
C&H strongly recommends that Halcyon resist any concession on the Lansheng Harborline Technologies Technologies Ltd. shipments. This recommendation is based on both the legal merits and the strategic consequences of including the Lansheng shipments in any settlement.
A. DOJ's Theory
DOJ NSD/CES has advanced a theory that six shipments made by HSI to Lansheng Harborline Technologies Technologies Ltd. (Chengdu, PRC; Managing Director: Chen Weiming) between April 8, 2024 and August 19, 2025, with an aggregate transaction value of approximately $2.42 million, constitute violations of 15 C.F.R. § 744.21. Section 744.21 imposes a license requirement for exports, reexports, and transfers (in-country) of items subject to the EAR when there is knowledge that the items are intended for a "military end use" or a "military end user" in certain countries, including the PRC. DOJ's theory is predicated on a classified intelligence assessment that allegedly identifies Lansheng as a potential procurement front for a PRC defense research institute. DOJ has not shared the underlying intelligence with C&H, citing national security classification restrictions.
B. Legal and Factual Deficiencies in DOJ's Theory
C&H's investigation, as detailed in our January 28, 2026 findings memorandum, has identified the following dispositive deficiencies in DOJ's § 744.21 theory:
Lansheng is not on the BIS Entity List, the Unverified List, or the Denied Persons List. At the time of each of the six shipments, and as of the date of this memorandum, Lansheng does not appear on any BIS restricted-party list. The Entity List, the Unverified List, and the Denied Persons List are the principal mechanisms by which BIS communicates to the exporting community that a particular entity poses a compliance risk. The absence of Lansheng from any of these lists is significant evidence that BIS itself had not determined, at the time of the shipments, that Lansheng warranted heightened scrutiny.
No evidence of knowledge or reason to know. C&H's investigation found no evidence that any HSI or HSAG employee had knowledge, or reason to know, of Lansheng's alleged military end-use connections. The investigation reviewed all internal communications (including email, instant messaging, and shared drive repositories) referencing Lansheng, all due diligence records, all customer qualification files, and all order processing records. No document or communication contained any reference to a military end use, a military end user, or any connection between Lansheng and a PRC defense research institute or military entity.
BIS did not issue an "is informed" letter. Under 15 C.F.R. § 744.21(b), BIS may inform a person that a license is required for a particular export because the item is destined for a military end use or military end user. Such notification — commonly referred to as an "is informed" letter — creates constructive knowledge on the part of the recipient. BIS did not issue an "is informed" letter or any other form of notification to HSAG or HSI regarding Lansheng prior to any of the six shipments. The absence of such notification is a critical gap in DOJ's theory.
End-user certificates stated civilian end use. Each of the six Lansheng orders was accompanied by an end-user certificate in which Lansheng represented that the products were intended for civilian telecommunications infrastructure applications. While end-user certificates are not conclusive evidence of actual end use, they are a standard element of export compliance due diligence, and the Company was entitled to rely on them in the absence of contrary information.
All shipments passed restricted-party screening. Lansheng was screened against all applicable restricted-party lists at the time of each shipment, and no hits or alerts were generated. The Company's screening procedures were consistent with industry standards and regulatory expectations.
In sum, without evidence of knowledge or reason to know of a military end use or military end user, and without an "is informed" notice from BIS, a violation of § 744.21 cannot be established as a matter of law. The mere existence of a classified intelligence assessment — which was not communicated to Halcyon in any form — is insufficient to impute knowledge to the Company.
C. Consequences of Including Lansheng in the Settlement
C&H has identified three significant adverse consequences of including the Lansheng shipments in the settlement:
1. Increased monetary penalty. Inclusion of the Lansheng shipments would add six additional violations to the penalty calculation, increasing the penalty by an estimated $1,500,000 to $2,500,000, depending on the per-violation calculation methodology and the weight accorded to aggravating and mitigating factors. This increase would bring the total monetary penalty to approximately $4,750,000 to $5,750,000, well above the resolution range we consider appropriate.
2. Adverse precedent. A settlement that includes the Lansheng shipments, even if framed as an administrative settlement rather than a finding of violation, would create an adverse precedent suggesting that companies can be held liable under § 744.21 without actual knowledge of military end use and without an "is informed" notice from BIS. This precedent would undermine the knowledge requirement that is the cornerstone of the § 744.21 framework and would expose the Company — and the broader exporting community — to enforcement risk based on classified information that is not shared with the regulated community.
