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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

TO: Priya Anand, Partner

FROM: Yuki Nakamura, Lead Associate; Carlos Espinoza, Associate

DATE: April 5, 2023

RE: Review Comments on Draft Expert Report of Dr. Sharon Kettlewell, CPA/CFF, CFE — Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC et al., Case No. 1021-00006 (Circuit Court, 17th Judicial Circuit, Broward County, Florida)

I. Introduction and Purpose

This memorandum provides our detailed comments and suggested revisions to the draft expert report of Dr. Sharon Kettlewell of Ridgeline Forensic Advisory LLC, which was received by our office on April 1, 2023 (the "Draft Report"). We have reviewed the Draft Report in its entirety, including the narrative text, the nine damages tables, and all fourteen appendices, and we have cross-referenced Dr. Kettlewell's analysis against the underlying record evidence — including deposition transcripts, Suncoast Room Management Inc. financial records, the Thornbury & Associates CPAs LLP preliminary audit findings, and the relevant provisions of the Franchise License Agreements ("FLAs").

By way of background, Dr. Kettlewell was retained on December 12, 2022, pursuant to an engagement letter executed between Ridgeline Forensic Advisory LLC and this firm on behalf of Verimark Hospitality Group Inc. ("Verimark"). Under the terms of that engagement, Dr. Kettlewell's fee arrangement provides for billing at $475 per hour for principal time and $325 per hour for staff time. She was retained to serve as Verimark's forensic accounting and damages-quantification expert in connection with this litigation, specifically to opine on the magnitude and duration of Coastal Palms Franchise Holdings LLC's ("Coastal Palms") systematic underreporting of Gross Room Revenue ("GRR") and the resulting underpayment of franchise fees, marketing contributions, and technology fees owed under the FLAs.

The final expert report must be served on Coastal Palms' counsel, Whitfield, Barrow & Crane LLP (lead attorneys Nathan Whitfield III and Gabriela Montes), no later than April 14, 2023, in accordance with the Court's discovery scheduling order. Given that the deadline is fewer than ten days away, and that the Draft Report requires substantive revisions in several areas, we have endeavored to make our comments as specific and actionable as possible so that Dr. Kettlewell can efficiently incorporate them into the final version.

We have organized our comments into five categories: (1) overall structure and presentation; (2) methodology section revisions, with particular attention to the extrapolation from audited properties to the full portfolio; (3) damages table corrections and reconciliation, including identification of a $1.4 million discrepancy between the summary table and property-level calculations; (4) support for key opinions with record evidence, including specific deposition testimony and documentary citations; and (5) anticipated defense critiques and prophylactic language to strengthen the report against challenges expected from Coastal Palms' expert, Prof. Grant Hargrove of Hargrove Economic Consulting Inc.

We recommend scheduling a conference call with Dr. Kettlewell no later than April 8, 2023, to walk through these revisions in detail and ensure that the final report can be prepared, reviewed, and filed on schedule. Carlos Espinoza has already reached out to Dr. Kettlewell's office to confirm availability for that date.

II. Executive Summary of Draft Report

Before turning to our specific comments, we summarize below the key opinions and findings set forth in the Draft Report so that this memorandum may be read as a self-contained reference document.

Dr. Kettlewell's Draft Report opines that Coastal Palms Franchise Holdings LLC, through its affiliate Suncoast Room Management Inc. ("Suncoast") and its principal, Randall Brecker, systematically underreported Gross Room Revenue as defined in Section 4.1 of the Franchise License Agreements over a nine-year period spanning fiscal years 2013 through 2021. The Draft Report concludes that cumulative underreported GRR across this period totals approximately $197.8 million across all 22 franchised hotel properties — consisting of 18 Verimark Suites-branded properties and 4 Verimark Select-branded properties — comprising approximately 3,740 guest rooms in total.

The resulting underpayments are broken into three categories of direct franchise-fee underpayments:

• Royalty underpayments at the contractual rate of 5% of GRR: $9.89 million;

• Marketing-fund contribution underpayments at the contractual rate of 2.5% of GRR: $4.945 million; and

• Technology fee underpayments for 214 guest rooms added across 4 properties without notice to Verimark, at the contractual rate of $12.50 per room per month for an average of approximately 47 months: $1.26 million.

These three categories yield a subtotal of $16.095 million in direct underpayments.

In addition, the Draft Report calculates two additional damages components:

• Late-payment interest at the contractual rate of 1.5% per month, compounded monthly, as provided in FLA Section 4.6, calculated on the unpaid amounts from their respective due dates through the projected judgment date. The Draft Report computes this figure at $28.4 million.

• Liquidated damages under FLA Section 15.3, which provides that upon termination for cause, the franchisor is entitled to 3× the trailing-twelve-month corrected royalties for each property. Applied on a per-property basis across all 22 franchised properties, this calculation yields $105.5 million.

The grand total of damages presented in the Draft Report is therefore approximately $150 million ($16.095M + $28.4M + $105.5M = $149.995M).

The Draft Report also addresses Fiscal Year 2021 in specific detail, as this is the period for which the most granular data is available. For FY 2021, the Draft Report states that Coastal Palms reported GRR of $112.4 million across the portfolio, whereas Dr. Kettlewell's analysis estimates true GRR of $145.6 million, yielding underreported GRR of $33.2 million for that year alone. The underreporting percentage ranged from approximately 22% to 31% depending on the individual property, with the higher percentages concentrated in the Fort Myers and Marco Island properties where Suncoast's walk-in and corporate-direct booking volume was highest.

III. Comments on Overall Structure and Presentation

A. Report Organization

The Draft Report is currently organized into the following nine sections: (1) Qualifications, (2) Scope of Engagement, (3) Materials Reviewed, (4) Background, (5) Methodology, (6) Findings, (7) Damages Calculations, (8) Conclusions, and (9) Exhibits/Appendices. This structure is generally logical and follows the customary format for forensic accounting expert reports in Florida state-court litigation. However, we have two organizational recommendations.

First, we recommend that Dr. Kettlewell add a standalone "Summary of Opinions" section immediately following the Qualifications section. This summary should be concise — no more than two pages — and should set forth each of her principal opinions in numbered-paragraph format, with cross-references to the sections of the report where each opinion is developed in full. We believe this addition is important for judicial efficiency. Judge Calloway is known to review expert reports at a high level before delving into the details, and a front-loaded summary will ensure that the Court immediately grasps the scope and magnitude of Dr. Kettlewell's findings. Additionally, a discrete Summary of Opinions section will serve as a useful reference during motions practice (e.g., any Frye-based challenge to Dr. Kettlewell's methodology) and at trial, where the summary can be used as a framework for direct examination.

Second, we suggest that Dr. Kettlewell consolidate the fourteen appendices into a more navigable structure. The current appendices are numbered A-1 through A-22 (property-level calculations for each of the 22 franchised hotels), but they are arranged alphabetically by property name. We recommend instead grouping the appendices by geographic region: Southwest Florida (the 12 properties located in Lee, Collier, and Charlotte Counties), Northeast Florida/Jacksonville (the 6 properties located in Duval and St. Johns Counties), and Coastal Georgia (the 4 properties located in Chatham and Glynn Counties). This geographic grouping will be more intuitive because it mirrors the entity structure used by Coastal Palms — Gulf Breeze Hospitality LLC operates the Southwest Florida properties, a separate group of entities operates the Jacksonville properties, and Savannah Lodging Partners LLC operates the Georgia properties. Grouping the appendices in this fashion will also facilitate the Court's review of the extrapolation methodology, which accounts for geographic market conditions as a variable.

B. Qualifications Section

Dr. Kettlewell's qualifications are impressively stated in the current draft. Her 28 years of forensic accounting experience, her dual certifications as a Certified Public Accountant with a specialization in Financial Forensics (CPA/CFF) and a Certified Fraud Examiner (CFE), her extensive publication history, and her prior expert testimony in 43 matters are all well-documented and lend substantial credibility to her opinions.

We do, however, recommend one addition. The qualifications section should include a brief but specific reference to Dr. Kettlewell's prior experience in franchise and hospitality-industry disputes. We understand from our initial discussions with her that she has served as a forensic accounting expert in at least seven prior franchise-fee disputes, including two involving hotel franchisors, and that she has been qualified as an expert in revenue-recognition matters in the hospitality industry on at least three occasions. These details should be added to the qualifications section, even if only in a single paragraph, to preempt any challenge to her qualifications. Although Florida has historically applied the Frye standard for expert testimony admissibility, the Legislature's recent amendment to Section 90.702 of the Florida Evidence Code (effective July 1, 2023) moves Florida toward the federal Daubert standard. While the effective date technically falls after the current expert-report deadline, the transition is well underway in judicial practice, and Judge Calloway may well apply a more rigorous reliability inquiry to expert methodology. Establishing Dr. Kettlewell's specialized industry experience at the outset will bolster her qualifications under either standard.

C. Materials Reviewed

The "Materials Reviewed" section of the Draft Report lists an extensive body of materials. The draft confirms that approximately 2.3 million documents, totaling 1.1 terabytes of data, were processed by Nexagen Document Solutions LLC and made available to Dr. Kettlewell and her team at Ridgeline Forensic Advisory. We have reviewed the materials list against our own records of the document productions in this case and have the following observations.

We have confirmed that the materials list includes all of the following categories of documents, each of which is essential to the foundation of Dr. Kettlewell's opinions:

(a) All 22 individual Franchise License Agreements between Verimark and the respective Coastal Palms property-level entities, with the earliest FLA first executed on June 15, 2007, and the most recent executed on September 3, 2019;

(b) The Thornbury & Associates CPAs LLP preliminary audit findings, delivered to Verimark on January 18, 2022, covering the 10 highest-GRR properties for the 2019–2021 period;

(c) Suncoast Room Management Inc. financial records, including general ledgers, bank statements, booking logs, and management-fee calculations, produced pursuant to the Court's October 28, 2022 order compelling production (312,000 supplemental documents produced by Coastal Palms on November 18, 2022, after initial production was found deficient);

(d) Coastal Palms' initial document production of approximately 84,000 documents, delivered in multiple tranches between August and October 2022;

(e) Deposition transcripts from all 14 fact depositions taken between January 9 and March 17, 2023, including in particular the two-day deposition of Randall Brecker (Coastal Palms' principal and managing member), the deposition of Janet Kerrigan (former Coastal Palms director of financial reporting), and the deposition of Nolan Prescott (Coastal Palms' minority investor and board member); and

(f) Ironclad National Bank loan documents and financial statements submitted by Coastal Palms in connection with its commercial credit facilities, obtained by Verimark via subpoena duces tecum served on Ironclad National Bank on August 8, 2022.

