Contract analysis

I. Executive Summary This is the second interim status report submitted by Calderwood & Harkness LLP ("C&H") in connection with its independent investigation on behalf of the Audit Committee of the Board of Directors (the "Audit Committee") of Verimark Hospitality Group Inc. ("VHG" or the "Company"; Nasdaq: VMRK) into revenue-recognition irregularities and expense-reporting misconduct at Verimark Coastal Resorts LLC

1. Revenue Overstatement. VCR overstated revenue by approximately $26.4 million across four fiscal quarters (Q3 2022 through Q2 2023) as a result of the premature recognition of timeshare-interest purchase deposits as completed-sale revenue upon execution of the purchase agreement, rather than upon the expiration of the ten-day statutory rescission period mandated by Florida Statute § 721.10. This practice was incons

2. Expense-Reimbursement Irregularities. Approximately $1.83 million in VCR funds was channeled through forty-seven (47) fictitious purchase orders directed to three shell entities — Gulf Standard Contracting LLC, Clearwater Design Collective Inc., and Suncoast Property Services LLC — that are beneficially owned and controlled by Daskine and Prescott, with the assistance of Serrano. Preliminary fund tracing indicates

II. Investigation Team and Staffing The investigation team remains as constituted since the commencement of the engagement in July 2023. There have been no changes to staffing since the first interim report. Calderwood & Harkness LLP. The C&H investigation team is comprised of the following personnel: • Howard Quinn, Partner — Responsible Partner with overall supervisory authority over the investigation, including di

III. Document Collection and Review Update A. Collection Status At the outset of the investigation, the investigation team identified eleven (11) custodians whose documents were potentially relevant to the matters under investigation. These custodians include the three principal subjects (Daskine, Prescott, and Serrano) as well as eight additional VCR personnel in the operations, accounting, and vendor-management fun

IV. Witness Interviews — Summary of Subject Interviews A. Overview. Since the first interim report, the investigation team has made significant progress in the interview phase of the investigation. The team has conducted initial interviews of all three principal subjects — Serrano, Daskine, and Prescott — bringing the total number of interviews conducted to date to thirteen (13) interviews of eleven (11) unique witne

V. Preliminary Forensic Accounting Findings — Crestline Forensic Advisory LLC Crestline Forensic Advisory LLC has made substantial progress in its forensic accounting analysis since the first interim report. The following subsections summarize Crestline's preliminary findings with respect to (A) the revenue-recognition analysis and (B) the expense-reimbursement irregularity analysis. Crestline's work remains ongoing,

1. Scope and Methodology. Crestline analyzed VCR's timeshare-interest sales transactions for the period beginning with the third fiscal quarter of 2022 (quarter ending September 30, 2022) through the second fiscal quarter of 2023 (quarter ending June 30, 2023) — a total of four fiscal quarters. The analysis focused on the timing of revenue recognition relative to the ten-day rescission period mandated by Florida Stat

2. Findings — Revenue Overstatement by Quarter. Crestline's analysis confirmed that VCR systematically booked timeshare-interest purchase deposits as completed-sale revenue upon execution of the purchase agreement, rather than upon expiration of the ten-day statutory rescission period. This practice resulted in the premature recognition of revenue across all four quarters examined. Moreover, in numerous cases during

3. Impact on VHG Consolidated Financial Statements. The revenue overstatement at VCR is material to VHG's consolidated financial statements. The following analysis quantifies the impact: • VCR FY 2022 revenue as reported: $438.7 million. VCR's revenue constituted approximately 23.46% of VHG's consolidated revenue of $1.87 billion for FY 2022, making VCR a significant reporting segment. • FY 2022 revenue overstatement

4. ASC 606 Implications. As a preliminary matter, Crestline and C&H have evaluated VCR's revenue-recognition practices against the requirements of ASC 606, Revenue from Contracts with Customers. The preliminary conclusion is that VCR's practice of recognizing revenue upon execution of the purchase agreement — before the expiration of the statutory rescission period — was inconsistent with ASC 606's requirements in se

1. Scope and Methodology. In addition to the revenue-recognition analysis, Crestline analyzed VCR's capital-improvement expenditures for the period from July 2021 through June 2023 — a span of approximately twenty-four (24) months. The purpose of this analysis was to identify payments to vendors that could not be corroborated as legitimate contractors and to trace the flow of funds from VCR through any such vendors t

2. Shell Entity Identification. The three entities identified as shell entities, together with key details regarding their formation, ownership, and invoicing activity, are as follows: Gulf Standard Contracting LLC ("GSC") • Entity type: Florida limited liability company • Date of formation: March 12, 2021 • Registered agent: Ryan Mateo Serrano • Sole member: Garrett W. Daskine (through a nominee arrangement) • Numbe

3. Aggregate Improper Payments. The total payments from VCR to the three shell entities during the investigated period are as follows: The aggregate improper payments total $1,830,000 (approximately $1.83 million), disbursed through 47 fictitious purchase orders over an approximately two-year period. The largest single invoice identified in the analysis is Invoice No. GSC-2023-007, in the amount of $94,500, dated Feb

