PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT — ATTORNEY-CLIENT COMMUNICATION
PRELIMINARY DUE DILIGENCE MEMORANDUM
Coral Reef Hospitality Group, Inc.
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT — ATTORNEY-CLIENT COMMUNICATION
INTERNAL MEMORANDUM
Calderwood & Harkness LLP 1301 Avenue of the Americas, 40th Floor New York, NY 10019
Matter No.: 1001-00005
Date: March 21, 2022
To: Harrison Wexford, Partner, Mergers & Acquisitions Beatrice Holloway, Partner, Mergers & Acquisitions
From: Megan Chu, Associate, Mergers & Acquisitions Derek Okonkwo, Associate, Mergers & Acquisitions
Re: Preliminary Legal Due Diligence — Coral Reef Hospitality Group, Inc. (Nasdaq: CRFH) — Project Trident
Client: Ardent Capital Partners III LP
This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the attorneys and personnel of Calderwood & Harkness LLP and authorized representatives of Ardent Capital Partners III LP in connection with Project Trident. This memorandum should not be disclosed to any third party without the prior written consent of the undersigned. This memorandum reflects preliminary findings based on the documents and information available to us as of the date hereof and is subject to revision as additional information becomes available.
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I. Executive Summary
This memorandum summarizes the key findings from the initial phase of legal due diligence conducted on Coral Reef Hospitality Group, Inc. ("CRFH," the "Company," or the "Target") in connection with the proposed take-private acquisition of the Target by Ardent Capital Partners III LP ("Ardent," the "Sponsor," or the "Buyer"). This memorandum has been prepared by Calderwood & Harkness LLP ("C&H" or the "Firm") in its capacity as legal counsel to Ardent and is intended to identify material legal issues, risks, and areas requiring further investigation as the transaction progresses toward definitive documentation and signing.
Transaction Overview. The proposed transaction contemplates a reverse triangular merger under Section 251 of the Delaware General Corporation Law ("DGCL"), pursuant to which a newly formed wholly owned subsidiary of Ardent (the "Merger Sub") would merge with and into CRFH, with CRFH surviving as a wholly owned subsidiary of Ardent. Each outstanding share of CRFH common stock (other than shares held by Ardent, Merger Sub, or any stockholder who properly perfects appraisal rights under DGCL § 262) would be converted into the right to receive all-cash merger consideration of $4.75 per share.
Valuation. Based on 6,315,789 shares of common stock currently outstanding, the proposed per-share consideration implies an aggregate equity value of approximately $30,000,000. After accounting for net debt of approximately $8,200,000 (comprising total debt of $11,400,000 less cash and cash equivalents of $3,200,000, each as of December 31, 2021), the implied enterprise value is approximately $38,200,000.
Premium Analysis. The proposed per-share price of $4.75 represents a premium of approximately 47.5% to the unaffected Nasdaq closing price of $3.22 per share on February 10, 2022 (the last trading day prior to the date on which media reports regarding Ardent's interest in the Target first surfaced). The unaffected market capitalization of the Target as of that date was approximately $20,336,840.
Implied Multiples. Based on the Target's publicly reported financial results for the fiscal year ended December 31, 2021, the transaction implies the following valuation multiples:
• EV / LTM EBITDA: Approximately 7.5x (based on FY2021 LTM EBITDA of $5,100,000)
• EV / LTM Revenue: Approximately 0.99x (based on FY2021 LTM revenue of $38,700,000)
These multiples are broadly consistent with precedent transactions in the boutique hospitality sector, though a detailed benchmarking analysis is being conducted separately by Ardent's financial advisors.
Data Room Review. The Target established a virtual data room on the Thackeray Solutions platform under the project code "Project Trident." Access was granted to our diligence team on March 1, 2022. As of the date of this memorandum, we have reviewed approximately 1,240 documents across 47 data room folders. Document production by the Target's counsel is ongoing, and several categories of requested materials remain outstanding, as described in Section XII.C and Appendix E hereto.
Target's Advisors. The Target is represented by Whitfield, Crane & Sato LLP, with Catherine Osei, Lead Partner, M&A, serving as lead deal counsel and Robert Whitfield III serving as Billing Partner. The Target's financial advisor is Lantern Hill Advisory LLC, with Evan Nakashima, Managing Director, leading the engagement. The Target's independent auditor is Hargrove & Liddell CPAs LLP, based in Tampa, Florida.