However, we have identified a gap in the materials list that should be corrected in the final report. The Draft Report does not currently list the gulfcoastrooms.com booking-log data or the OTA net-rate reconciliation reports from Suncoast among the enumerated materials reviewed. Both of these data sets are referenced substantively in the Draft Report's methodology section — the gulfcoastrooms.com booking logs are central to the quantification of diverted direct-booking revenue, and the OTA net-rate reconciliation reports are the basis for Dr. Kettlewell's analysis of the gross-versus-net OTA revenue issue. If these materials are not explicitly listed in the "Materials Reviewed" section, opposing counsel will have a basis to argue that Dr. Kettlewell relied on data she did not properly disclose, or that she failed to consider relevant materials. We recommend that Dr. Kettlewell add explicit line items for both data sets, with production Bates-number ranges, to the materials list.

IV. Comments on Methodology Section — Extrapolation from Audited Properties to Full Portfolio

A. Overview of Current Approach

The core analytical challenge in this case is that Thornbury & Associates' preliminary audit covered only 10 of the 22 franchised properties, and only for the three most recent fiscal years (2019–2021). The remaining 12 properties and the earlier fiscal years (2013–2018) have not been independently audited. Dr. Kettlewell's methodology addresses this challenge through an extrapolation approach, which we summarize as follows.

Thornbury audited the top 10 properties by reported GRR for the 2019–2021 period and found that those properties underreported GRR by approximately 26% on a weighted-average basis. Dr. Kettlewell uses these 10 audited properties as a baseline sample and extrapolates the findings to all 22 properties across the full 2013–2021 period. The extrapolation uses a weighted-average underreporting percentage that is adjusted by three property-specific variables: (1) property size (measured by available room count), (2) brand tier (Verimark Suites versus Verimark Select, the latter being a more limited-service brand with different revenue characteristics), and (3) geographic market (Southwest Florida, Northeast Florida/Jacksonville, and Coastal Georgia), which captures differences in walk-in booking rates, corporate-direct contract penetration, and OTA market share that affect the proportion of revenue likely to have been channeled through Suncoast.

This approach is reasonable and well within the methodological conventions accepted in forensic accounting, particularly in franchise-fee disputes where the franchisor's access to the franchisee's internal records is inherently limited. However, the Draft Report's presentation of the extrapolation methodology would benefit from several revisions designed to strengthen its analytical rigor and resilience to defense challenge. We address each below.

B. Recommended Revisions to Extrapolation Methodology

1. Strengthen the Representativeness Analysis

The Draft Report's current discussion of why the 10 audited properties are representative of the full 22-property portfolio is conclusory. Dr. Kettlewell states that the audited properties "are broadly representative of the Coastal Palms franchise portfolio," but she does not provide the supporting data that would allow a reader to independently verify this assertion. We recommend that the final report include a more explicit representativeness analysis that addresses at least the following three dimensions:

Property-Size Distribution: The 10 audited properties range from 120 to 280 rooms; the unaudited properties range from 85 to 210 rooms. The draft should present a table or chart showing the room-count distribution for both the audited and unaudited subsets, demonstrating that the audited sample captures the full range of property sizes within the portfolio.

Brand Mix: Of the 10 audited properties, 8 are Verimark Suites and 2 are Verimark Select. The unaudited properties include 10 Verimark Suites and 2 Verimark Select. The brand mix is thus comparable (80/20 vs. 83/17), and this should be explicitly stated.

Geographic Spread: The 10 audited properties include properties in all three geographic regions (Southwest Florida, Northeast Florida, and Coastal Georgia). The draft should confirm this and indicate how many audited properties fall in each region relative to the total properties in that region.

Presenting this representativeness data in a clear, tabular format will preempt the most obvious line of defense attack — that the audited sample is not comparable to the unaudited properties — and will provide Judge Calloway with a solid factual basis for finding that the extrapolation methodology is reliable.

2. Address Potential Selection Bias

We anticipate that Coastal Palms' expert, Prof. Hargrove, will argue that Thornbury's decision to audit the top 10 properties by reported GRR introduces selection bias, because larger properties may exhibit systematically different underreporting patterns than smaller ones. The argument would be that properties generating higher revenue have more complex booking channels and greater opportunity for diversion, and that extrapolating a 26% underreporting rate to smaller, simpler properties overstates the total underreporting.

Whether or not this argument has merit, the Draft Report should address it head-on. We recommend that Dr. Kettlewell include a sensitivity analysis demonstrating that even under substantially more conservative assumptions regarding the unaudited properties, the total underreported GRR remains significant. Specifically, we suggest the following sensitivity scenarios:

Scenario 1 (Primary): Apply the 26% weighted-average underreporting rate to all 22 properties, adjusted by property size, brand tier, and geography. This is the current methodology, yielding $197.8 million in underreported GRR.

Scenario 2 (Conservative): Assume that underreporting at unaudited properties was only 15% (rather than 26%), reflecting the possibility that smaller properties had less Suncoast booking activity. Recalculate total underreported GRR under this assumption.

Scenario 3 (Ultra-Conservative): Assume no underreporting at unaudited properties and calculate damages based solely on the 10 audited properties for the 2019–2021 period.

Even under Scenario 2, we believe total underreported GRR will substantially exceed the 2% audit-discrepancy threshold established in FLA Section 8.2 as the contractual trigger for remedial action. The inclusion of these sensitivity scenarios will accomplish two objectives: it will demonstrate the robustness of Dr. Kettlewell's primary opinion, and it will provide the Court with a range of damages figures that accounts for the inherent uncertainty in any extrapolation exercise.

3. Temporal Extrapolation

Perhaps the most significant methodological challenge is the backward extrapolation of findings from the 2019–2021 audit period to the full 2013–2021 time frame. The Thornbury audit only confirmed underreporting for three years. The Draft Report extends the underreporting finding back to January 2013, the beginning of the period when Suncoast Room Management was actively diverting revenue. This backward extrapolation covers six additional years (2013–2018) and accounts for a substantial portion of the total $197.8 million underreported GRR figure.

The Draft Report currently supports this temporal extrapolation primarily by reference to the consistent pattern of Suncoast's management-fee structure (a 12% fee retained from gross collections throughout the period) and the continuity of the booking-channel diversion mechanism. While this is a reasonable basis, it would benefit from additional evidentiary support drawn from the deposition record. We recommend that Dr. Kettlewell strengthen the temporal extrapolation discussion by referencing the following:

(a) Janet Kerrigan's deposition testimony (January 2023), in which she confirmed under oath that the Suncoast booking-channel diversion was in place from at least early 2013, when she first became aware of the practice in her role as director of financial reporting. Ms. Kerrigan testified that she "understood the Suncoast arrangement to have been in effect from the time the first properties came online under the Verimark brand" and that "nothing about the revenue-reporting methodology changed during [her] tenure."

(b) Suncoast Room Management Inc.'s incorporation date (November 14, 2012, per Florida Division of Corporations records) and its initial financial records, which show revenue activity beginning in the first quarter of 2013 — consistent with the commencement of the underreporting period.

(c) The consistent pattern of the 12% management fee retained by Suncoast throughout the 2013–2021 period, as reflected in Suncoast's general ledgers. The stability of this fee percentage supports the inference that the diversion mechanism operated in a consistent and systematic manner over the full nine-year period.

(d) Randall Brecker's deposition admissions (Days 1 and 2, January 2023) regarding the timing of his directive to property-level controllers to exclude Suncoast-collected revenues from GRR reports to Verimark. Although Mr. Brecker attempted to characterize the directive as applying only to "certain categories of direct revenue," he acknowledged that the practice was in place "from the beginning of Suncoast's operations."

Each of these evidentiary references should be cited by deposition transcript page and line number (or by Bates number for documentary evidence) in the final report. The combination of testimonial and documentary evidence supporting the temporal extrapolation is strong, and presenting it comprehensively will substantially reduce the vulnerability of Dr. Kettlewell's methodology to defense challenge on this point.

4. Year-by-Year Variation

The Draft Report notes that the underreporting percentage ranged from 22% to 31% depending on the property and year, but it does not explain the factors driving this variation. We recommend that Dr. Kettlewell add a brief discussion — even a single paragraph would suffice — acknowledging and explaining this variability. Relevant factors include:

• The growth of direct-booking channels over the nine-year period, as Suncoast expanded its gulfcoastrooms.com platform and its corporate-direct sales efforts, resulting in a higher proportion of revenue being diverted in later years;

• Variation in corporate-direct contract volume by property and market, with the Fort Myers and Marco Island properties generating substantially more corporate-direct business than the Jacksonville and Georgia properties;

• Changes in OTA market penetration over time, with OTA bookings comprising an increasing share of total bookings industry-wide, which affected the magnitude of the gross-versus-net revenue issue; and

• Property-specific factors such as renovations, temporary closures (particularly during the 2020 COVID-19 period), and changes in room count.

This discussion need not be lengthy, but it will demonstrate that Dr. Kettlewell's analysis accounts for the real-world complexity of revenue reporting across a diversified hotel portfolio, rather than simply applying a single blended percentage mechanically.

C. Treatment of Suncoast Room Management Revenue

The Draft Report correctly identifies Suncoast Room Management Inc. as the entity through which Coastal Palms diverted revenue away from its GRR reporting to Verimark. The draft further identifies three booking channels through which Suncoast collected revenue: (1) walk-in bookings at the hotel properties, (2) corporate-direct contracts negotiated by Suncoast with corporate clients, and (3) bookings made through the unbranded website gulfcoastrooms.com. This three-channel framework is accurate and well-supported by the record evidence.

However, we recommend that the final report include a clearer and more detailed explanation of the flow of funds from guest payment through to the property-level entities. The current draft describes the revenue diversion at a high level but does not trace the cash flow in sufficient detail for the Court to fully understand the mechanics of the scheme. We suggest adding a paragraph or diagram illustrating the following flow:

Step 1: Guest pays for room reservation through one of the three Suncoast channels (walk-in, corporate-direct, or gulfcoastrooms.com).

