Executive

To: Dr. Anthony Barnaby, President and CEO, NanoLance Inc.

From: Alex Hoffmann and Team, The Agency.

Re: Findings and Recommendations — Final Report, Case #516

Dr. Barnaby:

In response to your request to investigate certain issues occurring at NanoLance, as formulated in our meeting that took place on May 3 of this year, we are hereby filing our findings and recommendations.

The four primary issues brought to our attention on May 3 were as follows:

1. An anonymous note, received by you at the company Christmas party last year, containing the following message: Please stop this insanity or more people will die.

2. Unexplained stock price fluctuations, synchronized with your announced intentions to sell your stock.

3. Low employee engagement scores, with little additional feedback.

4. Potentially related drone incident taking place overseas, in Kandahar, Afghanistan, leading to loss of lives in a friendly fire incident.

Section A — Findings

The Agency approached this case by deploying Alex Hoffmann, on site, as a newly hired director of infrastructure and support. I am presenting below the leadership profiles of all the members of NanoLance's senior leadership team. Their roles in the issues listed above are complex and interlaced.

► Benjamin Walker, Chief Operating Officer

Walker is the typical toxic leader, an aggressive and abusive bully, displaying sadistic behavior on numerous occasions. He thrives on publicly humiliating employees, demoralizing and intimidating them into obedience. He pushes them into taking fear-driven actions that are against their better judgments or against any common business sense. However, he doesn't hesitate to hold them accountable for his actions, when the results are bad.

It is my finding that Walker, by applying unnecessary pressures on the employees, pressures that deserve to be called psychological torture, has led to overall decreases in product quality. Walker has repeatedly requested his teams to drive down costs by significant percentages. This request, unaligned with the overall company priorities and unjustified by the company's financial health, was a self-serving goal that will be explained later. While all companies should be cost conscious and should maintain good controls to ensure that costs are contained, Walker has set the cost-cutting goals at unachievable levels, driving product quality down and stifling innovation.

► Dustin Sheppard, Chief Technology Officer

Sheppard has a hatred for the human race that can't be compared to anything I have ever seen. His deep contempt for people is revealed through every word he speaks and every action he takes. Just this trait should disqualify Sheppard from managing in any people-leading roles.

He is not open to any feedback from his employees and doesn't set clear goals, preferring to maintain a generalized state of anxiety in the employees. His team members are second-guessing themselves in a constant attempt to figure out what he really wants so they can offer it to him. Besides being totally non-constructive, his dictatorial and discourteous attitude prevents people from seeking his support. Therefore, as a leader, Sheppard is highly dysfunctional.

► Angela Prescott, Vice President, Human Resources

Prescott is a charismatic figure, mostly displaying political correctness. In her role as an HR leader, she should have brought to the attention of the CEO all issues concerning the well-being of the organization and its employees, such as Walker's continued abuse. She has not fulfilled this role, preferring a defensive stance in which she simply "plays along." This defensive stance could be motivated by the personal, intimate relationship she has with Walker. Nevertheless, Prescott failed in her role. More details will follow on Prescott's involvement in this complex case.

► Chandler Griffiths, Chief Sales Officer

Griffiths is a highly professional and effective leader and raised no concerns during this investigation. He is respected by his employees and is supportive of his team.

► Audrey Kramer, Chief Financial Officer

In the case of Kramer, we will summarize the findings and recommendations a little later in this report. The main issue concerning Kramer doesn't involve her leadership abilities.

Going back to the list of issues brought to our attention, here are our findings:

1. The anonymous note

We have identified the author of the note as Janet Templeton, director of manufacturing quality. During my conversation with her, she had expressed concerns regarding the loss in product quality. It was her finding that these losses in quality were being driven by cost-cutting initiatives that were both unrealistic and unachievable.

Unfortunately, Janet was killed in a car crash, under suspicious circumstances. A contact at the San Diego Police Department has been notified and the case will remain open into the investigation about her death.

I have attached a chart that Janet created that examines quality rates over a period of time. The chart identifies events that triggered, in her well-documented opinion, these quality rates to decline. The correlation is obvious, linking cost pressures with declining product quality.

It is my belief that, due to the strong correlation between the two, reversing the current trend will be easily achievable in a timely manner.

The Agency team couldn't identify with any precision which deaths Janet was referring to in her note. Since she wrote the note in December, it could not have been related to the Kandahar incident in April. Last year, few drone-related casualties were reported, no friendly fire incidents, and no incidents took place on US soil either.