Buyer's Advisors. In addition to C&H serving as legal counsel to Ardent, we understand that Grayson Partners & Co. (Priya Venkatesh, Director) is serving as Ardent's financial advisor and that Ridgeline Risk Advisors LLC (Samuel Feng, Managing Director) has been engaged to arrange representations and warranties ("R&W") insurance.
Overall Risk Assessment. Based on our preliminary review, we assess the overall legal risk profile of the Target as Moderate. The identified issues of principal concern relate to (i) real property matters involving the Target's Bahamian property, including foreign ownership restrictions and regulatory approval requirements, (ii) regulatory licensing, particularly the transfer of liquor licenses across five states and territories, and (iii) existing indebtedness and mandatory prepayment obligations triggered by a change of control. We have not identified any litigation matters that would constitute a "showstopper" or that would, in our preliminary assessment, rise to the level of a Material Adverse Effect under customary definitions. These and other identified risk items are discussed in detail throughout this memorandum and are summarized in Section XII below.
Preliminary Nature of Findings. We wish to emphasize that this memorandum reflects preliminary findings only. Our diligence review is ongoing in several areas, including (without limitation) Bahamian regulatory compliance, USVI property matters, certain change-of-control consent requirements, Phase I environmental site assessments, and employee benefit plan documentation. We will supplement this memorandum as our review progresses and additional information is made available.
II. Corporate Organization and Capitalization
A. Organization and Good Standing
The Target's full legal name is Coral Reef Hospitality Group, Inc. The Company was incorporated in the State of Delaware and is currently in good standing under the laws of that state. The Company's principal place of business is located at 2400 Bayshore Boulevard, Suite 300, Tampa, Florida 33629.
The Company maintains a registered agent in Delaware: Prestige Corporate Services LLC, located at 850 New Burton Road, Suite 201, Dover, Delaware 19904. The Company's federal Employer Identification Number ("EIN") is 59-3847621.
CRFH is a reporting company under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and its common stock is listed on the Nasdaq Capital Market under the ticker symbol "CRFH." The Company's SEC File Number is 001-38742, and the CUSIP number for its common stock is 21874R109.
The Company is qualified to do business in the following jurisdictions in addition to its state of incorporation:
• Florida — Principal place of business; multiple property operations
• Georgia — Property operations (2 properties)
• South Carolina — Property operations (2 properties)
• U.S. Virgin Islands — Property operations (1 property)
• The Bahamas — Through a Bahamian subsidiary (1 property); discussed further in Subsection D below
We have reviewed certificates of good standing for the Company in Delaware and Florida, each dated within the last 30 days. Requests for certificates of good standing from the Secretaries of State (or equivalent offices) in Georgia, South Carolina, and the U.S. Virgin Islands remain outstanding as of the date of this memorandum. We will confirm receipt and review of these certificates in a supplemental report. The registration status and good standing of the Bahamian subsidiary are addressed separately in Subsection D below and have been flagged for follow-up with local counsel.
B. Capitalization. We have reviewed the Company's certificate of incorporation, as amended through the date hereof, as well as publicly available information regarding the Company's capitalization from its most recent Annual Report on Form 10-K, its proxy statements, and the data room materials.
Authorized Capital Stock. The Company's certificate of incorporation, as most recently amended, authorizes the issuance of 25,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share. The board of directors is authorized to issue shares of preferred stock in one or more series and to fix the rights, preferences, and privileges of each series, subject to the terms of the certificate of incorporation.
Outstanding Shares. As of the most recent practicable date, the Company has 6,315,789 shares of common stock issued and outstanding. No shares of preferred stock are outstanding, and no shares of preferred stock have been designated into any series.
Options, Warrants, and Convertible Securities. Based on our review of the data room documents and the Company's SEC filings, we have not identified any outstanding warrants, stock options, restricted stock units, or other convertible securities. The Company adopted a 2018 Equity Incentive Plan (the "2018 Plan"), which provides for the grant of stock options, restricted stock, restricted stock units, stock appreciation rights, and other equity-based awards. However, based on the disclosures in the Company's most recent proxy statement and the 2018 Plan documents reviewed in the data room, it appears that no awards are currently outstanding under the 2018 Plan. We recommend confirming this with management and reviewing the stock transfer agent records maintained by Adriatic Health IT (or such other transfer agent as may be engaged) to ensure completeness.
Observation. The simplicity of the Company's capital structure is favorable for the mechanics of the proposed merger, as there are no outstanding equity awards or convertible securities that would need to be addressed in the merger agreement (e.g., through cashing out of options or conversion of convertible notes). This simplifies the consideration and payment provisions and reduces the likelihood of disputes regarding treatment of equity interests.