Step 2: Suncoast Room Management Inc. collects the gross revenue from the guest payment.

Step 3: Suncoast retains a 12% management fee from the gross collection.

Step 4: Suncoast remits the remaining 88% of the gross collection to the appropriate property-level LLC — specifically, Gulf Breeze Hospitality LLC for the 6 Southwest Florida properties operated under that entity, Savannah Lodging Partners LLC for the 4 Coastal Georgia properties, and the other property-level entities for the remaining properties.

Step 5: Neither the gross revenue collected by Suncoast (Step 2) nor the net remittance to the property-level LLCs (Step 4) was included in the GRR figures reported by Coastal Palms to Verimark in its monthly and annual franchise-fee reports.

This flow-of-funds analysis is critical because it demonstrates that the underreporting was not a matter of inadvertent miscategorization or timing differences. The revenue was affirmatively excluded from GRR reports at every stage of the process.

The Draft Report should also emphasize — and we recommend doing so in bold or otherwise highlighted text — that the definition of GRR in FLA Section 4.1 unambiguously captures the revenue collected by Suncoast. Section 4.1 defines GRR as "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." The phrase "regardless of the entity collecting such revenue" is dispositive: it does not matter that Suncoast, rather than the property-level LLC or Coastal Palms itself, was the entity that received the guest's payment. If the revenue was "derived from or attributable to the rental of guest rooms at the Hotel," it falls within the GRR definition and is subject to the royalty, marketing-contribution, and technology-fee calculations.

D. Treatment of OTA Revenue Netting

The Draft Report addresses a second, distinct category of underreporting: Coastal Palms' practice of reporting revenue from online travel agencies ("OTAs") such as Aldermere Technologies, Bramwell Holdings, and similar platforms on a net basis (i.e., after deducting the OTA's commission, typically 15%–25%) rather than on a gross basis. Under the "gross" revenue requirement of FLA Section 4.1, the full room rate charged to the guest — before any deduction for OTA commissions — should be included in GRR.

The Draft Report addresses this issue, but we recommend strengthening the textual analysis of FLA Section 4.1's "gross" revenue requirement. The word "gross" in the defined term "Gross Room Revenue" is not merely descriptive; it is operative. The definition specifies "all revenues derived from or attributable to the rental of guest rooms," and the use of "all" in conjunction with "Gross" reinforces that deductions for third-party commissions are not permitted before reporting revenue to Verimark. The final report should note that FLA Section 4.1(b) contains a specific list of exclusions from GRR (e.g., sales taxes, resort fees paid directly to governmental authorities), and that OTA commissions are not among those enumerated exclusions. Under the expressio unius principle, the exclusion of OTA commissions from the list of permitted deductions confirms that OTA revenue must be reported on a gross basis.

We also note that the OTA-netting issue is separate from but compounding the Suncoast diversion issue. The Draft Report should make this distinction clear. Some OTA bookings were processed through Suncoast's systems (particularly corporate-direct OTA bookings), meaning that the revenue from those bookings was both netted (reducing the reported amount) and excluded entirely from GRR (through the Suncoast diversion). In these cases, the underreporting was doubly compounded, and Dr. Kettlewell's methodology should account for this overlap to avoid either double-counting or undercounting the affected revenue.

V. Comments on Damages Tables — Reconciliation and Corrections

A. Underreported GRR Summary Table (Draft Table 3)

The Draft Report presents its central finding — total underreported GRR across all 22 properties for 2013–2021 — in Draft Table 3. The summary table states the total as $197.8 million. This is the figure upon which all downstream damages calculations (royalties, marketing contributions, interest) are based, and it is therefore critical that this number be precisely reconciled with the underlying property-level calculations.

We have identified a reconciliation discrepancy. When we independently sum the property-level underreported GRR figures presented in Appendices A-1 through A-22, the total comes to approximately $196.4 million — a shortfall of approximately $1.4 million relative to the $197.8 million stated in the summary table. We have traced this discrepancy to two apparent sources:

(a) Rounding errors in the Savannah Lodging Partners LLC properties (Appendices A-15 through A-18): The annual underreported GRR figures for the four Coastal Georgia properties appear to have been rounded to the nearest thousand dollars before being summed to produce the multi-year total. This practice introduces a cumulative rounding error that, across four properties and nine years of data (36 individual data points), appears to account for approximately $400,000 of the discrepancy.

(b) Start-date discrepancy for Jacksonville properties (Appendices A-19 and A-20): The property-level calculations for the two Jacksonville properties appear to use a 2014 start date rather than 2013. We need to confirm with Dr. Kettlewell whether this is intentional — i.e., whether those two properties were not part of the Coastal Palms franchise portfolio until 2014 — or whether this is an error. If the two Jacksonville properties did in fact commence franchise operations in 2013, the omission of a full year of underreported GRR for those properties would account for the remaining approximately $1.0 million of the discrepancy.

We recommend that Dr. Kettlewell recompute all property-level underreported GRR figures to at least two decimal places (i.e., to the nearest cent) before rounding to the nearest thousand for presentation in the appendices. The summary table figure should then be derived directly from the sum of the property-level figures, carried to the same precision, and presented as a rounded figure only after the calculation is complete. This "sum then round" approach, rather than the current "round then sum" approach, will eliminate the rounding discrepancy and ensure that the $197.8 million total (or whatever revised total results from the recalculation) ties precisely to the underlying data.

This reconciliation issue is not merely cosmetic. If opposing counsel identifies a discrepancy between the summary table and the property-level calculations, it will undermine confidence in the entire report, regardless of the magnitude of the discrepancy. Dr. Kettlewell should treat this as a high-priority correction.

B. FY 2021 Reconciliation (Draft Table 4)

Draft Table 4 presents the FY 2021 analysis in detail. The Draft Report states that FY 2021 reported GRR was $112.4 million across the 22-property portfolio, that Dr. Kettlewell's estimated true GRR for FY 2021 was $145.6 million, and that the resulting underreported GRR for FY 2021 was $33.2 million.

This calculation is internally consistent: $145.6 million minus $112.4 million equals $33.2 million. Moreover, the FY 2021 figures are independently corroborated by the Thornbury & Associates preliminary audit and by the client's own internal records. We have no reconciliation concern with Draft Table 4.

We do, however, recommend one clarification. The underreporting percentage for the FY 2021 portfolio in aggregate is approximately 22.8% ($33.2 million divided by $145.6 million). This is at the lower end of the 22%–31% range that the Draft Report cites as the property-level underreporting range. The Draft Report should explain that the higher end of this range — 31% — applies to certain individual properties, particularly the Fort Myers and Marco Island properties where Suncoast booking activity was most concentrated, rather than to the portfolio average. Without this clarification, a reader might incorrectly infer that the 31% figure applies to the portfolio as a whole, which would imply a much larger total underreporting than the $33.2 million actually calculated. The distinction between property-level and portfolio-level percentages should be stated explicitly to avoid confusion at deposition or trial.

C. Underpaid Royalties (Draft Table 5)

Draft Table 5 calculates underpaid royalties as 5% of the $197.8 million in total underreported GRR, yielding $9.89 million. This calculation is arithmetically correct (0.05 × $197,800,000 = $9,890,000), and the 5% royalty rate is confirmed by Section 4.1(a) of each of the 22 FLAs.

We recommend that the final report break out the underpaid royalties by year (2013 through 2021), rather than presenting only the nine-year aggregate. A year-by-year presentation serves two purposes. First, it will show the compounding effect of the underreporting over time, as the annual underpayment grew from year to year in parallel with the growth of Suncoast's booking activity. Second, it will provide the necessary input data for the late-payment interest calculation (Draft Table 8), which requires each year's underpayment to be identified separately so that interest can be accrued from the applicable due date.

D. Underpaid Marketing Contributions (Draft Table 6)

Draft Table 6 calculates underpaid marketing-fund contributions as 2.5% of the $197.8 million in total underreported GRR, yielding $4.945 million. This calculation is correct (0.025 × $197,800,000 = $4,945,000), and the 2.5% marketing-contribution rate is confirmed by FLA Section 4.2.

As with the royalty calculation, we recommend presenting the underpaid marketing contributions on a year-by-year basis to support the interest calculation and to provide greater transparency into the temporal pattern of underpayments.

E. Underpaid Technology Fees (Draft Table 7)

Draft Table 7 calculates underpaid technology fees arising from 214 guest rooms that were added across 4 properties without notice to Verimark. The calculation is: 214 rooms × $12.50 per room per month × an average of approximately 47 months = $1.26 million (approximately $1,255,750).

We have two concerns with this calculation as currently presented.

First, the Draft Report does not identify which four properties added the 214 unreported rooms. The final report should specify each of the four properties by name, the number of rooms added at each property, the dates of the room additions, and the basis for determining that the rooms were unreported. The basis should include cross-referencing Coastal Palms' franchise-application amendments (which should reflect any increase in available room count) with actual room counts derived from at least two independent sources: (a) the Ironclad National Bank loan documents and associated property appraisals, which typically state the number of available rooms, and (b) the relevant county property-tax assessment records, which reflect room counts for ad valorem tax purposes. If the franchise-application amendments do not reflect the room additions, while the bank documents and tax records do, that discrepancy provides compelling evidence that the rooms were added without notice to Verimark.

Second, the Draft Report does not address whether the $12.50 per room per month technology-fee rate is subject to a CPI adjustment. FLA Section 4.3 provides that the technology fee is subject to an annual CPI adjustment, capped at 3% per year. Over the approximately 47-month average period, a 3% annual CPI adjustment could increase the effective per-room rate from $12.50 to approximately $14.42 by the end of the period. We need to confirm with Dr. Kettlewell whether this adjustment is immaterial to the total damages calculation (given that technology fees are a relatively small component of overall damages) or whether it should be incorporated for completeness and accuracy. Our preliminary estimate is that the CPI adjustment would increase the technology-fee damages by approximately $80,000–$120,000. While this is not a large amount in the context of a $150 million case, precision in every component of the damages calculation reinforces the overall credibility of the report.

F. Subtotal of Direct Underpayments

The sum of the three categories of direct underpayments is:

Underpaid royalties: $9,890,000 Underpaid marketing contributions: $4,945,000 Underpaid technology fees: $1,260,000 Total direct underpayments: $16,095,000

This subtotal is confirmed as arithmetically correct. We note, however, that if the underlying GRR total is revised as a result of the reconciliation discussed in Section V.A above (i.e., if the $197.8 million figure changes), the royalty and marketing-contribution figures will need to be recalculated accordingly.