The only potential death we could presumably link to Janet's note is the death of Sebastian Williams, former director of operational effectiveness at the Alpine plant. Williams died of a heart attack in October of last year. He was one of the most vocal opponents of the cost-driven actions and employee reductions at the plant. His cardiologist has confirmed for us that Williams had been complaining of stress-related chest pains and blood pressure, and that he had indicated the work environment as being the source of his elevated stress.

2. The unexplained stock price fluctuations.

We have uncovered the fact that four of the five senior leaders at NanoLance were planning to gain control over the company by acquiring the stock that you would be selling in preparation for your retirement. These leaders are Walker, Sheppard, Prescott, and Kramer.

There is nothing wrong with this intention by itself. However, to allow them to obtain control of more than 50 percent of the outstanding shares, the four needed to come up with a considerable amount of cash, which they don't currently possess. The following actions were taken to address their shortage of cash:

• Significant padding of specific, hard-to-trace expenses. Kramer was the orchestrator of this action, setting up overpaid contracts with offshore providers, for services that are hard to quantify and trace, such as outsourced research and development, software architecture, design and development, application testing, etc. This strategy maintained the company's profit margins at relatively low levels, thus keeping the stock price under control. This strategy also led to the accumulation of significant amounts of cash, in various offshore accounts, with the intention to provide the group with the liquidity needed to purchase the stock. Kramer is on tape admitting to this entire scheme, while holding me at gunpoint and setting me up to be killed by a drone, on the Alpine test field, on July 15. The FBI has stepped in to ensure the accounts are frozen and the funds are seized and returned.

• Deliberate leaks to the press, placing the company under unfavorable light, with the intention of driving down the stock price. Walker put pressure on Prescott to "get him something worth reading in the press." While this in itself is inconclusive, we have Prescott's cell phone records, showing she twice dialed a News of the Hour direct phone number. These calls took place on days before major releases of reports that were highly damaging to the company's reputation and stock price.

• These two separate, yet concerted, sets of actions were carefully timed to maximize the damage. They are responsible for the stock price losing almost 50 percent of its value. The size of the financial loss due to the oversized expenses is yet to be determined, as it would require your permission and guidance on how to investigate, report, and correct this issue. Recovering the offshore cash deposits could potentially pose additional challenges.

3. Low employee engagement scores.

Considering the depth of the damage uncovered with respect to the other issues, it is my strong belief that by replacing the ineffective or corrupt leaders, and by properly communicating the change and its reasons to the broader organization, the employee engagement will be restored. A key point in regaining employee trust would be to recognize the process failures and to set strategies to correct these failures, while giving assurances regarding the future. Clear, honest communication is essential.

4. Potentially related drone incident in Kandahar.

The drone that opened fire on a Canadian patrol in Kandahar last April was a NanoLance drone. However, findings indicate that there is no company liability in this case. The preliminary investigation into the incident has determined that the drone operators were at fault. A US Air Force liaison was able to secure some details about the events of that day. Allegedly, the two operators of the Kandahar drone were aware that the drone had the self-guidance module installed for testing purposes. They were flying the drone over a lengthy distance, from one base to another.

During this commute, no actions were required on their part, other than keeping the drone on course, speed, and altitude. They decided, on their own, to switch on the self-guidance software for a while, without any authorization, and go outside for a smoke. Being unaccustomed with operating the self-guidance module of the drone, they failed to put the safety measures in place, specifically those designed to keep the drone from launching missiles at unconfirmed targets, or to open fire on its own. Therefore, it can be concluded that NanoLance had no responsibility in the Kandahar incident.

However, the subsequent incident that took place in Florida can be blamed on intermittent defects preventing the drone from being under the control of its operators. During this separate investigation, we have learned that these operators also would engage in short, self-guided flights with their drones, lacking proper authorization. However, this was not the case on the day of the Florida incident. The Florida drone came in and out of control with the ground operators, despite their desperate attempts to control it, causing its flight path to be unpredictable, and the consequences to be dire.

This reported behavior is consistent with the lower-grade circuit boards found at the plant. Lower quality circuit boards can lead to intermittent defects, and this drone appeared to have been equipped with a faulty circuit board affecting its navigation and / or communications module(s). The US Air Force is yet to release complete official findings in this case.