C. Board of Directors and Officers
Board Composition. The Company's board of directors consists of five members, as follows:
Four of the five directors are classified as independent under the Nasdaq listing standards and applicable SEC rules. Mr. Ellender is the sole non-independent director by virtue of his role as Chief Executive Officer and co-founder of the Company. The board does not appear to be classified (i.e., all directors stand for election annually), which we will confirm through review of the certificate of incorporation and bylaws.
Special Committee. On February 14, 2022, the board of directors formed a Special Committee to evaluate the proposed transaction and to negotiate and make a recommendation to the full board regarding the proposed merger with Ardent. The Special Committee consists of:
• Reginald Ashworth (Chair)
• Diane Kowalski
• Howard Tremaine
Each member of the Special Committee is independent and disinterested for purposes of the proposed transaction. We understand that the Special Committee has engaged Lantern Hill Advisory LLC as its financial advisor and Whitfield, Crane & Sato LLP as its legal counsel, each of which is independent from Ardent and the Company's management.
Officers. The Company's principal executive officers are:
• Marcus Ellender — Chief Executive Officer and Co-Founder
• Patricia Sung — Chief Financial Officer
We have reviewed the Company's bylaws and corporate governance guidelines as posted in the data room. These documents appear to be consistent with standard corporate governance practices for a Nasdaq-listed company of CRFH's size. The bylaws include provisions governing notice of stockholder meetings, quorum requirements, indemnification of directors and officers, and procedures for amendment. We have not identified any unusual or non-standard provisions that would affect the mechanics of the proposed merger or the conduct of the stockholder vote.
D. Subsidiaries and Organizational Chart
CRFH operates both directly and through a number of subsidiaries. We have reviewed the organizational chart provided in the data room (see Appendix B for a summary) and have identified the following material subsidiary relationships:
Domestic Subsidiaries. The Company's domestic properties appear to be held at the parent-company level or through single-purpose Delaware limited liability companies or state-organized limited liability companies, consistent with common practice in the hospitality industry. The specific identity and structure of each domestic property-holding entity are being confirmed through our review of the organizational chart and entity formation documents in the data room.
Bahamian Subsidiary. The Company's property in The Bahamas (1 property) is held through a Bahamian subsidiary. This subsidiary is organized under the laws of The Commonwealth of The Bahamas. We have been provided with limited charter documents for this entity in the data room; however, a comprehensive review of the subsidiary's organizational documents, registration status, and regulatory compliance remains outstanding. We have flagged the following items for follow-up:
(a) Confirmation of the entity name, registration number, and current good standing status with the Registrar General of The Bahamas;
(b) Review of the charter documents (memorandum and articles of association) for any restrictions on share transfers or changes of control;
(c) Local counsel opinion on compliance with the International Persons Landholding Act, 1993, as amended, which governs the acquisition and holding of real property by non-Bahamian persons and entities;
(d) Exchange Control Board requirements for any transfer of ownership of the subsidiary or repatriation of funds from The Bahamas; and
(e) Foreign Investment Board approval requirements in connection with the proposed change of control.
We strongly recommend engaging qualified Bahamian counsel to provide a comprehensive review and legal opinion on these matters. The timeline for obtaining necessary Bahamian regulatory approvals could impact the transaction closing timeline, as discussed further in Section IX.D.
USVI Property. The Company operates one property in the U.S. Virgin Islands. We are in the process of confirming whether this property is held directly by CRFH or through a subsidiary entity, and whether the property interest is fee simple ownership or a leasehold. We will confirm the structure and any applicable local filing or approval requirements upon receipt of additional data room materials.
E. Significant Shareholders
Based on our review of the Company's most recent proxy statement (Schedule 14A), its Annual Report on Form 10-K, and beneficial ownership filings on Schedule 13D and Schedule 13G, the following are the significant shareholders of the Company:
Ellender Family Trust. Marcus Ellender serves as trustee of the Ellender Family Trust, which is an irrevocable trust organized under the laws of the State of Florida. The trust holds 1,155,789 shares, representing approximately 18.3% of the outstanding common stock. Mr. Ellender, in his capacity as CEO and director, has been engaged in discussions regarding the proposed transaction and, as a member of the Target's management team, is expected to vote the trust's shares in favor of the merger. We note, however, that the terms of the trust instrument should be reviewed to confirm Mr. Ellender's authority as trustee to vote and tender the trust's shares in connection with the merger, and to confirm that there are no restrictions or conditions on such actions.