G. Late-Payment Interest (Draft Table 8)

Draft Table 8 calculates late-payment interest at the contractual rate of 1.5% per month, compounded monthly, as provided in FLA Section 4.6. The interest is calculated on the underpaid franchise-fee amounts from their respective due dates through the projected judgment date. The Draft Report states a total late-payment interest figure of $28.4 million.

We have three recommendations regarding this table.

First, the Draft Report should clearly state the projected judgment date assumed in the interest calculation. The original trial date was set for February 2024, but the trial has since been continued to May 2024. Dr. Kettlewell should confirm which date she used and, if necessary, update the calculation to reflect the May 2024 trial date. If the calculation currently uses the February 2024 date, the additional three months of interest accrual at 1.5% per month (compounded) on a base of $16.095 million in underpaid fees could add a meaningful amount to the interest figure.

Second, the final report should provide a per diem accrual rate so that the interest figure can be adjusted at the time of trial, when the actual judgment date will be known. Given the compounding nature of the interest, the per diem rate will not be constant, but a table showing the monthly interest accrual from the current calculation end date forward would allow the Court and the parties to determine the correct interest figure as of any given date.

Third, we recommend that Dr. Kettlewell confirm that compounding is applied separately to underpaid royalties, marketing contributions, and technology fees, as each category has a different payment-due date under the FLAs. Royalties and marketing contributions are due on the 15th of the month following the reporting period (per FLA §§ 4.1 and 4.2), while technology fees are due on the 1st of each calendar quarter (per FLA § 4.3). Applying a single blended start date to the interest calculation would be less precise than calculating interest separately for each fee category and summing the results.

H. Liquidated Damages (Draft Table 9)

Draft Table 9 calculates liquidated damages under FLA Section 15.3, which provides that upon termination of the franchise for cause, the franchisor is entitled to liquidated damages equal to three times the trailing-twelve-month royalties for the terminated property. The Draft Report applies this formula on a per-property basis, calculating corrected (true) trailing-twelve-month royalties for each of the 22 properties, multiplying by three, and summing the results across all 22 properties to arrive at $105.5 million.

We have verified the internal logic of this calculation and offer the following observations.

The trailing-twelve-month corrected royalties (calculated as 5% of estimated true GRR for the most recent twelve months) for all 22 properties aggregate to approximately $7.28 million per year. One might therefore expect the liquidated-damages figure to be 3 × $7.28 million = $21.84 million. However, the Draft Report correctly explains that the FLA formula is applied on a per-property basis — that is, the liquidated damages for each property are calculated as 3× that property's trailing-twelve-month royalties, and the total is the sum across all 22 properties. Because the per-property formula is applied independently 22 times (rather than applied once to the portfolio aggregate), the resulting figure ($105.5 million) is substantially larger than a simple 3× portfolio-total calculation would suggest. This is a correct application of the FLA language, which specifies that the formula applies "with respect to each Hotel" upon termination.

We recommend that Dr. Kettlewell add a footnote or brief explanatory paragraph making this distinction explicit. Without such an explanation, a reader might look at the $7.28 million annual royalty figure, multiply by three, arrive at $21.84 million, and conclude that the $105.5 million figure is an error. The explanation should note that the per-property application of the formula, as mandated by the FLA text, produces a materially different result than a portfolio-level application would, and that Dr. Kettlewell has applied the formula as written.

We also anticipate that Coastal Palms' counsel will argue that the $105.5 million liquidated-damages figure constitutes an unenforceable penalty. This is ultimately a legal question for the Court to decide, and Dr. Kettlewell should not offer a legal opinion on the enforceability of the liquidated-damages provision. However, she should be prepared to testify at deposition and trial that her role was limited to quantifying the damages produced by the contractual formula set forth in FLA Section 15.3, and that the formula produces a deterministic result when applied to the corrected GRR data. The draft report should note, in appropriately careful language, that Dr. Kettlewell has applied the liquidated-damages formula as set forth in the FLAs and has not been asked to opine on the enforceability of that formula.

I. Grand Total Reconciliation

The grand total of damages presented in the Draft Report is:

Direct underpayments (royalties + marketing + technology fees): $16,095,000 Late-payment interest: $28,400,000 Liquidated damages: $105,500,000 Grand total: $149,995,000

This figure rounds to approximately $150 million, which is consistent with the damages figure alleged in Verimark's Amended Complaint. The internal arithmetic is correct ($16,095,000 + $28,400,000 + $105,500,000 = $149,995,000).

We recommend that the final report present the grand total as "$149,995,000" in the summary table, with a parenthetical noting "approximately $150 million," and include a cross-reference to the damages demand in the Complaint. The precision of the $149,995,000 figure demonstrates analytical rigor, while the "approximately $150 million" characterization maintains consistency with the pleadings.

As noted throughout this section, the grand total is contingent on the accuracy of the underlying GRR calculation and will need to be adjusted if the $197.8 million total underreported GRR figure changes as a result of the reconciliation discussed in Section V.A.

VI. Evidentiary Support — Record Citations

A. Key Deposition Testimony to Cite

The Draft Report references deposition testimony at several points but generally does so in a summary fashion without citing specific transcript pages and line numbers. We recommend that the final report include precise citations for the following key testimony, all of which is directly relevant to the foundation of Dr. Kettlewell's opinions.

Randall Brecker (Days 1 and 2, January 9–10, 2023): Mr. Brecker is the managing member and principal of Coastal Palms Franchise Holdings LLC and the founder of Suncoast Room Management Inc. His testimony includes the following critical admissions:

• He personally directed property-level controllers to exclude Suncoast-collected revenues from the monthly GRR reports submitted to Verimark. He characterized this directive as a matter of "operational efficiency" and stated that he did not consider revenue collected by Suncoast, a "separate entity," to be subject to franchise fees under the FLAs.

• He testified that Suncoast was established "to handle the direct side of the business," confirming that the entity was created specifically to manage booking channels that would generate revenue outside the scope of what Coastal Palms reported to Verimark.

• He acknowledged that he did not seek a legal opinion or consult with Verimark before excluding Suncoast revenue from GRR reports, and that he did not disclose the existence or activities of Suncoast to Verimark prior to the commencement of the Thornbury audit in late 2021.

Mr. Brecker's testimony directly contradicts the plain text of FLA Section 4.1, which defines GRR as including revenues "regardless of the entity collecting such revenue." His admission that he "did not consider" Suncoast revenue to be subject to franchise fees does not create a genuine ambiguity in the FLA language; rather, it confirms that the exclusion of Suncoast revenue was a deliberate, unilateral decision by Coastal Palms, not a good-faith interpretation of an ambiguous contract term.

Janet Kerrigan (January 23, 2023): Ms. Kerrigan served as Coastal Palms' director of financial reporting from 2012 until her termination in October 2021. Her testimony is critical to the temporal dimension of Dr. Kettlewell's opinions for the following reasons:

• She confirmed that the Suncoast booking-channel diversion was in place from at least early 2013, when she first became aware of the practice. She testified that the reporting methodology was established at Coastal Palms' inception and was never modified during her nine-year tenure.

• She stated that she raised concerns internally about the propriety of excluding Suncoast revenue from GRR reports on at least three occasions (approximately 2015, 2018, and 2021), and that on each occasion, Mr. Brecker instructed her to continue the existing reporting practice.

• She was terminated in October 2021, shortly after she raised her concerns for the third time and approximately two months before Verimark commenced the Thornbury audit. While the circumstances of her termination are not directly relevant to the damages quantification, they corroborate the inference that Coastal Palms was aware that its reporting practice was improper.

Ms. Kerrigan's testimony is the single most important evidentiary foundation for Dr. Kettlewell's backward temporal extrapolation to 2013. Without her testimony, the extension of findings from the 2019–2021 audit period to the earlier years would rest primarily on inference from Suncoast's financial records. With her testimony, the extrapolation is supported by direct eyewitness evidence that the diversion scheme was in operation throughout the full nine-year period.

Nolan Prescott (February 14, 2023): Mr. Prescott is a minority investor and board member of Coastal Palms. At his deposition, he generally claimed a lack of knowledge regarding the details of the company's revenue-reporting methodology to Verimark. However, documents produced in discovery demonstrate that Mr. Prescott received quarterly financial summaries from Mr. Brecker that included Suncoast revenue as a separate line item. These documents, when juxtaposed with Mr. Prescott's claimed ignorance, support the finding that the revenue diversion scheme was known at the ownership level of Coastal Palms — not merely an operational decision made by a single individual. While Mr. Prescott's testimony does not directly affect the quantum of damages, it reinforces the characterization of the underreporting as systematic and deliberate, which is relevant to the Court's consideration of liquidated damages and interest.

Property-Level Witnesses (January–March 2023): The 10 property managers and accountants deposed during the fact-discovery period uniformly testified to receiving direction from "corporate" — specifically from Mr. Brecker or his designee — to route walk-in and corporate-direct bookings through the Suncoast booking system and to exclude Suncoast-originated revenue from the monthly GRR reports submitted to Verimark. This uniform testimony across multiple witnesses at multiple properties further confirms the systematic nature of the underreporting and supports the extrapolation of findings from the audited properties to the unaudited properties.

B. Key Documents to Cite

In addition to deposition testimony, the Draft Report should include specific citations (with Bates numbers) to the following categories of documentary evidence:

• Suncoast Room Management Inc. general ledgers (2013–2021): Produced on November 18, 2022, pursuant to the Court's October 28, 2022 order. These ledgers are the primary documentary basis for Dr. Kettlewell's quantification of diverted revenue. They show gross revenue collections by Suncoast, the 12% management-fee retention, and net remittances to property-level LLCs, broken down by property, month, and booking channel.

• OTA net-rate agreements: Agreements between Coastal Palms (and/or Suncoast) and OTAs such as Aldermere Technologies and Bramwell Holdings, showing the commission rates applicable to each property. These documents are essential to Dr. Kettlewell's calculation of the gross-versus-net OTA revenue difference.

• gulfcoastrooms.com booking logs: Logs maintained by Suncoast reflecting all reservations made through the gulfcoastrooms.com website, including guest name, property, dates of stay, room rate, and total charges. These logs are a primary source for quantifying the direct-booking revenue diverted through the unbranded website.

