Contract analysis

I. EXECUTIVE SUMMARY The purpose of this memorandum is to recommend that the Board of Directors of Verimark Hospitality Group Inc. ("Verimark" or the "Company") authorize the undersigned counsel to negotiate and accept a settlement of the above-captioned litigation in the range of $75 million to $95 million in monetary consideration, together with substantial non-monetary relief, at the mediation session scheduled fo

II. PROCEDURAL POSTURE AND LITIGATION HISTORY A. Pre-Litigation Investigation The investigation that ultimately gave rise to this litigation was triggered by a whistleblower report submitted to Verimark's compliance hotline on November 8, 2021. The report was made by Janet Kerrigan, a former regional controller for Coastal Palms who had been terminated by Coastal Palms in October 2021. Ms. Kerrigan reported that Coas

III. DAMAGES ANALYSIS A. Verimark's Claimed Damages — Full Model Verimark's total claimed damages in this action amount to approximately $150 million. This figure is composed of the following elements, each of which is supported by the forensic analysis of Dr. Sharon Kettlewell and the franchise-compliance audit of Thornbury & Associates CPAs LLP:

1. Underreported Gross Room Revenue (2013–2021): The Thornbury/Kettlewell forensic estimate, based on analysis of Suncoast bank records, OTA reconciliations, PMS data, and property-level financial records across all 22 Coastal Palms properties, determined that total underreported GRR for the 2013–2021 period was approximately $197.8 million. This figure represents the difference between the GRR that Coastal Palms rep

2. Underpaid Royalties (5% of $197.8 million): Under Section 4.1 of each FLA, Coastal Palms was required to pay Verimark a continuing royalty equal to 5% of monthly GRR. Applied to the underreported GRR of $197.8 million, the resulting underpayment of royalties totals $9.89 million.

3. Underpaid Marketing-Fund Contributions (2.5% of $197.8 million): Under Section 4.2 of each FLA, Coastal Palms was required to contribute 2.5% of monthly GRR to Verimark's national marketing fund. Applied to the underreported GRR, the underpayment of marketing-fund contributions totals $4.945 million.

4. Underpaid Technology Fees: Separate from the GRR-based fees, Section 4.3 of each FLA requires the franchisee to pay a per-room technology fee of $12.50 per room per month to support Verimark's central reservation system, property-management system integration, and guest-loyalty platform. The Thornbury audit identified that Coastal Palms added a total of 214 rooms across 4 properties without providing the required

5. Subtotal of Direct Underpayments: $9.89 million + $4.945 million + $1.26 million = $16.095 million.

6. Contractual Late-Payment Interest (FLA Section 4.6): Each FLA provides that any amounts not paid when due shall bear interest at a rate of 1.5% per month, compounded monthly. Dr. Kettlewell's model calculates interest on each monthly underpayment from the date due through a projected judgment date of June 30, 2024. The resulting late-payment interest totals approximately $28.4 million. This figure reflects the com

7. Liquidated Damages (FLA Section 15.3): Upon termination of an FLA for material breach, Section 15.3 provides for liquidated damages equal to three times the trailing-twelve-month royalties for the affected property. Applied across all 22 properties using corrected (actual) GRR figures for the most recent trailing twelve months, the liquidated-damages claim totals approximately $105.5 million. This figure varies by

8. Grand Total — Claimed Damages: Approximately $150 million ($16.095 million in direct underpayments + $28.4 million in contractual interest + $105.5 million in liquidated damages). It is important to note that the $150 million figure represents the maximum amount Verimark could potentially recover under its contract claims. The actual recovery is subject to significant uncertainties, as discussed in Section III.D b

IV. LITIGATION-COST EXPOSURE THROUGH TRIAL A. Costs Incurred to Date (Through February 2024) Verimark has incurred substantial litigation costs in prosecuting this case through the summary judgment phase. As of the end of February 2024, the total costs incurred are approximately $8.7 million, broken down as follows: The Calderwood & Harkness fees of approximately $6.0 million represent roughly 88% of the total projec

V. COLLECTIBILITY ANALYSIS A. Ironclad National Bank Senior Lien Position A critical factor in evaluating any settlement or judgment in this case is the senior secured position of Ironclad National Bank ("Ironclad"). Ironclad, headquartered at 225 Peachtree Street NE, Suite 2600, Atlanta, Georgia 30303 (commercial real estate lending contact: Devon Schultz, Senior Vice President), holds first-lien mortgage loans on 1

VI. FRANCHISE-SURRENDER VALUE ANALYSIS A. Strategic Value of Franchise Surrender A critical non-monetary component of our recommended settlement is the requirement that Coastal Palms surrender its franchise rights to 14 of its 22 properties. This franchise-surrender provision serves both defensive and offensive strategic purposes for Verimark: it removes a non-compliant and untrustworthy franchisee from a significant