Tidewater Asset Management LLC. Tidewater is a Virginia-based institutional investment manager holding 612,632 shares, representing approximately 9.7% of the outstanding common stock. To our knowledge, Tidewater has not publicly indicated its position regarding the proposed transaction.
Broadleaf Institutional Partners LP. Broadleaf is a Delaware limited partnership holding 448,421 shares, representing approximately 7.1% of the outstanding common stock. To our knowledge, Broadleaf has not publicly indicated its position regarding the proposed transaction.
Stockholder Vote Considerations. The merger will require the affirmative vote of a majority of the outstanding shares of common stock entitled to vote thereon, which equates to at least 3,157,895 shares (assuming all 6,315,789 shares remain outstanding at the time of the vote). The combined holdings of the Ellender Family Trust, Tidewater, and Broadleaf represent approximately 35.1% of outstanding shares (2,216,842 shares). If the Ellender Family Trust votes in favor (which is anticipated), securing the support of either Tidewater or Broadleaf (or both) would significantly increase the likelihood of obtaining the requisite stockholder approval. Conversely, if Tidewater and Broadleaf were both to oppose or abstain, Ardent would need to secure the affirmative vote of approximately 2,002,106 of the remaining 4,098,947 shares held by other investors — approximately 48.8% of the dispersed shareholder base. We therefore recommend that Ardent develop an early stockholder engagement strategy, potentially including outreach to Tidewater and Broadleaf, to assess the likelihood of support and to address any concerns these holders may raise regarding the proposed transaction. This risk item is classified as High in our risk summary in Section XII.
III. Material Contracts
A. Overview and Review Methodology
We have reviewed the material contracts disclosed in the Company's SEC filings (including its Annual Report on Form 10-K for the fiscal year ended December 31, 2021, its Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K) as well as those documents populated in the data room under the "Contracts" and "Commercial Agreements" folders. Our review focused on identifying contracts that contain the following types of provisions or present the following types of risks:
(a) Change-of-control provisions, including provisions that trigger consent requirements, termination rights, price adjustments, or accelerated payment obligations upon the occurrence of a change of control;
(b) Assignment restrictions that may be implicated by the proposed merger structure;
(c) Non-compete, exclusivity, or most-favored-nation covenants that could restrict the Company's operations or the Buyer's post-closing business plans;
(d) Material revenue or cost exposures, including contracts representing significant portions of the Company's revenue base or cost structure;
(e) Termination provisions that could be exercised by counterparties in connection with or following the transaction; and
(f) Related-party transactions that may require disclosure or present conflicts of interest.
Our review of the Company's material contracts is ongoing, and additional contracts continue to be produced in the data room. The findings below are based on our review as of the date of this memorandum.
B. Management and Franchise Agreements
CRFH operates all 11 of its boutique resort and inn properties under the Company's own proprietary brand. We have not identified any third-party franchise agreements, hotel management agreements with third-party operators, or licensing arrangements pursuant to which the Company operates under a brand owned by a third party. This is consistent with the Company's business model as a vertically integrated owner-operator of boutique hospitality properties.
Food and beverage services, spa operations, and event planning and catering services are operated in-house at each property by the Company's employees. We have not identified any management contracts with third-party food and beverage operators or spa management companies.
We note, however, that certain properties maintain exclusive vendor and supplier agreements for food and beverage products and spa product supply. These agreements are discussed in Subsection D below. We are reviewing these agreements for change-of-control provisions and assignment restrictions that may require attention in connection with the proposed transaction.
C. Revenue Contracts
The Company generates revenue primarily through room bookings (direct and through online travel agency ("OTA") channels), food and beverage sales, spa services, and group/event bookings. We have reviewed the following categories of revenue-generating contracts:
OTA Distribution Agreements. The Company has entered into distribution agreements with several major OTAs, including Ridgeway & Co. (Bramwell Holdings), Hollowell Industries, and other regional travel platforms. These agreements are generally terminable by either party on relatively short notice (30 to 90 days) and contain standard commission structures. We have not identified unusual termination provisions, non-compete restrictions, or change-of-control triggers in the OTA agreements reviewed to date.
Direct Booking Platform. The Company operates its own direct booking platform through its corporate website and individual property websites. We are confirming the ownership of the underlying technology platform (i.e., whether it is proprietary or licensed from a third-party provider) and reviewing the terms of any software-as-a-service agreements associated with the direct booking platform.