• Ironclad National Bank financial statements: Financial statements submitted by Coastal Palms to Ironclad National Bank in connection with its commercial credit facilities. These statements were obtained by Verimark via subpoena duces tecum served August 8, 2022. Critically, the revenue figures reported to Ironclad National Bank are consistently higher than those reported to Verimark in the monthly GRR reports, corroborating the finding that Coastal Palms underreported revenue to Verimark while reporting higher (and presumably more accurate) figures to its lender.

• Thornbury & Associates preliminary audit findings (January 18, 2022): The audit report covering 10 properties for the 2019–2021 period, which found an approximately 26% underreporting rate and was the initial catalyst for this litigation.

C. Coordination with Thornbury Audit

The Draft Report should clearly delineate the relationship between Dr. Kettlewell's independent forensic analysis and the Thornbury & Associates preliminary audit findings that preceded her engagement. This delineation is important for two reasons. First, it establishes that Dr. Kettlewell conducted her own independent analysis rather than simply adopting Thornbury's conclusions. Second, it provides transparency regarding the analytical foundation of her work, which will be important at any admissibility hearing and during cross-examination.

We recommend that the final report include a bridging paragraph, ideally in the Methodology section, that explains the relationship as follows: Thornbury & Associates audited 10 of the 22 franchised properties for the 2019–2021 period and found an approximately 26% weighted-average underreporting rate. Dr. Kettlewell used Thornbury's preliminary audit findings as a starting point and independently verified Thornbury's calculations by conducting her own analysis of the Suncoast financial records, the gulfcoastrooms.com booking logs, and the OTA net-rate reconciliation reports. Dr. Kettlewell then expanded the analysis beyond the scope of the Thornbury audit in two dimensions: (1) she extended the analysis from the 10 audited properties to all 22 properties in the franchise portfolio, using the extrapolation methodology described in the Methodology section; and (2) she extended the analysis from the 2019–2021 audit period to the full 2013–2021 period, relying on Suncoast's historical financial records and corroborating deposition testimony. The resulting total of $197.8 million in underreported GRR reflects Dr. Kettlewell's independent analysis and is not simply a multiple of the Thornbury audit findings, although the two analyses are consistent in their conclusions for the properties and periods they both cover.

VII. Anticipated Defense Critiques and Prophylactic Recommendations

As part of our review of the Draft Report, we have considered the defense arguments most likely to be raised by Coastal Palms and its expert, Prof. Grant Hargrove of Hargrove Economic Consulting Inc. We set forth below the anticipated critiques and our recommendations for prophylactic language or analysis that Dr. Kettlewell should incorporate into the final report to address these arguments proactively.

A. GRR Definition Ambiguity Argument

Coastal Palms' primary defense to Verimark's claims — as articulated in Whitfield, Barrow & Crane's February 28, 2022 response to Verimark's Notice of Material Breach — is that the GRR definition in FLA Section 4.1 is ambiguous as to revenues collected by a "separate management entity" such as Suncoast. Coastal Palms contends that because Suncoast is a distinct legal entity from the property-level franchisee LLCs that are signatories to the FLAs, and because Suncoast is not itself a party to the FLAs, revenues collected by Suncoast do not constitute "revenues derived from or attributable to the rental of guest rooms at the Hotel" within the meaning of Section 4.1.

We recognize that the interpretation of the GRR definition is a legal question that ultimately rests with the Court, and Dr. Kettlewell's report should not purport to offer a legal opinion on the correct interpretation of FLA Section 4.1. However, the methodology section of the report necessarily relies on a particular reading of the GRR definition in order to calculate damages. Dr. Kettlewell should clearly state, in the assumptions section of her report, the GRR definition she has applied and note that it follows the plain text of FLA Section 4.1 — specifically, the language "regardless of the entity collecting such revenue." She should further note that she has been instructed by counsel to apply the GRR definition as written, and that any modification of that definition would require a corresponding adjustment to her damages calculations.

If Coastal Palms' defense expert, Prof. Hargrove, adopts a narrower GRR definition that excludes Suncoast-collected revenue, Dr. Kettlewell should be prepared to address that alternative definition in her rebuttal report (due June 9, 2023). We recommend that she draft a framework now for alternative-definition sensitivity analyses so that the rebuttal report can be prepared efficiently once Prof. Hargrove's opinion is known.

B. Anticipated Hargrove Counter-Opinion

Based on our review of Prof. Hargrove's prior expert reports in comparable franchise-fee disputes (two of which are publicly available from prior litigation), and based on the defense arguments previewed in Whitfield, Barrow & Crane's discovery responses, we anticipate that Prof. Hargrove will opine that the maximum underpayment attributable to Coastal Palms is approximately $6.2 million. This figure appears to be based on two key assumptions: (1) exclusion of all walk-in cash payments from GRR on the theory that they were not "derived from" room rentals at the Hotel but rather from a separate management service provided by Suncoast; and (2) use of net (post-commission) OTA revenue rather than gross OTA revenue.

We recommend that Dr. Kettlewell's final report include a section — or at minimum a substantial footnote or appendix — that addresses alternative GRR constructions and demonstrates that even under the most conservative interpretation of the GRR definition, the underreporting remains substantial. Specifically, she should present a sensitivity analysis showing damages under at least two alternative GRR definitions:

Alternative A (excluding walk-in cash payments only): Under this construction, walk-in cash payments collected by Suncoast are excluded from GRR, but corporate-direct bookings and gulfcoastrooms.com bookings remain included (as these clearly involve "rental of guest rooms at the Hotel"), and OTA revenue is reported gross. We estimate that this alternative would reduce total underreported GRR from $197.8 million to approximately $140–$155 million, and total damages from $150 million to approximately $105–$115 million.

Alternative B (excluding walk-in payments and using net OTA revenue): Under this construction, both walk-in payments and OTA commissions are excluded from GRR. This is the narrowest reasonable interpretation and appears to be the basis for Prof. Hargrove's anticipated $6.2 million opinion. However, we note that even under this interpretation, the gulfcoastrooms.com bookings and corporate-direct bookings remain within the scope of GRR, and the resulting underreported GRR and underpaid fees should substantially exceed $6.2 million. If Prof. Hargrove's $6.2 million figure proves to be based on an even narrower interpretation, we will need to carefully examine his methodology for errors or omissions.

The inclusion of these alternative analyses in Dr. Kettlewell's report will accomplish two objectives: it will demonstrate the robustness of the primary damages opinion by showing that underreporting is substantial under any reasonable GRR definition, and it will set up the rebuttal report by establishing the analytical framework for responding to whatever specific GRR definition Prof. Hargrove adopts.

C. Extrapolation Challenge

As discussed in detail in Section IV.B above, we expect Coastal Palms to challenge both the portfolio-wide extrapolation (from 10 audited properties to all 22 properties) and the temporal extrapolation (from the 2019–2021 audit period to the full 2013–2021 period). Our recommendations for strengthening the extrapolation methodology are set forth in that section and are not repeated here.

In addition to those recommendations, we suggest that Dr. Kettlewell consider presenting a "conservative estimate" scenario alongside the primary $197.8 million figure. This conservative scenario would apply the lower end of the underreporting range to unaudited properties and earlier years, an