Section B — Recommendations

1. Staffing

I would highly recommend the immediate termination of the following personnel:

• Benjamin Walker, COO

Future investigations will be conducted by the authorities regarding Walker's involvement into criminal activities. An indictment is highly likely, in case he is found responsible for instigating Prescott into leaking damaging information to the press. He is also under investigation for a series of SEC violations.

His replacement could well be John Dunwood, vice president of manufacturing. Dunwood is a well-respected and dedicated man with great operational experience, a passion for his work, and consideration for his employees. His moral compass is unaffected by his tenure as a direct report of Walker's. He has my full endorsement for the role of COO.

• Dustin Sheppard, CTO

Further investigations will also be conducted in his case, probing into his involvement into padding technology expenses. Regardless of outcome, his employment should be terminated immediately.

• Angela Prescott, VP, HR

Prescott's contribution to the media leaks will probably not attract any legal consequence, due to the media scandal that would ensue. Therefore, we would highly recommend you avoid pursuing the media leaks angle.

However, following my arrest for drug possession on July 2, after being framed by someone in the office, our team deployed a drug-sniffing dog to identify who planted the drugs in my coffeemaker and my car. The sniffing dog led us straight to her office, where we found a stash of drugs with precisely the same formulation as the packet found in my car. That matter is now in the hands of the San Diego Police Department. They have promised to discreetly handle this matter and are waiting for our approval to take her into custody.

During the course of the police investigation, we are expecting Prescott to name Walker as a partner and instigator, which will probably lead to additional charges against Walker.

• Audrey Kramer, CFO

Kramer will be arrested shortly for a variety of charges, spanning from multiple accounts of fraud and SEC violations, including a charge for attempted murder, in regard to the incidents that took place in the test field on July 15.

There is a strong possibility that Kramer contacted a professional to intimidate and/or kill me. This individual is in police custody; however, he has not yet confirmed anyone's involvement, but the investigation continues. We have no reasons to believe this attack was random; therefore, we are expecting at least one of the conspirators to be named in this case.

• Peter Wilson, director of Six Sigma.

Peter Wilson has demonstrated support for Walker's practices on numerous occasions. He should be made aware that in his role he needs to do what's right, at any cost, rather than taking the easy way out.

• Robin Maxwell, HR Manager

Maxwell has failed in her role of HR manager by repeatedly enabling Walker during his abusive outbursts in operational meetings. She should not be kept on staff.

2. Damage Control

Restoring product quality, safety, and reliability is an immediate priority and can be executed with some investment into the operational cost structure.

There will be financial losses associated with the quality issues containment, losses driven by the destruction of all substandard components, and by the recall of all the drones that have had substandard components installed.

A recall is mandatory in this case, yet quite easy to execute. The execution of the recall could be shared with the media and used to restore the public's confidence in the company's quality and reliability standards.

A potential recall might be warranted for the GPS devices. Due to the lack of hazard associated with those potential failures, I would recommend an "as needed" recall, replacing all reported defective products with a new product, ensuring that consumers will be satisfied with the company's approach to handling the defects and spreading out, over time, the associated costs.

Finally, I recommend adding a higher security control mechanism around the self-guiding software, ensuring that only properly authorized personnel can access and control it.

3. Public Relations

The firm of Leesman & Koch has been retained to assist in this case. It is ready to proceed with the communication strategy and press releases meant to ensure that the shareholder confidence is restored as soon as possible.

Further exposure could be a possibility; however, taking immediate recall action should contain the risk and make it a non-issue.

Regarding the incidents still awaiting public disclosure of findings, the Florida incident could generate the biggest damage. Leesman & Koch will work with the company's retained counsel to ensure proactive management of the damage and reparation to the families of those killed or injured in the incident.

4. Final Notes

Note #1: Mr. Louie Blake, Senior Analyst in Infrastructure and Support, has accepted an offer of employment from The Agency. He will be starting with us on August 1st. His role in solving this case was a significant one, and he has demonstrated the rare combination of skills and personality traits needed to be successful in our line of work. We apologize for headhunting this employee away from NanoLance.

Note 2: An anti-slip coating should be applied to the main lobby floor at NanoLance Corporate Headquarters. It's very slippery, hence unsafe.

Conclusion

Restoring NanoLance to its previous state will not be an easy task, but it's not impossible.

Please count on our continued support with implementing the suggested recommendations or with any further needs you might have for our services.

Best personal regards,

Alex Hoffmann, Executive