Plaintiffs Atlantic Wave Holdings, LLC and Strikepoint Consulting LLC’s Update re: Motion to Vacate

David M. Keithly, State Bar No. 292101 dkeithly@mortensontaggart.com Sara K. Ross, State Bar No. 346153 sross@mortensontaggart.com MORTENSON TAGGART ADAMS LLP 300 Spectrum Center Drive, Suite 1200 Irvine, California 92618 Telephone: (949) 774-2224 Facsimile: (949) 774-2545

Attorneys for Plaintiffs and Counterclaim Defendants ATLANTIC WAVE HOLDINGS, LLC and STRIKEPOINT, LLC

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA

ATLANTIC WAVE HOLDINGS, LLC, a Virginia limited liability company and STRIKEPOINT CONSULTING, LLC, a Virginia limited liability company, Plaintiffs, VS. CYBERLUX CORPORATION, a Nevada Corporation; MARK D. SCHMIDT, an individual; and DOES 1 to 50, Inclusive,

Defendants.

CASE NO. 3:24-cv-00482-RBM-VET Honorable Ruth Bermudez Montenegro

PLAINTIFFS ATLANTIC WAVE HOLDINGS, LLC AND STRIKEPOINT CONSULTING, LLC'S UPDATE RE: MOTION TO VACATE

ORAL ARGUMENT REQUESTED

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Plaintiffs Atlantic Wave Holdings, LLC and Strikepoint, LLC (collectively, "Plaintiffs") submit this update to the Court in accordance with the Order dated July 22, 2024 (Doc. 26), which denied Plaintiffs' Ex Parte Application for an Order to Require Defendant to Post a Bond and directed supplemental briefing on Defendant Cyberlux Corporation's Motion to Vacate the domesticated judgment. Since the Court's Order, Plaintiffs have diligently pursued enforcement of the judgment and uncovered further evidence of Defendants' ongoing misconduct, financial instability, and continued breach of the settlement agreement.

Defendants have engaged in actions that have significantly delayed the enforcement of the judgment. They improperly filed the same declaratory relief actions as counterclaims in our collection action and then re-filed them as a request for declaratory relief on the original case in Virginia, even though it had been closed since the final judgment was issued. After this Court dismissed those same claims on grounds of forum non conveniens, Defendants finally filed new actions in Virginia. Despite claiming to seek injunctive and immediate declaratory relief, Defendants have not responded to our counsel or to discovery requests, and they are clearly attempting to delay proceedings at every turn.

Since August 2023, Defendants have failed to make required payments under the settlement agreement, provide requested information on drone sales, and have made several late payments. Despite receiving a substantial $38 million payment from a US Government contract in September 2023, Defendants misused these funds for personal expenses and transfers. Bank records obtained in discovery show that over $4 million was transferred to Defendant Mark D. Schmidt and his associates. Specific transfers include $250,000 on September 8, 2023, $213,000 on September 11, 2023 for a car purchase, and $850,000 on October 16, 2023 to Schmidt's Edward Jones account, among many others. The total amount of these transfers is $4,417,205.06.

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Furthermore, Defendants violated the May 31, 2024, Court Order by misusing $317,000 in garnished funds intended for payroll purposes. This misuse of funds directly contravenes the Court's directive and further demonstrates Defendants' disregard for their legal obligations and the authority of this Court.

Plaintiffs have continued their efforts to collect the judgment through garnishment proceedings in Virginia and Texas, and by scheduling depositions of key Cyberlux personnel. These enforcement actions have been met with resistance and non-compliance from Defendants. Both Neil Whiteley and Phillip Tucker were served in Texas, with depositions set for August 27, 2024. However, Defendants filed a motion to vacate our judgment in Texas, which automatically stayed discovery. Additionally, a deposition in Virginia was scheduled for August 27, 2024, but Defendants did not appear, resulting in a non-appearance. This consistent failure to comply with discovery obligations further highlights the urgency of lifting the stay to allow Plaintiffs to continue their collection efforts.

Defendants' refusal to provide requested information on drone sales and their pattern of transferring significant sums of money to personal accounts, friends, and family members, while ignoring their obligations to Plaintiffs and the IRS, underscores the critical need for immediate court intervention. Plaintiffs have uncovered that, despite public statements and financial reports indicating drone sales, Defendants have continually denied such sales in communications with Plaintiffs. An email from Doug Grimes explicitly stated, "we did not sell any drones," contradicting financial records showing payments received for drone sales.

