Contract analysis

I. EXECUTIVE SUMMARY Calderwood & Harkness LLP ("C&H" or "the Firm") was retained by the Audit Committee (the "Audit Committee") of the Board of Directors of Verimark Hospitality Group Inc. ("VHG" or the "Company") to conduct an independent investigation into potential financial irregularities at VHG's wholly owned subsidiary, Verimark Coastal Resorts LLC ("VCR"). The engagement was authorized pursuant to an engageme

1. Premature Revenue Recognition. VCR systematically recorded timeshare-interest purchase deposits as completed-sale revenue upon the execution of purchase agreements, rather than upon the expiration of the statutory 10-calendar-day rescission period mandated by Florida Statute § 721.10. This practice, which violated ASC 606 (Revenue from Contracts with Customers) and VHG's own stated revenue-recognition policies, re

2. Expense-Reimbursement Fraud (Fictitious Vendor Scheme). Over a period of approximately 24 months, from July 2021 through June 2023, VCR processed 47 fabricated purchase orders purportedly for capital-improvement work at VCR resort properties. These purchase orders directed aggregate payments of $1.83 million to three shell entities that were beneficially owned or controlled by VCR executives, and no legitimate wor

II. BACKGROUND A. Verimark Hospitality Group Inc. Verimark Hospitality Group Inc. is a Delaware corporation whose shares of common stock are publicly traded on the Nasdaq Stock Market under the ticker symbol "VMRK." The Company maintains its corporate headquarters at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. VHG operates in the hospitality and real-estate sectors, with business lines encompassing res

III. INVESTIGATION METHODOLOGY A. Scope. The scope of the investigation, as defined in the engagement letter and subsequently refined in consultation with the Audit Committee, encompassed two principal areas of inquiry:

1. Premature Revenue Recognition. The investigation examined VCR's revenue-recognition practices with respect to timeshare-interest purchase deposits during the period from Q3 2022 (the quarter ending September 30, 2022) through Q2 2023 (the quarter ending June 30, 2023), with particular focus on whether timeshare deposits were improperly recognized as completed-sale revenue prior to the expiration of statutory resci

2. Expense-Reporting Irregularities (Fictitious Vendor Scheme). The investigation examined irregularities in VCR's expense-reporting and purchase-order processes during the period from approximately July 2021 through June 2023, with particular focus on whether fictitious vendor invoices were used to direct Company funds to entities lacking legitimate business operations. The investigation also examined the potential

IV. FINDINGS: REVENUE-RECOGNITION IRREGULARITIES A. Applicable Accounting Standards and Legal Framework The investigation's analysis of VCR's revenue-recognition practices was conducted against the framework of the applicable accounting standards and Florida statutory law. The key authorities are summarized below. ASC 606 — Revenue from Contracts with Customers. Under ASC 606, revenue is recognized when (or as) a rep

V. FINDINGS: EXPENSE-REIMBURSEMENT IRREGULARITIES (FICTITIOUS VENDOR SCHEME) A. Overview of the Scheme The investigation determined that, from approximately July 2021 through June 2023 — a period of approximately 24 months — VCR Controller Ryan Mateo Serrano created 47 fictitious purchase orders purportedly for "capital improvement" work at VCR resort properties. The purchase orders were attributed to three purported

1. Gulf Standard Contracting LLC ("GSC"). Gulf Standard Contracting LLC is a Florida limited liability company formed on March 12, 2021 — approximately four months before the first fictitious invoice attributed to the entity. The registered agent listed in GSC's articles of organization was Ryan Mateo Serrano. The sole member of GSC was Garrett W. Daskine, who held his ownership interest through a nominee arrangement

2. Clearwater Design Collective Inc. ("CDC"). Clearwater Design Collective Inc. is a Florida corporation formed on June 4, 2021. The registered agent listed in CDC's articles of incorporation was Ryan Mateo Serrano. The sole shareholder and sole director of CDC was Nicole Prescott. Prescott's ownership of CDC was established through corporate-formation records, Florida Annual Report filings, and bank-account records

3. Suncoast Property Services LLC ("SPS"). Suncoast Property Services LLC is a Florida limited liability company formed on November 18, 2021, approximately five months after the formation of GSC and CDC. Unlike GSC and CDC, for which Serrano served as registered agent, SPS used a commercial registered-agent service — Panhandle Agent Services Inc., based in Tallahassee, Florida. The sole member of SPS was Garrett W. D

VI. INDIVIDUAL FINDINGS This section sets forth the investigation's findings with respect to each of the three investigation subjects. A. Garrett W. Daskine — Division President, VCR Garrett W. Daskine served as Division President of Verimark Coastal Resorts LLC throughout the investigated period. Daskine is a 17-year VHG veteran who rose through the Company's hospitality-management ranks before being appointed to le