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Priya Anand, Partner
FROM: Yuki Nakamura, Lead Associate; Carlos Espinoza, Associate
DATE: April 5, 2023
RE: Review Comments on Draft Expert Report of Dr. Sharon Kettlewell, CPA/CFF, CFE — Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC et al., Case No. 1021-00006 (Circuit Court, 17th Judicial Circuit, Broward County, Florida)
I. Introduction and Purpose
This memorandum provides our detailed comments and suggested revisions to the draft expert report of Dr. Sharon Kettlewell of Ridgeline Forensic Advisory LLC, which was received by our office on April 1, 2023 (the "Draft Report"). We have reviewed the Draft Report in its entirety, including the narrative text, the nine damages tables, and all fourteen appendices, and we have cross-referenced Dr. Kettlewell's analysis against the underlying record evidence — including deposition transcripts, Suncoast Room Management Inc. financial records, the Thornbury & Associates CPAs LLP preliminary audit findings, and the relevant provisions of the Franchise License Agreements ("FLAs").
By way of background, Dr. Kettlewell was retained on December 12, 2022, pursuant to an engagement letter executed between Ridgeline Forensic Advisory LLC and this firm on behalf of Verimark Hospitality Group Inc. ("Verimark"). Under the terms of that engagement, Dr. Kettlewell's fee arrangement provides for billing at $475 per hour for principal time and $325 per hour for staff time. She was retained to serve as Verimark's forensic accounting and damages-quantification expert in connection with this litigation, specifically to opine on the magnitude and duration of Coastal Palms Franchise Holdings LLC's ("Coastal Palms") systematic underreporting of Gross Room Revenue ("GRR") and the resulting underpayment of franchise fees, marketing contributions, and technology fees owed under the FLAs.
The final expert report must be served on Coastal Palms' counsel, Whitfield, Barrow & Crane LLP (lead attorneys Nathan Whitfield III and Gabriela Montes), no later than April 14, 2023, in accordance with the Court's discovery scheduling order. Given that the deadline is fewer than ten days away, and that the Draft Report requires substantive revisions in several areas, we have endeavored to make our comments as specific and actionable as possible so that Dr. Kettlewell can efficiently incorporate them into the final version.
We have organized our comments into five categories: (1) overall structure and presentation; (2) methodology section revisions, with particular attention to the extrapolation from audited properties to the full portfolio; (3) damages table corrections and reconciliation, including identification of a $1.4 million discrepancy between the summary table and property-level calculations; (4) support for key opinions with record evidence, including specific deposition testimony and documentary citations; and (5) anticipated defense critiques and prophylactic language to strengthen the report against challenges expected from Coastal Palms' expert, Prof. Grant Hargrove of Hargrove Economic Consulting Inc.
We recommend scheduling a conference call with Dr. Kettlewell no later than April 8, 2023, to walk through these revisions in detail and ensure that the final report can be prepared, reviewed, and filed on schedule. Carlos Espinoza has already reached out to Dr. Kettlewell's office to confirm availability for that date.
II. Executive Summary of Draft Report
Before turning to our specific comments, we summarize below the key opinions and findings set forth in the Draft Report so that this memorandum may be read as a self-contained reference document.
Dr. Kettlewell's Draft Report opines that Coastal Palms Franchise Holdings LLC, through its affiliate Suncoast Room Management Inc. ("Suncoast") and its principal, Randall Brecker, systematically underreported Gross Room Revenue as defined in Section 4.1 of the Franchise License Agreements over a nine-year period spanning fiscal years 2013 through 2021. The Draft Report concludes that cumulative underreported GRR across this period totals approximately $197.8 million across all 22 franchised hotel properties — consisting of 18 Verimark Suites-branded properties and 4 Verimark Select-branded properties — comprising approximately 3,740 guest rooms in total.
The resulting underpayments are broken into three categories of direct franchise-fee underpayments:
• Royalty underpayments at the contractual rate of 5% of GRR: $9.89 million;
• Marketing-fund contribution underpayments at the contractual rate of 2.5% of GRR: $4.945 million; and
• Technology fee underpayments for 214 guest rooms added across 4 properties without notice to Verimark, at the contractual rate of $12.50 per room per month for an average of approximately 47 months: $1.26 million.
These three categories yield a subtotal of $16.095 million in direct underpayments.
In addition, the Draft Report calculates two additional damages components:
• Late-payment interest at the contractual rate of 1.5% per month, compounded monthly, as provided in FLA Section 4.6, calculated on the unpaid amounts from their respective due dates through the projected judgment date. The Draft Report computes this figure at $28.4 million.
• Liquidated damages under FLA Section 15.3, which provides that upon termination for cause, the franchisor is entitled to 3× the trailing-twelve-month corrected royalties for each property. Applied on a per-property basis across all 22 franchised properties, this calculation yields $105.5 million.
The grand total of damages presented in the Draft Report is therefore approximately $150 million ($16.095M + $28.4M + $105.5M = $149.995M).
The Draft Report also addresses Fiscal Year 2021 in specific detail, as this is the period for which the most granular data is available. For FY 2021, the Draft Report states that Coastal Palms reported GRR of $112.4 million across the portfolio, whereas Dr. Kettlewell's analysis estimates true GRR of $145.6 million, yielding underreported GRR of $33.2 million for that year alone. The underreporting percentage ranged from approximately 22% to 31% depending on the individual property, with the higher percentages concentrated in the Fort Myers and Marco Island properties where Suncoast's walk-in and corporate-direct booking volume was highest.
III. Comments on Overall Structure and Presentation
A. Report Organization
The Draft Report is currently organized into the following nine sections: (1) Qualifications, (2) Scope of Engagement, (3) Materials Reviewed, (4) Background, (5) Methodology, (6) Findings, (7) Damages Calculations, (8) Conclusions, and (9) Exhibits/Appendices. This structure is generally logical and follows the customary format for forensic accounting expert reports in Florida state-court litigation. However, we have two organizational recommendations.
First, we recommend that Dr. Kettlewell add a standalone "Summary of Opinions" section immediately following the Qualifications section. This summary should be concise — no more than two pages — and should set forth each of her principal opinions in numbered-paragraph format, with cross-references to the sections of the report where each opinion is developed in full. We believe this addition is important for judicial efficiency. Judge Calloway is known to review expert reports at a high level before delving into the details, and a front-loaded summary will ensure that the Court immediately grasps the scope and magnitude of Dr. Kettlewell's findings. Additionally, a discrete Summary of Opinions section will serve as a useful reference during motions practice (e.g., any Frye-based challenge to Dr. Kettlewell's methodology) and at trial, where the summary can be used as a framework for direct examination.
Second, we suggest that Dr. Kettlewell consolidate the fourteen appendices into a more navigable structure. The current appendices are numbered A-1 through A-22 (property-level calculations for each of the 22 franchised hotels), but they are arranged alphabetically by property name. We recommend instead grouping the appendices by geographic region: Southwest Florida (the 12 properties located in Lee, Collier, and Charlotte Counties), Northeast Florida/Jacksonville (the 6 properties located in Duval and St. Johns Counties), and Coastal Georgia (the 4 properties located in Chatham and Glynn Counties). This geographic grouping will be more intuitive because it mirrors the entity structure used by Coastal Palms — Gulf Breeze Hospitality LLC operates the Southwest Florida properties, a separate group of entities operates the Jacksonville properties, and Savannah Lodging Partners LLC operates the Georgia properties. Grouping the appendices in this fashion will also facilitate the Court's review of the extrapolation methodology, which accounts for geographic market conditions as a variable.
B. Qualifications Section
Dr. Kettlewell's qualifications are impressively stated in the current draft. Her 28 years of forensic accounting experience, her dual certifications as a Certified Public Accountant with a specialization in Financial Forensics (CPA/CFF) and a Certified Fraud Examiner (CFE), her extensive publication history, and her prior expert testimony in 43 matters are all well-documented and lend substantial credibility to her opinions.
We do, however, recommend one addition. The qualifications section should include a brief but specific reference to Dr. Kettlewell's prior experience in franchise and hospitality-industry disputes. We understand from our initial discussions with her that she has served as a forensic accounting expert in at least seven prior franchise-fee disputes, including two involving hotel franchisors, and that she has been qualified as an expert in revenue-recognition matters in the hospitality industry on at least three occasions. These details should be added to the qualifications section, even if only in a single paragraph, to preempt any challenge to her qualifications. Although Florida has historically applied the Frye standard for expert testimony admissibility, the Legislature's recent amendment to Section 90.702 of the Florida Evidence Code (effective July 1, 2023) moves Florida toward the federal Daubert standard. While the effective date technically falls after the current expert-report deadline, the transition is well underway in judicial practice, and Judge Calloway may well apply a more rigorous reliability inquiry to expert methodology. Establishing Dr. Kettlewell's specialized industry experience at the outset will bolster her qualifications under either standard.
C. Materials Reviewed
The "Materials Reviewed" section of the Draft Report lists an extensive body of materials. The draft confirms that approximately 2.3 million documents, totaling 1.1 terabytes of data, were processed by Nexagen Document Solutions LLC and made available to Dr. Kettlewell and her team at Ridgeline Forensic Advisory. We have reviewed the materials list against our own records of the document productions in this case and have the following observations.
We have confirmed that the materials list includes all of the following categories of documents, each of which is essential to the foundation of Dr. Kettlewell's opinions:
(a) All 22 individual Franchise License Agreements between Verimark and the respective Coastal Palms property-level entities, with the earliest FLA first executed on June 15, 2007, and the most recent executed on September 3, 2019;
(b) The Thornbury & Associates CPAs LLP preliminary audit findings, delivered to Verimark on January 18, 2022, covering the 10 highest-GRR properties for the 2019–2021 period;
(c) Suncoast Room Management Inc. financial records, including general ledgers, bank statements, booking logs, and management-fee calculations, produced pursuant to the Court's October 28, 2022 order compelling production (312,000 supplemental documents produced by Coastal Palms on November 18, 2022, after initial production was found deficient);
(d) Coastal Palms' initial document production of approximately 84,000 documents, delivered in multiple tranches between August and October 2022;
(e) Deposition transcripts from all 14 fact depositions taken between January 9 and March 17, 2023, including in particular the two-day deposition of Randall Brecker (Coastal Palms' principal and managing member), the deposition of Janet Kerrigan (former Coastal Palms director of financial reporting), and the deposition of Nolan Prescott (Coastal Palms' minority investor and board member); and
(f) Ironclad National Bank loan documents and financial statements submitted by Coastal Palms in connection with its commercial credit facilities, obtained by Verimark via subpoena duces tecum served on Ironclad National Bank on August 8, 2022.
However, we have identified a gap in the materials list that should be corrected in the final report. The Draft Report does not currently list the gulfcoastrooms.com booking-log data or the OTA net-rate reconciliation reports from Suncoast among the enumerated materials reviewed. Both of these data sets are referenced substantively in the Draft Report's methodology section — the gulfcoastrooms.com booking logs are central to the quantification of diverted direct-booking revenue, and the OTA net-rate reconciliation reports are the basis for Dr. Kettlewell's analysis of the gross-versus-net OTA revenue issue. If these materials are not explicitly listed in the "Materials Reviewed" section, opposing counsel will have a basis to argue that Dr. Kettlewell relied on data she did not properly disclose, or that she failed to consider relevant materials. We recommend that Dr. Kettlewell add explicit line items for both data sets, with production Bates-number ranges, to the materials list.
IV. Comments on Methodology Section — Extrapolation from Audited Properties to Full Portfolio
A. Overview of Current Approach