Given these developments and the ongoing dissipation of assets by Defendants, Plaintiffs respectfully request that the Court deny Defendants' Motion to Vacate the domesticated judgment and lift the stay to allow Plaintiffs to pursue collection efforts. Plaintiffs also request a hearing to address any questions the Court may have and to avoid further delay. Immediate court intervention is necessary to prevent further

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evasion of financial responsibilities by Defendants and to secure the assets needed to satisfy the judgment.

Plaintiffs initiated a straightforward collection action in California to enforce the Virginia Judgment against Cyberlux's wholly-owned subsidiary, Datron, Inc., located in Vista, California. This action was necessary due to Defendants' consistent breaches of the settlement agreement and failure to comply with their payment obligations. This action is stayed pending the resolution of Defendants' Motion to Vacate Domesticated Judgment. (Dkt. Nos. 9, 12, 13; Declaration of William Welter ("Welter Decl.") at [2).

The original action in Virginia resulted in the Settlement Agreement (Dkt. No. 15 |24-1) and the Amended Final Order and Judgment ("Virginia Judgment") (Dkt. No. 9-2 at p. 29), which form the basis of Plaintiffs' collection efforts. After Plaintiffs garnished Defendants' funds held in PNC and Towne Bank accounts, Defendants filed an emergency motion seeking access to the garnished funds. (Welter Decl. at 1 4, Ex. A). Defendants sought declarations regarding the validity and enforceability of the settlement agreement. (Id.) The court initially allowed Cyberlux to access up to $317,000 for payroll purposes and $230,000 to pay Plaintiffs. (Welter Decl. at 1| 5, Ex. B). This initial relief was granted to address alleged urgent payroll needs and partial payment obligations. (Id.) Bank records obtained in discovery show that the same day the Court issued the temporary order, Cyberlux requested a check for $198,798.37 to pay its attorneys' fees. (Welter Decl. at | 6).

However, the same judge who signed the original Judgment and Order later found that Defendants' request for declaratory relief was improperly filed. In the June 7, 2024, Opinion and Order, the court dismissed Defendants' declaratory relief

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complaint and awarded Plaintiffs their attorneys' fees for defending against the improperly brought action. (Welter Decl. at |7, Ex. C). Subsequently, on August 9, 2024, the court released $183,798.34 from PNC Bank and $4,862.86 from Towne Bank to Plaintiffs. (Welter Decl. at | 8, Exs. D & E).

On July 8, 2024, Cyberlux filed a Declaratory Relief action and a Complaint for Temporary Preliminary Injunction in Virginia. (Welter Decl. at | 9, Ex. F). Despite these filings claiming the need for emergency relief, Defendants have done nothing to schedule a hearing or submit further briefing regarding their so-called emergency. (Welter Decl. at [ 10). This inaction strongly suggests that the filings were intended to delay enforcement rather than to address any substantive legal issues.

Additionally, Defendants have ignored several letters from Plaintiffs' counsel regarding deposition scheduling, demonstrating their refusal to engage in the legal process. (Welter Decl. at | 11, Exs. G, H, & I). For instance, letters sent by Plaintiffs' counsel on August 6, 2024, August 9, 2024, and August 23, 2024, went unanswered. Defendants also failed to respond to discovery requests and did not appear for a deposition scheduled for August 27, 2024, resulting in a non-appearance. (Welter Decl. at | 12, Ex. J).

In Texas, the Virginia judgment was domesticated, and garnishment proceedings were initiated to obtain assets related to Cyberlux's subsidiary, Catalyst Machine Works. (Welter Decl. at | 13). However, Defendants filed a motion to vacate the domesticated judgment, which automatically stayed the proceedings. (Id.) Depositions of Cyberlux's PMK and other personnel were scheduled for August 27, 2024, but did not occur due to the motion to vacate. (Id.)

When attempting to serve the PMK subpoena, the process server noted that there were no vehicles parked at the address, and there was no answer at the door. (Welter Decl. at | 14). Employees in the leasing office confirmed that Neil Whiteley and Phillip Tucker work at this address but are not currently in possession of their

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office as they are negotiating the terms of their lease. (Id.) This further complicates Plaintiffs' efforts to enforce the judgment and highlights Defendants' ongoing attempts to delay and obstruct the collection process.

Defendants have been in breach of the contract since August 2023. Despite multiple efforts by Plaintiffs to obtain compliance, Defendants have consistently failed to meet their obligations under the settlement agreement. The following outlines the key disputes and instances of non-compliance:

On July 31, 2023, Plaintiffs, through their principal, Will Welter, requested information from Defendants regarding the number of drones included in Cyberlux's contract with the Department of Defense (Dkt. No. 9-3 at p. 22). Cyberlux never responded to this request, violating their obligations under the settlement agreement (Welter Decl. at | 22).