Group Sales and Corporate Event Agreements. The Company enters into contracts for group bookings, corporate retreats, and event services on a regular basis. These agreements are generally short-term in nature (annual or event-specific) and do not contain unusual termination provisions, change-of-control triggers, or exclusivity arrangements that would be implicated by the proposed transaction.
Revenue Concentration. Based on our review of the Company's revenue data and disclosures, no single customer, booking channel, or counterparty accounts for more than 15% of the Company's LTM revenue. The Company's revenue base appears reasonably diversified across its 11 properties, booking channels, and customer types.
D. Key Vendor and Service Agreements
We have reviewed the Company's material vendor and service agreements, including the following categories:
Property Management Software. The Company utilizes a licensed property management system ("PMS") to manage reservations, front desk operations, housekeeping, and guest services across its portfolio. The PMS license agreement is a standard commercial software license and does not appear to contain unusual restrictions. We are confirming whether the license contains an assignment or change-of-control provision.
Landscaping, Maintenance, and Cleaning Services. Certain properties engage third-party service providers for landscaping, building maintenance, and cleaning services. These agreements are generally annual or month-to-month contracts and contain standard termination provisions. Several of these agreements include assignment clauses requiring notice to the counterparty upon a change of control.
Food and Beverage Suppliers. As noted in Subsection B, certain properties maintain exclusive vendor arrangements for food and beverage products. We are reviewing these agreements for change-of-control provisions, minimum purchase commitments, and exclusivity covenants.
Insurance Policies. The Company maintains property insurance, general liability insurance, liquor liability insurance, and workers' compensation insurance across its portfolio. These policies are discussed in greater detail in Section VIII.D and Section IX below.
General Observation. Most of the vendor and service agreements reviewed to date contain standard assignment or change-of-control provisions requiring notice to the counterparty and, in some cases, the counterparty's consent prior to assignment or upon a change of control. We have flagged specific contracts requiring affirmative consent for further review and have included them in the material contract schedule attached as Appendix D.
E. Change-of-Control Provisions
We have identified change-of-control triggers in approximately 14 contracts across the Company's contract portfolio. Of these, most require only that the Company provide written notice to the counterparty upon the occurrence of a change of control. A subset of approximately 5 contracts requires the affirmative consent of the counterparty as a condition to the continued effectiveness of the agreement following a change of control.
We recommend that the Buyer obtain all required waivers and consents either as a condition to closing or promptly following closing, depending on the materiality of each contract and the risk of counterparty non-cooperation. Contracts requiring affirmative consent include:
(a) The ground lease for the Company's Seaside Palms property in Clearwater, Florida (discussed further in Section V.C below);
(b) An exclusive food and beverage supply agreement with Gulf Coast Provisions LLC;
(c) A technology services agreement with a third-party PMS provider; and
(d) Two additional vendor service agreements for landscaping and spa product supply at specific properties.
We recommend that the consent solicitation process for these contracts be initiated promptly upon execution of the definitive merger agreement, with the goal of obtaining all necessary consents prior to or concurrently with closing. The ground lease consent requirement, in particular, is a material issue that should be addressed as a closing condition in the merger agreement, as discussed further in Section V.C.
F. Contracts with Related Parties
We have reviewed the Company's related-party transaction disclosures in its most recent proxy statement (Schedule 14A) and Annual Report on Form 10-K, as well as the data room materials.
CEO Employment Agreement. Marcus Ellender is party to an employment agreement with the Company, which is discussed in detail in Section VII.B below. The employment agreement contains change-of-control provisions that may trigger severance and other obligations.
Ellender Family Trust. We have not identified any contracts between the Company and the Ellender Family Trust other than the standard indemnification agreement between the Company and Mr. Ellender in his capacity as a director and officer. The indemnification agreement is on the Company's standard form and provides for indemnification and advancement of expenses to the fullest extent permitted by Delaware law.
Other Related-Party Transactions. We have not identified any other related-party transactions in the data room or in the Company's public filings that would require further investigation at this time. We recommend confirming the absence of additional related-party transactions through management representations and the officer's certificate to be delivered at signing.
IV. Financial Overview
A. Audited Financial Statements
We have reviewed the Company's audited consolidated financial statements for the fiscal years ended December 31, 2021, 2020, and 2019, as filed with the SEC in the Company's Annual Reports on Form 10-K. The Company's independent auditor is Hargrove & Liddell CPAs LLP, a Tampa, Florida-based accounting firm.
