Contract analysis

I. BACKGROUND — THE FRANCHISE RELATIONSHIP Coastal Palms entered into its first Franchise License Agreement with Verimark on June 15, 2007, for the operation of a single Verimark Suites branded hotel property located in Naples, Florida. That initial agreement marked the beginning of what would become one of the largest multi-unit franchise relationships in Verimark's system. Over the ensuing twelve years, Coastal Pal

II. CONTRACTUAL OBLIGATIONS — REVENUE REPORTING AND PAYMENT Under each of the twenty-two FLAs, Coastal Palms is required to report Gross Room Revenue on a monthly basis and to remit the following payments to Verimark: (a) Royalty Fee. Pursuant to FLA Section 4.1, Coastal Palms is obligated to pay Verimark a continuing royalty of five percent (5%) of Gross Room Revenue. Section 4.1 defines "Gross Room Revenue" or "GRR

III. DISCOVERY OF THE REVENUE DIVERSION SCHEME On November 8, 2021, a former Coastal Palms regional controller, Janet Kerrigan, contacted Verimark's compliance hotline and reported that Coastal Palms had been systematically diverting revenue through off-platform booking channels and affiliated management entities, thereby materially understating GRR in its monthly reports to Verimark. Ms. Kerrigan served as a regiona

IV. AUDIT FINDINGS Following receipt of the whistleblower report, Verimark retained Thornbury & Associates CPAs LLP ("Thornbury"), a regional accounting firm based in West Palm Beach, Florida, to conduct a comprehensive franchise-compliance audit of Coastal Palms' operations. Thornbury was engaged on November 22, 2021, under the direction of lead audit partner Malcolm Thornbury, CPA. The initial phase of the audit fo

1. The ten (10) audited properties had underreported Gross Room Revenue by approximately twenty-six percent (26%) for the period spanning fiscal years 2019 through 2021.

2. The underreporting was attributable to both the Suncoast revenue diversion scheme and the improper netting of OTA revenues, consistent with the mechanisms described by Ms. Kerrigan.

3. Extrapolating the audit findings across all twenty-two (22) properties and across the full period during which the revenue diversion scheme appears to have been in operation — January 2013 through December 2021 — the estimated total underreported GRR is approximately One Hundred Ninety-Seven Million Eight Hundred Thousand Dollars ($197,800,000.00).

4. For fiscal year 2021 alone, Coastal Palms reported GRR of One Hundred Twelve Million Four Hundred Thousand Dollars ($112,400,000.00). Based on Verimark's forensic analysis, the estimated true GRR for fiscal year 2021 is approximately One Hundred Forty-Five Million Six Hundred Thousand Dollars ($145,600,000.00), indicating underreporting of approximately Thirty-Three Million Two Hundred Thousand Dollars ($33,200,00

5. The underreporting percentage varies by individual property and year, ranging from approximately twenty-two percent (22%) to thirty-one percent (31%) across the portfolio. These figures are preliminary and are based on the information currently available to Verimark and its auditors. As the investigation continues and as Verimark obtains access to additional records — including, critically, the complete financial

V. QUANTIFICATION OF UNDERPAYMENTS AND DAMAGES Based on the preliminary audit findings of Thornbury & Associates and Verimark's internal financial analysis, the cumulative underpayments resulting from the revenue diversion scheme, together with contractually available damages, are quantified as follows: A. Direct Underpayments The technology fee underpayment arises from the fact that Coastal Palms added a total of ap

VI. MATERIAL BREACH AND DEMAND FOR CURE The systematic underreporting of Gross Room Revenue, the diversion of room-rental revenues through Suncoast Room Management Inc. and the gulfcoastrooms.com website, the improper netting of OTA revenues, and the resulting failure to pay royalties, marketing-fund contributions, and technology fees owed under the FLAs constitute material breaches of FLA Sections 4.1, 4.2, and 4.3,

VII. RESERVATION OF RIGHTS — LIQUIDATED DAMAGES AND TERMINATION Verimark expressly reserves all rights and remedies available to it under the FLAs, at law, and in equity, including but not limited to the following: (a) Termination of all twenty-two (22) Franchise License Agreements for cause pursuant to FLA Section 14.2(c), based on the systematic underreporting of Gross Room Revenue; (b) Recovery of liquidated damag

VIII. LITIGATION NOTICE If Coastal Palms fails to tender full and complete cure of all breaches identified herein within the thirty (30)-day cure period — that is, if cure is not effected by March 6, 2022 — Verimark intends to file suit in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida, consistent with the mandatory venue provision set forth in each of the twenty-two Franchis

IX. PRESERVATION DEMAND Verimark hereby demands that Coastal Palms Franchise Holdings LLC, its principals (including Randall Brecker, Theresa Brecker, and Nolan Prescott), and all affiliated entities — including, without limitation, Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and Suncoast Room Management Inc. — immediately take all steps necessary to preserve all documents, electronically stored infor

X. REQUEST FOR RESPONSE We request that you respond in writing on behalf of Coastal Palms Franchise Holdings LLC and its principals no later than February 18, 2022, indicating (a) whether Coastal Palms acknowledges the breaches identified herein, (b) whether Coastal Palms intends to cure the identified breaches within the thirty (30)-day cure period, and (c) the specific terms and timeline on which Coastal Palms prop