On September 8, 2023, Welter again asked whether an extra payment made by Defendants was "related to the $5k per drone sold" provision in the Settlement Agreement (Dkt. No. 9-3 at p. 38). Cyberlux never responded to this request (Welter Decl. at | 23).

Welter renewed his request on October 2, 2023, emphasizing the significance of the information by stating, "Also, the agreement calls for accelerated payments ($5,000 per drone sold). Can you please let us know how many drones were sold? Would be nice to conclude these matters. Thanks" (Dkt. No. 9-3 at p. 55). Again, Cyberlux did not respond (Welter Decl. at | 24).

On October 9, 2023, Welter made another request for basic information: "Can you advise how many drones were sold?" (Dkt. No. 9-3 at p. 62). Once more, Cyberlux ignored this request for information they agreed to promptly provide under the settlement agreement (Welter Decl. at | 25).

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On November 2, 2023, Welter again asked for information related to drone sales: "Also, the initial drone transaction was mid-September. If the transaction has proceeded and if they pay the $5k per drone, that would conclude matters (beside the stock issues). As mentioned to you before, our goal has been to make a clean cut between the two companies. The proposed / new SA appears to prolong that by another 3 years. Lastly, any documents relevant to the drone transaction will be helpful. I've held back on requests for same thus far, however, I think reviewing the documents on the drone transaction will now be very helpful" (Dkt. No. 9-3 at p. 75). Cyberlux ignored this request as well (Welter Decl. at | 26).

Finally, on December 5, 2023, Welter once again requested information about drone sales: "We are still concerned about the Drone sales and the necessity to fulfill all the terms of and under the settlement agreement ($5k per Drone) upon the sale. As mentioned we have been dealing with this matter since fall 2021 and are ready to conclude. To that end, I ask again can you please send documentation relevant to the Drone sales" (Dkt. No. 9-3 at p. 80). Cyberlux also ignored this request (Welter Decl. at 1 27).

The settlement agreement defines requested information as being late if not received within ten (10) calendar days and states that any breach not cured within three (3) calendar days will be considered a breach of the agreement (Dkt. No. 24-1 at p. 11, § 21). Defendants' utter refusal to provide any information about drone sales is an ongoing breach of the Settlement Agreement.

Defendants do not deny making late payments under the settlement agreement. The agreement explicitly states that Defendants shall transmit thirty-six (36) non- defeasible monthly payments of $21,459.00 payable on the first day of each month, beginning in July 2023. (Dkt. No. 24-1 at pp. 5-6, §§ 4.a-4.c). Time being of the essence, these monthly payments were to continue on the first of each month until the total Settlement Consideration due to Plaintiffs was paid. Defendants also agreed to Case No. 3:24-cv-00196-RBM-VET

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accelerate and pay the full outstanding balance of all sums owed under the Consent Judgment within twenty-one (21) days of receiving payment for any contract to purchase drone aircraft (Id.).

The settlement agreement defines a late payment as any payment not received by the first of each month and states that any breach not cured within three (3) calendar days will be considered a breach of the agreement (Dkt No. 24-1 at p. 11, § 21). Specifically, Section 21 of the Settlement Agreement (Dkt. No. 24-1 at p. 11) states: "For the avoidance of doubt, any payment not received by the first of each month shall be deemed late, any information requested shall be due in ten (10) calendar days and, unless cured within 3 calendar days, will be considered a breach of this Agreement."

Despite these clear terms, Defendants have made several late payments and ceased payments due in June, July, and August 2024. (Welter Decl. at | 15). This failure to make timely payments constitutes a breach of the settlement agreement.

Defendants have claimed that Plaintiffs agreed to amend the terms of the settlement agreement or payment terms. This claim is categorically false. Plaintiffs never agreed to any modifications or amendments to the settlement agreement. (Welter Decl. at | 18). The terms of the agreement were clear and unambiguous, and Plaintiffs have consistently sought compliance with these terms. (Welter Decl. at 1 19).

Plaintiffs' requests for information and payments were made in accordance with the original terms of the settlement agreement. (Welter Decl. at | 19). At no point did Plaintiffs agree to alter or amend the payment schedule or any other terms of the agreement. (Welter Decl. at | 19). Defendants' assertions are unsupported and appear to be an attempt to justify their continued non-compliance and breaches of the settlement agreement.

The settlement agreement explicitly states that any modification or amendment must be in writing and signed by both parties. (Dkt. No. 24-1 at p. 10, § 16). No such Case No. 3:24-cv-00196-RBM-VET

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written amendment exists. (Welter Decl. at | 20). Plaintiffs have fulfilled their obligations under the agreement and have made multiple attempts to secure compliance from Defendants, who have continually failed to meet their contractual responsibilities.