4. Fund Tracing — Preliminary Results. Crestline has commenced the process of tracing fund flows from VCR's operating bank accounts through the three shell entities to the ultimate recipients and uses of the diverted funds. This analysis involves review of bank statements, wire-transfer records, check images, and credit-card statements associated with the shell entities and their beneficial owners. While the fund-tra

VI. Coordination with External Parties A. Hargrove, Steen & Aldrich LLP (Independent Auditor) C&H continues to coordinate with HSA lead engagement partner William Gentry pursuant to the communication and information-sharing protocols established in C&H's letter to HSA dated August 9, 2023. These protocols were designed to facilitate appropriate information sharing between the investigation team and the independent au

VII. Status of Personnel Actions As reported in the first interim status report, Daskine, Prescott, and Serrano were placed on administrative leave, effective August 7, 2023, pending the outcome of the investigation. Administrative leave was implemented at the recommendation of C&H in order to preserve the integrity of the investigation and to prevent potential spoliation of evidence or interference with witnesses. A

VIII. D&O Insurance Considerations C&H has coordinated with VHG's general counsel and outside insurance-coverage counsel to ensure the preservation of the Company's rights under its directors' and officers' liability insurance program. The relevant policies are as follows: • Primary D&O Policy: Issued by North Atlantic Indemnity Corp., Policy No. NAI-DOL-2023-004891, for the policy period January 1, 2023 through Dece

IX. Budget and Cost Update The following is a summary of investigation costs incurred to date and projected total costs through the anticipated close of the investigation: Calderwood & Harkness LLP Fees incurred through October 15, 2023: approximately $1,850,000 (of an estimated total of $3,420,000 through investigation close). Current billing rates for the C&H investigation team are as follows: Crestline Forensic Ad

X. Anticipated Next Steps The investigation team anticipates undertaking the following key activities in the coming weeks:

1. Second interview of Nicole Prescott. The second interview of Prescott has been scheduled for November 8, 2023, at C&H's Miami office, with her counsel, Ms. Langford, present. The interview will address, among other topics, the additional documentary evidence regarding Prescott's ownership of Clearwater Design Collective Inc. and her role in the revenue-recognition practices at VCR.

2. Finalization of cooperation agreement with Ryan Mateo Serrano. Discussions with Serrano's counsel, Mr. Ruiz, regarding the terms of a formal cooperation agreement are ongoing and are expected to be finalized in mid-November 2023. The cooperation agreement will establish the terms and scope of Serrano's further cooperation with the investigation.

3. Follow-up interview of Ryan Mateo Serrano. A follow-up interview of Serrano will be scheduled promptly following the execution of the cooperation agreement. The follow-up interview will seek to obtain additional detail regarding the mechanics of both the revenue-recognition scheme and the fictitious vendor scheme, including any additional individuals who may have been aware of or participated in the misconduct.

4. Continued pursuit of follow-up interview and document production from Daskine. C&H will continue to pursue, through Merritt & Dunleavy LLP, a follow-up interview and production of personal documents from Daskine. If Daskine continues to decline cooperation, C&H will assess the implications for the investigation's findings and will advise the Audit Committee accordingly.

5. Completion of Crestline fund-tracing analysis. Crestline's comprehensive fund-tracing analysis is expected to be completed in late November or early December 2023. The analysis will trace all fund flows from VCR's operating accounts through the three shell entities to their ultimate disposition and will quantify the amounts diverted for the personal benefit of each subject.

6. Preparation of shell-entity analysis memorandum. C&H and Crestline will prepare a comprehensive memorandum analyzing the formation, ownership, invoicing activity, and fund flows associated with each of the three shell entities. This memorandum is expected to be completed in late November 2023.

7. Completion of document review for remaining secondary custodians. The review of documents from secondary custodians (VCR operations and accounting staff) is expected to be completed by mid-November 2023, at which point the document review phase of the investigation will be substantially concluded.

8. Continued coordination with Westlake Burris regarding SEC inquiry and amended filings. C&H will continue to coordinate with Westlake Burris regarding the SEC Division of Enforcement's preliminary inquiry (File No. HO-14237), including any voluntary production of non-privileged materials, and regarding the scope and timing of potential amended SEC filings once the investigation has concluded.

9. Final Investigation Report. The final investigation report, including comprehensive factual findings, legal analysis, and recommendations, is targeted for delivery to the Audit Committee in early January 2024. This timeline is contingent upon the investigation team's ability to complete the remaining interviews, the cooperation agreement with Serrano, and the Crestline analyses as described above. PRIVILEGED AND C

XI. Concluding Observations The evidence developed to date strongly indicates that Daskine directed, and Prescott implemented, a scheme to prematurely recognize timeshare-interest deposit revenue at VCR in violation of the requirements of ASC 606 and the contractual and statutory constraints imposed by Florida Statute § 721.10. This scheme resulted in an aggregate overstatement of approximately $26.4 million in VCR r