Contract analysis

I. Introduction and Capacity This firm represents Verimark Hospitality Group Inc. ("Verimark" or "VHG"), a Delaware corporation publicly traded on the Nasdaq Stock Market under the ticker symbol VHMK, with its principal offices located at 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, Florida 33301. Verimark is one of the largest franchised hospitality platforms in the southeastern United States. Through

II. Identification of the Franchise License Agreements Coastal Palms and Verimark are parties to twenty-two (22) individual Franchise License Agreements, each governing the operation of a specific hotel property under one of Verimark's branded flags. These twenty-two FLAs cover hotel properties located throughout the State of Florida and the State of Georgia. The first of these FLAs was executed on June 15, 2007, for

III. Relevant FLA Provisions The following provisions of the FLAs are material to the breaches identified in this Notice. The section numbers cited below are uniform across all twenty-two FLAs. A. Gross Room Revenue Definition (FLA § 4.1)

Section 4.1 of each FLA defines "Gross Room Revenue" (or "GRR") as follows: "Gross Room Revenue" or "GRR" shall mean all revenues derived from or attributable to the rental of guest rooms at the Hotel, including revenues from any booking channel, direct or indirect, and regardless of the entity collecting such revenue. For purposes of this definition, Gross Room Revenue shall be calculated on a gross basis, without d

Section 4.2 of each FLA requires the franchisee to pay a marketing-fund contribution equal to two and one-half percent (2.5%) of Gross Room Revenue, calculated and reported monthly on the same schedule as the royalty fee. These contributions are deposited into the Verimark National Marketing Fund, which is utilized for system-wide advertising, brand development, and marketing initiatives that benefit all franchised p

Section 4.3 of each FLA imposes a flat per-room, per-month technology fee of twelve dollars and fifty cents ($12.50) per available room. This fee is subject to annual adjustment based on the Consumer Price Index ("CPI"), with such adjustment capped at a maximum of three percent (3%) per year. The technology fee is intended to cover the costs associated with Verimark's proprietary reservation system, property manageme

Section 4.6 of each FLA provides that any underpayment or late payment of amounts owed under the FLA shall accrue interest at the rate of one and one-half percent (1.5%) per month, compounded monthly, from the date such payment was originally due until the date of actual payment. This provision applies to underpaid royalties, marketing-fund contributions, technology fees, and any other amounts due under the FLAs. F.

Section 8.2 of each FLA grants Verimark the right to audit, inspect, and examine the franchisee's books, records, accounts, tax returns, and any other financial documentation related to the operation of the franchised property and the calculation and reporting of Gross Room Revenue. Verimark may exercise this right upon ten (10) business days' written notice to the franchisee. The FLAs further provide that if any suc

Section 14.1 of each FLA establishes a general cure mechanism, providing that upon written notice of a material breach by the franchisor, the franchisee shall have a period of thirty (30) calendar days from the date of receipt of such notice to cure the identified breach. If the breach is not cured within the thirty-day period, the franchisor shall be entitled to terminate the FLA and to pursue all available remedies

Section 15.3 of each FLA provides that upon termination of the FLA for cause attributable to the franchisee, the franchisee shall be liable to pay liquidated damages in an amount equal to three times (3×) the trailing-twelve-month royalties paid or payable with respect to the terminated property. The parties have agreed that this liquidated damages provision represents a reasonable estimate of the damages Verimark wo

IV. Facts Giving Rise to the Material Breach A. The Whistleblower Report On November 8, 2021, Janet Kerrigan, a former regional controller employed by Coastal Palms, contacted Verimark's compliance hotline. Ms. Kerrigan had served as a regional controller for Coastal Palms from approximately March 2016 until her termination by Coastal Palms in October 2021. During her tenure, Ms. Kerrigan was directly involved in the

V. Quantification of Underpayments Based on the preliminary findings of the Thornbury & Associates audit, Verimark has calculated the following estimated underpayments attributable to Coastal Palms' breaches of the FLAs: To provide further context for the scale of the underreporting: for fiscal year 2021 alone, Coastal Palms reported aggregate Gross Room Revenue of one hundred twelve million four hundred thousand dol

VI. Declaration of Material Breach Based on the foregoing, Verimark hereby declares that Coastal Palms is in material breach of each of the twenty-two Franchise License Agreements. The conduct described above — specifically, the systematic diversion of guest-room revenue through Suncoast Room Management Inc., the operation of the unbranded gulfcoastrooms.com booking channel as a mechanism to circumvent the GRR report

VII. Demand for Cure Verimark demands that within thirty (30) calendar days of the date of this Notice — that is, by no later than March 6, 2022 — Coastal Palms take the following actions in full and without reservation:

1. Immediate Cessation of Revenue Diversion. Coastal Palms shall immediately cease and permanently discontinue all practices of diverting guest-room revenue through Suncoast Room Management Inc., gulfcoastrooms.com, or any other entity, channel, or mechanism through which guest-room revenue is collected but not reported to Verimark as Gross Room Revenue. Coastal Palms shall take immediate steps to shut down the gulfc

2. Corrected GRR Reports. Coastal Palms shall provide Verimark with complete, accurate, and verified Gross Room Revenue reports for all twenty-two (22) franchised properties for the entire period from January 1, 2013 through the date of this Notice. These corrected reports shall include all revenue previously diverted through Suncoast Room Management Inc. or otherwise excluded from prior GRR reports, and shall reflec

3. Payment of All Underpaid Amounts. Coastal Palms shall pay all underpaid royalties (at 5% of the corrected GRR), all underpaid marketing-fund contributions (at 2.5% of the corrected GRR), and all underpaid technology fees (including technology fees for the 214 unreported rooms), together with all accrued late-payment interest at the rate of 1.5% per month, compounded monthly, as provided under FLA § 4.6. Based on V

4. Complete Access to Books and Records. Coastal Palms shall provide Verimark and its authorized representatives (including Thornbury & Associates and this firm) with complete, unrestricted, and immediate access to all books, records, financial statements, bank statements, tax returns, merchant processing records, OTA remittance records, reservation system data, and all other financial data and documentation of Coast

5. Written Explanation of Revenue-Reporting Methodology. Coastal Palms shall provide Verimark with a detailed written explanation, certified as accurate by Randall Brecker in his capacity as Managing Member, of the revenue-reporting methodology employed by Coastal Palms and its affiliated entities since January 1, 2013. This explanation shall include: (a) a complete identification of all entities and booking channels

VIII. Reservation of Rights Verimark expressly reserves all rights and remedies available to it under the FLAs, applicable law, and equity, including but not limited to the following: • The right to terminate each of the twenty-two (22) FLAs for cause under Section 14.2(c), upon written notice, and to seek liquidated damages in the aggregate estimated amount of $105,500,000 under Section 15.3 of the FLAs, as set fort

IX. Consequences of Failure to Cure If Coastal Palms fails to fully cure the material breaches identified herein within the thirty (30)-day cure period — that is, by March 6, 2022 — Verimark will pursue all available remedies with the full force and resources at its disposal, including without limitation: • Immediate termination of each of the twenty-two (22) Franchise License Agreements for cause, with all consequen

X. Direction for Response Any and all responses to this Notice, and all further communications regarding this matter, should be directed exclusively to the undersigned at the following address: Priya Anand, Partner Calderwood & Harkness LLP 110 SE 6th Street, Suite 2800 Fort Lauderdale, Florida 33301 Telephone: (954) 761-8217 Email: panand@calderwoodharkness.com Coastal Palms and its counsel should direct all communi