There is a remaining dispute over the Caveat Emptor status of Cyberlux's stock. According to the settlement agreement, Defendants promised that the Caveat Emptor status would be removed from their stock on or before December 31, 2023. (Dkt. No. 24-1 at pp. 4-5, § 2.e). As of the date of this filing, the Caveat Emptor status has not been removed. (Welter Decl. at | 33, Ex. K).

While this dispute remains unresolved, it is not a subject of Plaintiffs' collection action, which deals solely with the enforcement of the amended final judgment and order. (Dkt. No. 9-2 at p. 29).

Bank records obtained in discovery in Virginia show that Cyberlux received a payment of $38 million from a U.S. Government contract to supply drones to Ukraine in September 2023. (Welter Decl. at | 34). Despite receiving this substantial amount, Defendants misused these funds for personal expenses and cash transfers instead of fulfilling their obligations under the settlement agreement. This misuse of funds further demonstrates Defendants' disregard for their contractual responsibilities and highlights the urgency for immediate court intervention.

Bank records obtained in discovery reveal that Defendants transferred significant sums of money to personal accounts, friends, and family members, beginning on the same day the $38 million was transferred into Cyberlux's account. (Welter Decl. at | 36). Instead of making the required payments to Plaintiffs,

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Defendant Mark D. Schmidt and his associates diverted these funds for personal use. Specific transfers include:

· $250,000 phone transfer authorized by Mark Schmidt on September 8, 2023;

· $213,000 wire to Fletcher Jones Motorcars on September 11, 2023 for a vehicle purchase;

· $175,000 phone transfer authorized by Mark Schmidt on September 13, 2023;

· $187,500 phone transfer authorized by Mark Schmidt on September 14, 2023;

· $600,000 phone transfer authorized by Mark Schmidt on September 20, 2023;

· $692,689 member debit memo on September 26, 2023;

· $850,000 on October 16, 2023 to Schmidt's Edward Jones account (Welter Decl. at | 37).

The total amount of these transfers is $4,417,205.06. (Id.) These unauthorized transfers are a clear violation of the settlement agreement, which required Defendants to make timely payments to Plaintiffs and provided for accelerated payments upon receipt of substantial funds from drone contracts. (Dkt. No. 24-1 at pp. 5-6, §§ 4.a- 4.c).

Following the garnishment of Defendants' funds held in PNC and Towne Bank accounts and subsequent court orders, Plaintiffs applied the remaining garnished funds to reduce the total amount Defendants owe. Specifically, $183,798.34 from PNC Bank and $4,862.86 from Towne Bank were released to Plaintiffs on August 9, 2024. (Welter Decl. at | 31). These amounts were applied to partially satisfy Defendants' outstanding obligations under the settlement agreement. (Id.)

Defendants' last regular payment was made in May 2024. (Welter Decl. at 1 16). Since then, Defendants have not made any further payments. (Id.) This cessation of payments, coupled with Defendants' refusal to provide any information on the number of drones sold, further complicates the accurate determination of the total Case No. 3:24-cv-00196-RBM-VET

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amount owed. Despite receiving $38 million under a US Government contract to supply drones to Ukraine, Defendants have consistently failed to provide the required information and payments as stipulated in the settlement agreement.

This persistent non-compliance and financial mismanagement underscore the need for immediate court intervention to ensure that Plaintiffs can enforce their rightful claims under the settlement agreement and secure the assets needed to satisfy the judgment.

As of August 2024, the outstanding amounts due under the Settlement Agreement are as follows:

· Atlantic Wave Holdings, LLC and Secure Community, LLC (AWH/SC)

· Principal: $430,295.59

o Interest Due: $95,000.62

o Total Owed: $525,296.21

· StrikePoint, LLC

· Principal: $372,669.40

o Interest Due: $79,916.69

o Total Owed: $452,586.09

Grand Total Owed: $977,882.31 (Welter Decl. at | 32).

Given the ongoing breaches of the settlement agreement, the misuse of funds, and the failure to comply with court orders and discovery obligations, Plaintiffs respectfully request that the Court deny Defendants' Motion to Vacate the domesticated judgment. Plaintiffs further request that the Court lift the stay on collection efforts and schedule a hearing to address these matters urgently. Immediate court intervention is necessary to prevent further dissipation of assets and to ensure that Plaintiffs can recover the amounts owed under the settlement agreement.

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By: David M. Keithly Attorneys for Plaintiffs ATLANTIC WAVE HOLDINGS, LLC STRIKEPOINT, LLC, and SECURE COMMUNITY, LLC