The key financial highlights for FY2021 are as follows:
Hargrove & Liddell issued an unqualified (clean) audit opinion on the FY2021 financial statements. No going concern qualifications were included in the audit report for FY2021 or FY2019. We note, however, that the FY2020 audit report included a going concern emphasis-of-matter paragraph relating to the impact of the COVID-19 pandemic on the Company's operations and liquidity. That concern appears to have been resolved by FY2021 as the Company's revenue and profitability recovered significantly.
Trend Analysis. The Company experienced a significant decline in revenue and profitability in FY2020 attributable to the COVID-19 pandemic, which severely impacted the hospitality industry broadly. Revenue declined from $35,800,000 in FY2019 to $24,100,000 in FY2020 (a decline of approximately 32.7%), and the Company reported negative EBITDA of $(1,200,000) and a net loss of $(4,600,000) for FY2020. The Company's FY2021 results reflect a strong recovery, with revenue exceeding FY2019 levels by approximately 8.1% and EBITDA exceeding FY2019 levels by approximately 15.9%. This recovery trajectory supports the reasonableness of the transaction multiples and may be a factor in the Target board's willingness to entertain a take-private at the proposed valuation.
B. Indebtedness. Outstanding Debt. As of December 31, 2021, the Company had total debt outstanding of $11,400,000 and cash and cash equivalents of $3,200,000, resulting in net debt of $8,200,000.
The Company's principal debt instrument is a senior secured credit facility (the "Existing Credit Facility") with Coastal Atlantic Bank, N.A. The material terms of the Existing Credit Facility, based on our review of the credit agreement in the data room, are summarized below:
We have not identified any subordinated debt, mezzanine financing, or other indebtedness of the Company beyond the Existing Credit Facility. The Company does not appear to have any outstanding letters of credit or revolving credit commitments.
Change-of-Control Provision. The Existing Credit Facility contains a mandatory prepayment provision requiring the Company to repay all outstanding principal, accrued interest, and any applicable prepayment premium upon the occurrence of a "Change of Control" (as defined in the credit agreement). The proposed merger would constitute a Change of Control under the credit agreement. Accordingly, the Existing Credit Facility will need to be repaid in full at or prior to closing, and the related liens on the Company's assets will need to be released. We will coordinate the preparation of payoff letters and lien release documentation with Coastal Atlantic Bank, N.A. in advance of closing.
Acquisition Financing. We understand that Ardent is in the process of arranging acquisition financing for the transaction. Pinnacle Commercial Lending Corp. has issued a debt commitment letter (reference number PCL-2022-SF-0417) for a $10,000,000 senior secured term loan facility with the following indicative terms:
• Borrower: CRFH (post-closing, as surviving entity)
• Principal Amount: $10,000,000
• Interest Rate: SOFR + 425 bps
• Maturity: 5 years from closing
• Original Issue discount ("OID"): 1.0%
• Collateral: First priority lien on all assets of CRFH post-closing
• Commitment Fee: 0.50% per annum on undrawn amounts
• Financial Covenants: To be negotiated
The proceeds of the Pinnacle term loan, together with Ardent's equity contribution, are expected to be used to fund the aggregate merger consideration, repay the Existing Credit Facility in full, and pay transaction expenses. We will review the final terms of the Pinnacle debt commitment letter and the related credit agreement documentation as they become available.
C. Tax Matters
Federal Income Taxes. CRFH files federal income tax returns as a C-corporation. We have reviewed the Company's federal income tax returns for the three most recent fiscal years (FY2019 through FY2021) as provided in the data room. Based on our preliminary review, we have not identified any material tax audits, disputes, or deficiency notices from the Internal Revenue Service.
State and Local Taxes. The Company files state and local tax returns in the following jurisdictions:
• Florida: Florida does not impose a state personal income tax; however, the Company is subject to the Florida corporate income tax on its Florida-sourced income. We have reviewed the Company's Florida corporate income tax filings and have not identified any material issues.
• Georgia: The Company files Georgia corporate income tax returns in connection with its operations at two properties in that state.
• South Carolina: The Company files South Carolina corporate income tax returns in connection with its operations at two properties in that state.
• U.S. Virgin Islands: The Company is subject to the U.S. Virgin Islands income tax on income sourced to the territory. We are reviewing the Company's USVI tax filings for compliance.
• The Bahamas: The Bahamas does not impose a corporate income tax. However, we will confirm with Bahamian counsel whether any withholding tax, stamp duty, value-added tax, or other tax obligations apply to the Company's Bahamian subsidiary or to the proposed merger transaction.