3. Future exposure. If Lansheng is subsequently added to the Entity List — a possibility that cannot be ruled out given DOJ's apparent interest in the entity — the inclusion of the Lansheng shipments in the current settlement could complicate the Company's position if the prior shipments are scrutinized in the context of any future enforcement action. A settlement that concedes § 744.21 liability with respect to Lansheng would weaken the Company's ability to argue that future Lansheng-related compliance decisions were made in good faith.
D. Recommended Approach
Based on our assessment, DOJ appears willing to exclude the Lansheng shipments from the penalty calculation. DOJ's primary interest in the Lansheng shipments appears to be as context for the enhanced compliance undertakings — i.e., DOJ wishes to demonstrate that the Company's compliance program had broader deficiencies that extend beyond the Zhonghe violations and that justify the scope and duration of the compliance measures being imposed.
C&H recommends the following compromise: the settlement agreement may reference the Lansheng shipments in the factual recitals as background or context for the enhanced compliance undertakings, provided that the language of the recitals makes clear that (a) no violation of 15 C.F.R. § 744.21 is admitted or found with respect to the Lansheng shipments, (b) the Lansheng shipments are not included in the penalty calculation, and (c) the Company reserves all rights and defenses with respect to any future enforcement action relating to the Lansheng shipments. C&H will draft proposed language for the Lansheng recitals and will circulate it for client review prior to its submission to DOJ.
VII. Negotiation Timeline
The following table sets forth the anticipated timeline for the remaining stages of the settlement negotiation process:
We note that this timeline is ambitious and is contingent upon DOJ's timely circulation of a draft settlement agreement and the absence of unexpected complications in the negotiation process. We will keep the client informed of any developments that may affect the timeline.
VIII. Recommendation and Authorization Request
Based on the analysis set forth in this memorandum, C&H recommends that Halcyon authorize Calderwood & Harkness LLP to negotiate a resolution of the Matter on the following parameters:
Monetary penalty. C&H will target a monetary penalty of $3,000,000. C&H requests authority to negotiate and agree to a penalty of up to $3,500,000 without requiring further client approval. Any proposed resolution in excess of $3,500,000 will require Supervisory Board authorization before C&H may agree to the proposed amount on behalf of the Company.
Form of resolution. C&H will seek an administrative settlement agreement. C&H will resist any attempt by DOJ to impose an NPA or DPA framework.
Compliance undertakings. C&H will negotiate compliance undertakings consistent with those outlined in Section V above, specifically:
• An independent compliance monitor for a period of 18 months, with the monitor possessing demonstrated export-controls expertise and selected from a DOJ-approved list with meaningful Company input.
• Annual independent export compliance audits for a period of three years (the Enhanced Compliance Period), conducted by a firm selected by the Company subject to DOJ approval.
• Automated restricted-party screening at both the order-entry and ship-confirm stages for all shipments to PRC, Russia, and other EAR Country Group D:1/D:5 destinations.
• Mandatory export compliance training for all sales and distribution personnel with PRC-facing responsibilities.
• Semi-annual (not quarterly) written reporting to DOJ on compliance program status for a period of three years.
Lansheng. C&H will resist any admission of violation with respect to the Lansheng Harborline Technologies Technologies Ltd. shipments. Factual recital references to the Lansheng shipments in the settlement agreement are acceptable, provided the language makes clear that no violation is admitted or found and that the Lansheng shipments are not included in the penalty calculation.
No criminal prosecution. This is a non-negotiable condition of any settlement. DOJ must confirm in the settlement agreement that no criminal prosecution will be pursued against HSAG, HSI, or any individual employees in connection with the matters covered by the settlement.
No denial of export privileges. This is a non-negotiable condition of any settlement. DOJ must confirm that no denial order will be sought in connection with the settlement.
No OFAC referral. DOJ's confirmation that no referral to OFAC has been or will be made should be memorialized in the settlement agreement.
We respectfully request that Halcyon's management review these parameters and confirm authorization to proceed at the earliest practicable date, in advance of the February 24, 2026 resolution-in-principle discussion. If any of the foregoing parameters require modification or if additional Supervisory Board input is needed before authorization can be given, we ask that you advise us promptly so that we may adjust our preparation accordingly.
We note for the record that Lodestar National Bank (Danielle Osborne, Relationship Manager) received a material-litigation notice on November 1, 2025 under Section 6.02(b) of the $300 million revolving credit agreement dated March 15, 2023, as amended. The anticipated resolution amount of $3,250,000 is well below the Material Adverse Effect threshold defined in the credit agreement, and we do not anticipate that the settlement will trigger any default or event of default under the credit facility. We recommend, however, that the Company provide Lodestar with an updated notice upon execution of the settlement agreement, consistent with the ongoing reporting obligations under the credit agreement.