The core analytical challenge in this case is that Thornbury & Associates' preliminary audit covered only 10 of the 22 franchised properties, and only for the three most recent fiscal years (2019–2021). The remaining 12 properties and the earlier fiscal years (2013–2018) have not been independently audited. Dr. Kettlewell's methodology addresses this challenge through an extrapolation approach, which we summarize as follows.
Thornbury audited the top 10 properties by reported GRR for the 2019–2021 period and found that those properties underreported GRR by approximately 26% on a weighted-average basis. Dr. Kettlewell uses these 10 audited properties as a baseline sample and extrapolates the findings to all 22 properties across the full 2013–2021 period. The extrapolation uses a weighted-average underreporting percentage that is adjusted by three property-specific variables: (1) property size (measured by available room count), (2) brand tier (Verimark Suites versus Verimark Select, the latter being a more limited-service brand with different revenue characteristics), and (3) geographic market (Southwest Florida, Northeast Florida/Jacksonville, and Coastal Georgia), which captures differences in walk-in booking rates, corporate-direct contract penetration, and OTA market share that affect the proportion of revenue likely to have been channeled through Suncoast.
This approach is reasonable and well within the methodological conventions accepted in forensic accounting, particularly in franchise-fee disputes where the franchisor's access to the franchisee's internal records is inherently limited. However, the Draft Report's presentation of the extrapolation methodology would benefit from several revisions designed to strengthen its analytical rigor and resilience to defense challenge. We address each below.
B. Recommended Revisions to Extrapolation Methodology
1. Strengthen the Representativeness Analysis
The Draft Report's current discussion of why the 10 audited properties are representative of the full 22-property portfolio is conclusory. Dr. Kettlewell states that the audited properties "are broadly representative of the Coastal Palms franchise portfolio," but she does not provide the supporting data that would allow a reader to independently verify this assertion. We recommend that the final report include a more explicit representativeness analysis that addresses at least the following three dimensions:
Property-Size Distribution: The 10 audited properties range from 120 to 280 rooms; the unaudited properties range from 85 to 210 rooms. The draft should present a table or chart showing the room-count distribution for both the audited and unaudited subsets, demonstrating that the audited sample captures the full range of property sizes within the portfolio.
Brand Mix: Of the 10 audited properties, 8 are Verimark Suites and 2 are Verimark Select. The unaudited properties include 10 Verimark Suites and 2 Verimark Select. The brand mix is thus comparable (80/20 vs. 83/17), and this should be explicitly stated.
Geographic Spread: The 10 audited properties include properties in all three geographic regions (Southwest Florida, Northeast Florida, and Coastal Georgia). The draft should confirm this and indicate how many audited properties fall in each region relative to the total properties in that region.
Presenting this representativeness data in a clear, tabular format will preempt the most obvious line of defense attack — that the audited sample is not comparable to the unaudited properties — and will provide Judge Calloway with a solid factual basis for finding that the extrapolation methodology is reliable.
2. Address Potential Selection Bias
We anticipate that Coastal Palms' expert, Prof. Hargrove, will argue that Thornbury's decision to audit the top 10 properties by reported GRR introduces selection bias, because larger properties may exhibit systematically different underreporting patterns than smaller ones. The argument would be that properties generating higher revenue have more complex booking channels and greater opportunity for diversion, and that extrapolating a 26% underreporting rate to smaller, simpler properties overstates the total underreporting.
Whether or not this argument has merit, the Draft Report should address it head-on. We recommend that Dr. Kettlewell include a sensitivity analysis demonstrating that even under substantially more conservative assumptions regarding the unaudited properties, the total underreported GRR remains significant. Specifically, we suggest the following sensitivity scenarios:
Scenario 1 (Primary): Apply the 26% weighted-average underreporting rate to all 22 properties, adjusted by property size, brand tier, and geography. This is the current methodology, yielding $197.8 million in underreported GRR.
Scenario 2 (Conservative): Assume that underreporting at unaudited properties was only 15% (rather than 26%), reflecting the possibility that smaller properties had less Suncoast booking activity. Recalculate total underreported GRR under this assumption.
Scenario 3 (Ultra-Conservative): Assume no underreporting at unaudited properties and calculate damages based solely on the 10 audited properties for the 2019–2021 period.
Even under Scenario 2, we believe total underreported GRR will substantially exceed the 2% audit-discrepancy threshold established in FLA Section 8.2 as the contractual trigger for remedial action. The inclusion of these sensitivity scenarios will accomplish two objectives: it will demonstrate the robustness of Dr. Kettlewell's primary opinion, and it will provide the Court with a range of damages figures that accounts for the inherent uncertainty in any extrapolation exercise.
3. Temporal Extrapolation
Perhaps the most significant methodological challenge is the backward extrapolation of findings from the 2019–2021 audit period to the full 2013–2021 time frame. The Thornbury audit only confirmed underreporting for three years. The Draft Report extends the underreporting finding back to January 2013, the beginning of the period when Suncoast Room Management was actively diverting revenue. This backward extrapolation covers six additional years (2013–2018) and accounts for a substantial portion of the total $197.8 million underreported GRR figure.
The Draft Report currently supports this temporal extrapolation primarily by reference to the consistent pattern of Suncoast's management-fee structure (a 12% fee retained from gross collections throughout the period) and the continuity of the booking-channel diversion mechanism. While this is a reasonable basis, it would benefit from additional evidentiary support drawn from the deposition record. We recommend that Dr. Kettlewell strengthen the temporal extrapolation discussion by referencing the following:
(a) Janet Kerrigan's deposition testimony (January 2023), in which she confirmed under oath that the Suncoast booking-channel diversion was in place from at least early 2013, when she first became aware of the practice in her role as director of financial reporting. Ms. Kerrigan testified that she "understood the Suncoast arrangement to have been in effect from the time the first properties came online under the Verimark brand" and that "nothing about the revenue-reporting methodology changed during [her] tenure."
(b) Suncoast Room Management Inc.'s incorporation date (November 14, 2012, per Florida Division of Corporations records) and its initial financial records, which show revenue activity beginning in the first quarter of 2013 — consistent with the commencement of the underreporting period.
(c) The consistent pattern of the 12% management fee retained by Suncoast throughout the 2013–2021 period, as reflected in Suncoast's general ledgers. The stability of this fee percentage supports the inference that the diversion mechanism operated in a consistent and systematic manner over the full nine-year period.
(d) Randall Brecker's deposition admissions (Days 1 and 2, January 2023) regarding the timing of his directive to property-level controllers to exclude Suncoast-collected revenues from GRR reports to Verimark. Although Mr. Brecker attempted to characterize the directive as applying only to "certain categories of direct revenue," he acknowledged that the practice was in place "from the beginning of Suncoast's operations."
Each of these evidentiary references should be cited by deposition transcript page and line number (or by Bates number for documentary evidence) in the final report. The combination of testimonial and documentary evidence supporting the temporal extrapolation is strong, and presenting it comprehensively will substantially reduce the vulnerability of Dr. Kettlewell's methodology to defense challenge on this point.
4. Year-by-Year Variation
The Draft Report notes that the underreporting percentage ranged from 22% to 31% depending on the property and year, but it does not explain the factors driving this variation. We recommend that Dr. Kettlewell add a brief discussion — even a single paragraph would suffice — acknowledging and explaining this variability. Relevant factors include:
• The growth of direct-booking channels over the nine-year period, as Suncoast expanded its gulfcoastrooms.com platform and its corporate-direct sales efforts, resulting in a higher proportion of revenue being diverted in later years;
• Variation in corporate-direct contract volume by property and market, with the Fort Myers and Marco Island properties generating substantially more corporate-direct business than the Jacksonville and Georgia properties;
• Changes in OTA market penetration over time, with OTA bookings comprising an increasing share of total bookings industry-wide, which affected the magnitude of the gross-versus-net revenue issue; and
• Property-specific factors such as renovations, temporary closures (particularly during the 2020 COVID-19 period), and changes in room count.
This discussion need not be lengthy, but it will demonstrate that Dr. Kettlewell's analysis accounts for the real-world complexity of revenue reporting across a diversified hotel portfolio, rather than simply applying a single blended percentage mechanically.
C. Treatment of Suncoast Room Management Revenue
The Draft Report correctly identifies Suncoast Room Management Inc. as the entity through which Coastal Palms diverted revenue away from its GRR reporting to Verimark. The draft further identifies three booking channels through which Suncoast collected revenue: (1) walk-in bookings at the hotel properties, (2) corporate-direct contracts negotiated by Suncoast with corporate clients, and (3) bookings made through the unbranded website gulfcoastrooms.com. This three-channel framework is accurate and well-supported by the record evidence.
However, we recommend that the final report include a clearer and more detailed explanation of the flow of funds from guest payment through to the property-level entities. The current draft describes the revenue diversion at a high level but does not trace the cash flow in sufficient detail for the Court to fully understand the mechanics of the scheme. We suggest adding a paragraph or diagram illustrating the following flow:
Step 1: Guest pays for room reservation through one of the three Suncoast channels (walk-in, corporate-direct, or gulfcoastrooms.com).
Step 2: Suncoast Room Management Inc. collects the gross revenue from the guest payment.
Step 3: Suncoast retains a 12% management fee from the gross collection.
Step 4: Suncoast remits the remaining 88% of the gross collection to the appropriate property-level LLC — specifically, Gulf Breeze Hospitality LLC for the 6 Southwest Florida properties operated under that entity, Savannah Lodging Partners LLC for the 4 Coastal Georgia properties, and the other property-level entities for the remaining properties.
Step 5: Neither the gross revenue collected by Suncoast (Step 2) nor the net remittance to the property-level LLCs (Step 4) was included in the GRR figures reported by Coastal Palms to Verimark in its monthly and annual franchise-fee reports.
This flow-of-funds analysis is critical because it demonstrates that the underreporting was not a matter of inadvertent miscategorization or timing differences. The revenue was affirmatively excluded from GRR reports at every stage of the process.
The Draft Report should also emphasize — and we recommend doing so in bold or otherwise highlighted text — that the definition of GRR in FLA Section 4.1 unambiguously captures the revenue collected by Suncoast. Section 4.1 defines GRR as "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." The phrase "regardless of the entity collecting such revenue" is dispositive: it does not matter that Suncoast, rather than the property-level LLC or Coastal Palms itself, was the entity that received the guest's payment. If the revenue was "derived from or attributable to the rental of guest rooms at the Hotel," it falls within the GRR definition and is subject to the royalty, marketing-contribution, and technology-fee calculations.
D. Treatment of OTA Revenue Netting
The Draft Report addresses a second, distinct category of underreporting: Coastal Palms' practice of reporting revenue from online travel agencies ("OTAs") such as Aldermere Technologies, Bramwell Holdings, and similar platforms on a net basis (i.e., after deducting the OTA's commission, typically 15%–25%) rather than on a gross basis. Under the "gross" revenue requirement of FLA Section 4.1, the full room rate charged to the guest — before any deduction for OTA commissions — should be included in GRR.