Transaction Tax Considerations. We will coordinate with Ardent's tax advisors to evaluate any stamp duty, transfer tax, or other transactional tax implications of the proposed merger, including with respect to the Bahamian subsidiary. In particular, we recommend that Bahamian counsel be consulted regarding potential stamp duty on the transfer of shares of the Bahamian subsidiary (if any indirect transfer occurs) and any exchange control implications for the repatriation of funds.
V. Real Property and Leasehold Interests
A. Property Portfolio Overview
CRFH owns and/or leases 11 boutique resort and inn properties with an aggregate of 742 keys (rooms). The properties are geographically distributed as follows:
A detailed property portfolio summary, including the name, location, number of keys, ownership structure (owned vs. leased), and key contract/lease terms for each property, is set forth in Appendix C to this memorandum.
B. Owned Properties
The majority of the Company's domestic properties are owned in fee simple by the Company or its wholly owned subsidiaries. We have reviewed the following documents for each owned property as available in the data room:
(a) Deeds (warranty deeds or special warranty deeds, as applicable);
(b) Title insurance policies and/or title commitments;
(c) ALTA/NSPS surveys; and
(d) Any recorded instruments identified as exceptions in the title insurance policies.
Preliminary Title Review. Our preliminary title review has not identified any material liens or encumbrances on the Company's owned properties beyond (i) the existing mortgage or deed of trust securing the Existing Credit Facility with Coastal Atlantic Bank, N.A., and (ii) standard utility easements, restrictive covenants, and building and zoning restrictions that are typical for hospitality properties and do not, in our preliminary assessment, materially impair the use or value of the properties for their intended purpose.
We recommend that title insurance be obtained or, where existing policies are in place, that endorsements be obtained at closing for all owned domestic properties to reflect the change of ownership and the new Pinnacle term loan lien.
Bahamian Property. The Company's property in The Bahamas presents unique legal considerations due to Bahamian foreign ownership restrictions. Under the International Persons Landholding Act, 1993, as amended, non-Bahamian persons and entities are required to obtain a permit from the Government of The Bahamas (typically through the Investments Board, formerly the Foreign Investment Board) to acquire and hold real property in The Bahamas. The Company currently holds title to the Bahamian property through its Bahamian subsidiary, which we understand was organized specifically for this purpose.
We have identified the following action items in connection with the Bahamian property:
(a) Confirm that the Bahamian subsidiary's existing landholding permit is current and in good standing;
(b) Determine whether the proposed change of control of the ultimate parent company (i.e., the acquisition of CRFH by Ardent) requires a new or amended landholding permit from the Investments Board;
(c) Obtain a local counsel opinion from qualified Bahamian counsel on compliance with the International Persons Landholding Act, the Exchange Control Regulations, and any other applicable Bahamian laws and regulations;
(d) Review the title documentation for the Bahamian property (conveyance, title search, and any title insurance or legal opinion as to title); and
(e) Assess any stamp duty implications of a change of control at the parent-company level.
C. Leased Properties
Certain of the Company's properties are subject to ground leases or long-term leasehold arrangements rather than fee simple ownership. Based on our preliminary review, we have identified two properties that operate under ground lease structures.
Review of Lease Terms. For each leased property, we have reviewed (or are in the process of reviewing) the following terms:
• Lease duration and remaining term;
• Renewal options (number, duration, and conditions for exercise);
• Rent amounts and escalation provisions (fixed increases, CPI adjustments, or percentage rent);
• Assignment and subletting provisions;
• Change-of-control clauses;
• Maintenance, insurance, and tax obligations;
• Default and cure provisions; and
• Termination and purchase options.
Florida Ground Lease — Seaside Palms Property. At least one Florida property (the Seaside Palms property in Clearwater, Florida) is subject to a ground lease that contains a change-of-control consent requirement. Specifically, the ground lease provides that any "Transfer" (as defined in the lease) of a controlling interest in the tenant or any assignee of the tenant requires the prior written consent of the landlord, which consent may not be unreasonably withheld, conditioned, or delayed. The proposed merger would constitute a Transfer under this provision. Accordingly, the Company will need to obtain landlord consent prior to or at closing. We have flagged this item for the deal team's attention and recommend that the consent solicitation process for this lease be initiated promptly upon execution of the merger agreement. We further recommend that landlord consent for this ground lease be included as a closing condition in the definitive merger agreement.
USVI Property. We are in the process of confirming the nature of the Company's interest in the USVI property — specifically, whether the property is owned in fee simple or held under a lease from the territorial government or a private landowner. If the property is held under a leasehold arrangement, we will review the lease terms for any assignment, change-of-control, or governmental approval requirements and will report our findings in a supplemental memorandum.