We are available to discuss the foregoing at the client's convenience and look forward to receiving authorization to proceed.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Howard Quinn Partner Calderwood & Harkness LLP 1301 K Street NW, Suite 1100 Washington, D.C. 20005 Telephone: (202) 555-7400
Email: hquinn@calderwoodharkness.com
________________________________________
Conrad Ashby Partner Calderwood & Harkness LLP 1301 K Street NW, Suite 1100 Washington, D.C. 20005 Telephone: (202) 555-7412
Email: cashby@calderwoodharkness.com
________________________________________
Liam Donahue Associate Calderwood & Harkness LLP 1301 K Street NW, Suite 1100 Washington, D.C. 20005 Telephone: (202) 555-7438
Email: ldonahue@calderwoodharkness.com
CONFIDENTIAL TREATMENT REQUESTED: This memorandum is protected by the attorney-client privilege and the attorney work-product doctrine. It is intended solely for the named recipients and may not be disclosed, copied, or distributed to any person or entity without the prior written consent of Calderwood & Harkness LLP. If you have received this memorandum in error, please notify us immediately and destroy all copies.
Undertaking | DOJ Expected Requirement | Duration | C&H Recommended Position
Independent compliance monitor | Appointment of independent compliance monitor with authority to review and assess the Company's export compliance program | 18 months within a 3-year Enhanced Compliance Period | Accept. Resist any extension beyond 18 months. The monitor should be a specialist with demonstrated expertise in export controls and sanctions compliance, not a generalist white-collar compliance monitor. The monitor should be selected from a DOJ-approved list, with the Company having meaningful input into the selection process.
Annual export compliance audits | Independent third-party audits of the Company's export compliance program | 3 years (co-extensive with the Enhanced Compliance Period) | Accept. Ensure that audits are conducted by a firm selected by the Company, subject to DOJ approval of the selected firm's qualifications. This preserves the Company's ability to manage costs and to engage a firm with relevant industry expertise.
Automated restricted-party screening | Implementation of automated restricted-party screening for all shipments to PRC, Russia, and other countries in EAR Country Groups D:1 and D:5 | Ongoing, with a 3-year reporting period | Accept. This requirement is already substantially in implementation since October 2025, following the emergency remedial measures that introduced re-screening at both the order-entry and ship-confirm stages. The principal remaining task is the completion of the technology upgrade to incorporate cross-language and transliteration matching capabilities.
Mandatory training | Comprehensive export compliance training for all sales and distribution personnel with PRC-facing responsibilities | Ongoing | Accept. A mandatory training program is already in implementation across HSI and relevant HSAG personnel. The program should be structured to include initial certification training and annual refresher training, consistent with industry best practices.
Periodic reporting to DOJ | Written reports to DOJ NSD/CES on the status of the Company's compliance program, including any new potential violations identified during the Enhanced Compliance Period | 3 years | Accept in principle, but negotiate for semi-annual reporting rather than quarterly reporting. Quarterly reporting imposes a significant cost and administrative burden and is not justified by the nature of the violations. Semi-annual reporting is sufficient to provide DOJ with meaningful oversight and is consistent with the reporting cadence in comparable settlements.
Target Date | Action | Key Participants
February 24, 2026 | Resolution-in-principle discussion with DOJ NSD/CES. This meeting is currently scheduled and will be the first substantive settlement discussion following DOJ's acknowledgment of the Company's substantial cooperation. | C&H (Quinn, Ashby, Donahue); DOJ NSD/CES (Adrienne Kolb, Senior Trial Attorney; Jonathan Weir, Trial Attorney)
Late February / Early March 2026 | DOJ circulates draft settlement agreement for C&H review. | DOJ NSD/CES; C&H
March 2026 | C&H prepares and submits redline of draft settlement agreement. Negotiation of final terms, including penalty amount, compliance undertakings, Lansheng recital language, and other provisions. | C&H; DOJ NSD/CES; client consultations as needed
Late March / April 2026 | Execution of final settlement agreement. Presentation to and approval by HSAG Supervisory Board and/or Audit Committee, as required by corporate governance procedures. | C&H; HSAG General Counsel (Friedl); HSI President (Tran); HSAG Supervisory Board
April 2026 | Public announcement of settlement, as required by applicable law and regulation. Coordination with Braxton Merritt LLP (Elena Voss) on SEC Regulation FD compliance and with Kessler Pratt & Whitfield LLP (Dr. Tobias Engel) on MAR Article 17 ad-hoc disclosure obligations. | C&H; Braxton Merritt LLP; KPW; HSAG Investor Relations

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