D. Zoning and Land Use
We have reviewed available zoning and land use documentation for the Company's domestic properties, including certificates of occupancy, zoning compliance letters, and local government records as provided in the data room.
Based on our preliminary review, all domestic properties appear to be in compliance with applicable zoning and land use requirements. We have not identified any pending zoning challenges, rezoning applications, condemnation proceedings, or eminent domain actions affecting any of the Company's properties.
We note that certain properties are located in special zoning districts (e.g., coastal overlay zones, historic preservation districts) that may impose additional restrictions on development, renovation, or changes of use. These restrictions do not appear to affect the Company's current operations but may be relevant to Ardent's post-closing capital improvement or development plans.
E. Condition of Properties
Environmental Assessments. Phase I environmental site assessments are discussed in detail in Section X below.
Property Condition. We have requested property condition reports, engineering assessments, and deferred maintenance schedules from the Company's management through the data room. As of the date of this memorandum, these materials have not been fully populated. We recommend that the deal team prioritize the review of these materials as they become available, particularly with respect to any deferred maintenance items or capital expenditure requirements that could materially affect the post-closing operating budget or the Buyer's return assumptions.
VI. Intellectual Property
A. Trademarks and Branding
The Company operates its properties under the "Coral Reef Hospitality" brand and uses individual property names and logos for each of its 11 boutique resort and inn properties. We have reviewed available federal and state trademark registration records for the Company's principal marks.
The Company holds federal trademark registrations with the United States Patent and Trademark Office ("USPTO") for the "Coral Reef Hospitality" word mark and design mark, as well as registrations for certain individual property names. We are in the process of confirming the registration status, renewal dates, and ownership records for each registered mark. Based on our preliminary review, all registrations appear to be current and in good standing.
We have not identified any pending trademark opposition or cancellation proceedings involving the Company's marks. We are also reviewing the Company's trademark portfolio for any unregistered common-law marks that may require attention.
B. Domain Names and Digital Assets
The Company owns and operates several internet domain names, including its corporate website domain and individual property-specific domains. We are confirming the ownership and registrar details for each domain name to ensure that they are registered in the Company's name (or a subsidiary's name) and that there are no encumbrances or disputes affecting the Company's control over these digital assets.
The Company also maintains profiles and listings on various third-party platforms (e.g., OTA sites, social media, review sites). While these profiles are not "owned" in the traditional intellectual property sense, they represent valuable digital assets for the Company's operations and brand reputation.
We are also reviewing the ownership and licensing terms for the Company's proprietary reservation and booking system (if any) and any related technology assets.
C. IP Licenses
The Company utilizes various software applications under commercial license agreements for its operations, including property management systems, point-of-sale systems, guest management and CRM platforms, and accounting and payroll software. Based on our preliminary review, these license agreements are standard commercial software-as-a-service or perpetual license arrangements and do not contain unusual restrictions on use, assignment, or change of control.
We have not identified any material inbound intellectual property licenses (i.e., licenses under which the Company receives rights to use third-party intellectual property) beyond the commercial software licenses described above. We have also not identified any material outbound intellectual property licenses (i.e., licenses under which the Company grants third parties the right to use the Company's intellectual property).
D. Trade Secrets and Proprietary Information
The Company maintains certain proprietary information related to its operations, including guest data and customer databases, proprietary recipes used in food and beverage operations, spa treatment formulations, and event planning methodologies. The Company's guest data and customer databases are discussed in the context of data privacy in Section XI below.
With respect to the Company's proprietary recipes, spa formulations, and event planning methodologies, we note that these items do not appear to be the subject of any formal intellectual property protection (e.g., patents, registered copyrights, or trade secret registrations). While these items may have some operational value, the risk of third-party misappropriation or loss of competitive advantage is assessed as low given the nature of the Company's business and the availability of comparable formulations and methodologies in the hospitality industry.
VII. Employment and Benefits Matters
A. Workforce Overview
CRFH employs an estimated 460 individuals across its 11 properties and its corporate headquarters in Tampa, Florida. The workforce includes a mix of full-time salaried employees (primarily management and corporate staff), full-time hourly employees (front desk, housekeeping, food and beverage, maintenance), part-time employees, and seasonal employees. The hospitality industry generally experiences significant seasonal variability in staffing levels, particularly at resort properties in tourist destinations, and we would expect the Company's workforce to fluctuate accordingly.