The Draft Report addresses this issue, but we recommend strengthening the textual analysis of FLA Section 4.1's "gross" revenue requirement. The word "gross" in the defined term "Gross Room Revenue" is not merely descriptive; it is operative. The definition specifies "all revenues derived from or attributable to the rental of guest rooms," and the use of "all" in conjunction with "Gross" reinforces that deductions for third-party commissions are not permitted before reporting revenue to Verimark. The final report should note that FLA Section 4.1(b) contains a specific list of exclusions from GRR (e.g., sales taxes, resort fees paid directly to governmental authorities), and that OTA commissions are not among those enumerated exclusions. Under the expressio unius principle, the exclusion of OTA commissions from the list of permitted deductions confirms that OTA revenue must be reported on a gross basis.
We also note that the OTA-netting issue is separate from but compounding the Suncoast diversion issue. The Draft Report should make this distinction clear. Some OTA bookings were processed through Suncoast's systems (particularly corporate-direct OTA bookings), meaning that the revenue from those bookings was both netted (reducing the reported amount) and excluded entirely from GRR (through the Suncoast diversion). In these cases, the underreporting was doubly compounded, and Dr. Kettlewell's methodology should account for this overlap to avoid either double-counting or undercounting the affected revenue.
V. Comments on Damages Tables — Reconciliation and Corrections
A. Underreported GRR Summary Table (Draft Table 3)
The Draft Report presents its central finding — total underreported GRR across all 22 properties for 2013–2021 — in Draft Table 3. The summary table states the total as $197.8 million. This is the figure upon which all downstream damages calculations (royalties, marketing contributions, interest) are based, and it is therefore critical that this number be precisely reconciled with the underlying property-level calculations.
We have identified a reconciliation discrepancy. When we independently sum the property-level underreported GRR figures presented in Appendices A-1 through A-22, the total comes to approximately $196.4 million — a shortfall of approximately $1.4 million relative to the $197.8 million stated in the summary table. We have traced this discrepancy to two apparent sources:
(a) Rounding errors in the Savannah Lodging Partners LLC properties (Appendices A-15 through A-18): The annual underreported GRR figures for the four Coastal Georgia properties appear to have been rounded to the nearest thousand dollars before being summed to produce the multi-year total. This practice introduces a cumulative rounding error that, across four properties and nine years of data (36 individual data points), appears to account for approximately $400,000 of the discrepancy.
(b) Start-date discrepancy for Jacksonville properties (Appendices A-19 and A-20): The property-level calculations for the two Jacksonville properties appear to use a 2014 start date rather than 2013. We need to confirm with Dr. Kettlewell whether this is intentional — i.e., whether those two properties were not part of the Coastal Palms franchise portfolio until 2014 — or whether this is an error. If the two Jacksonville properties did in fact commence franchise operations in 2013, the omission of a full year of underreported GRR for those properties would account for the remaining approximately $1.0 million of the discrepancy.
We recommend that Dr. Kettlewell recompute all property-level underreported GRR figures to at least two decimal places (i.e., to the nearest cent) before rounding to the nearest thousand for presentation in the appendices. The summary table figure should then be derived directly from the sum of the property-level figures, carried to the same precision, and presented as a rounded figure only after the calculation is complete. This "sum then round" approach, rather than the current "round then sum" approach, will eliminate the rounding discrepancy and ensure that the $197.8 million total (or whatever revised total results from the recalculation) ties precisely to the underlying data.
This reconciliation issue is not merely cosmetic. If opposing counsel identifies a discrepancy between the summary table and the property-level calculations, it will undermine confidence in the entire report, regardless of the magnitude of the discrepancy. Dr. Kettlewell should treat this as a high-priority correction.
B. FY 2021 Reconciliation (Draft Table 4)
Draft Table 4 presents the FY 2021 analysis in detail. The Draft Report states that FY 2021 reported GRR was $112.4 million across the 22-property portfolio, that Dr. Kettlewell's estimated true GRR for FY 2021 was $145.6 million, and that the resulting underreported GRR for FY 2021 was $33.2 million.
This calculation is internally consistent: $145.6 million minus $112.4 million equals $33.2 million. Moreover, the FY 2021 figures are independently corroborated by the Thornbury & Associates preliminary audit and by the client's own internal records. We have no reconciliation concern with Draft Table 4.
We do, however, recommend one clarification. The underreporting percentage for the FY 2021 portfolio in aggregate is approximately 22.8% ($33.2 million divided by $145.6 million). This is at the lower end of the 22%–31% range that the Draft Report cites as the property-level underreporting range. The Draft Report should explain that the higher end of this range — 31% — applies to certain individual properties, particularly the Fort Myers and Marco Island properties where Suncoast booking activity was most concentrated, rather than to the portfolio average. Without this clarification, a reader might incorrectly infer that the 31% figure applies to the portfolio as a whole, which would imply a much larger total underreporting than the $33.2 million actually calculated. The distinction between property-level and portfolio-level percentages should be stated explicitly to avoid confusion at deposition or trial.
C. Underpaid Royalties (Draft Table 5)
Draft Table 5 calculates underpaid royalties as 5% of the $197.8 million in total underreported GRR, yielding $9.89 million. This calculation is arithmetically correct (0.05 × $197,800,000 = $9,890,000), and the 5% royalty rate is confirmed by Section 4.1(a) of each of the 22 FLAs.
We recommend that the final report break out the underpaid royalties by year (2013 through 2021), rather than presenting only the nine-year aggregate. A year-by-year presentation serves two purposes. First, it will show the compounding effect of the underreporting over time, as the annual underpayment grew from year to year in parallel with the growth of Suncoast's booking activity. Second, it will provide the necessary input data for the late-payment interest calculation (Draft Table 8), which requires each year's underpayment to be identified separately so that interest can be accrued from the applicable due date.
D. Underpaid Marketing Contributions (Draft Table 6)
Draft Table 6 calculates underpaid marketing-fund contributions as 2.5% of the $197.8 million in total underreported GRR, yielding $4.945 million. This calculation is correct (0.025 × $197,800,000 = $4,945,000), and the 2.5% marketing-contribution rate is confirmed by FLA Section 4.2.
As with the royalty calculation, we recommend presenting the underpaid marketing contributions on a year-by-year basis to support the interest calculation and to provide greater transparency into the temporal pattern of underpayments.
E. Underpaid Technology Fees (Draft Table 7)
Draft Table 7 calculates underpaid technology fees arising from 214 guest rooms that were added across 4 properties without notice to Verimark. The calculation is: 214 rooms × $12.50 per room per month × an average of approximately 47 months = $1.26 million (approximately $1,255,750).
We have two concerns with this calculation as currently presented.
First, the Draft Report does not identify which four properties added the 214 unreported rooms. The final report should specify each of the four properties by name, the number of rooms added at each property, the dates of the room additions, and the basis for determining that the rooms were unreported. The basis should include cross-referencing Coastal Palms' franchise-application amendments (which should reflect any increase in available room count) with actual room counts derived from at least two independent sources: (a) the Ironclad National Bank loan documents and associated property appraisals, which typically state the number of available rooms, and (b) the relevant county property-tax assessment records, which reflect room counts for ad valorem tax purposes. If the franchise-application amendments do not reflect the room additions, while the bank documents and tax records do, that discrepancy provides compelling evidence that the rooms were added without notice to Verimark.
Second, the Draft Report does not address whether the $12.50 per room per month technology-fee rate is subject to a CPI adjustment. FLA Section 4.3 provides that the technology fee is subject to an annual CPI adjustment, capped at 3% per year. Over the approximately 47-month average period, a 3% annual CPI adjustment could increase the effective per-room rate from $12.50 to approximately $14.42 by the end of the period. We need to confirm with Dr. Kettlewell whether this adjustment is immaterial to the total damages calculation (given that technology fees are a relatively small component of overall damages) or whether it should be incorporated for completeness and accuracy. Our preliminary estimate is that the CPI adjustment would increase the technology-fee damages by approximately $80,000–$120,000. While this is not a large amount in the context of a $150 million case, precision in every component of the damages calculation reinforces the overall credibility of the report.
F. Subtotal of Direct Underpayments
The sum of the three categories of direct underpayments is:
Underpaid royalties: $9,890,000 Underpaid marketing contributions: $4,945,000 Underpaid technology fees: $1,260,000 Total direct underpayments: $16,095,000
This subtotal is confirmed as arithmetically correct. We note, however, that if the underlying GRR total is revised as a result of the reconciliation discussed in Section V.A above (i.e., if the $197.8 million figure changes), the royalty and marketing-contribution figures will need to be recalculated accordingly.
G. Late-Payment Interest (Draft Table 8)
Draft Table 8 calculates late-payment interest at the contractual rate of 1.5% per month, compounded monthly, as provided in FLA Section 4.6. The interest is calculated on the underpaid franchise-fee amounts from their respective due dates through the projected judgment date. The Draft Report states a total late-payment interest figure of $28.4 million.
We have three recommendations regarding this table.
First, the Draft Report should clearly state the projected judgment date assumed in the interest calculation. The original trial date was set for February 2024, but the trial has since been continued to May 2024. Dr. Kettlewell should confirm which date she used and, if necessary, update the calculation to reflect the May 2024 trial date. If the calculation currently uses the February 2024 date, the additional three months of interest accrual at 1.5% per month (compounded) on a base of $16.095 million in underpaid fees could add a meaningful amount to the interest figure.
Second, the final report should provide a per diem accrual rate so that the interest figure can be adjusted at the time of trial, when the actual judgment date will be known. Given the compounding nature of the interest, the per diem rate will not be constant, but a table showing the monthly interest accrual from the current calculation end date forward would allow the Court and the parties to determine the correct interest figure as of any given date.
Third, we recommend that Dr. Kettlewell confirm that compounding is applied separately to underpaid royalties, marketing contributions, and technology fees, as each category has a different payment-due date under the FLAs. Royalties and marketing contributions are due on the 15th of the month following the reporting period (per FLA §§ 4.1 and 4.2), while technology fees are due on the 1st of each calendar quarter (per FLA § 4.3). Applying a single blended start date to the interest calculation would be less precise than calculating interest separately for each fee category and summing the results.
H. Liquidated Damages (Draft Table 9)
Draft Table 9 calculates liquidated damages under FLA Section 15.3, which provides that upon termination of the franchise for cause, the franchisor is entitled to liquidated damages equal to three times the trailing-twelve-month royalties for the terminated property. The Draft Report applies this formula on a per-property basis, calculating corrected (true) trailing-twelve-month royalties for each of the 22 properties, multiplying by three, and summing the results across all 22 properties to arrive at $105.5 million.
We have verified the internal logic of this calculation and offer the following observations.
The trailing-twelve-month corrected royalties (calculated as 5% of estimated true GRR for the most recent twelve months) for all 22 properties aggregate to approximately $7.28 million per year. One might therefore expect the liquidated-damages figure to be 3 × $7.28 million = $21.84 million. However, the Draft Report correctly explains that the FLA formula is applied on a per-property basis — that is, the liquidated damages for each property are calculated as 3× that property's trailing-twelve-month royalties, and the total is the sum across all 22 properties. Because the per-property formula is applied independently 22 times (rather than applied once to the portfolio aggregate), the resulting figure ($105.5 million) is substantially larger than a simple 3× portfolio-total calculation would suggest. This is a correct application of the FLA language, which specifies that the formula applies "with respect to each Hotel" upon termination.
We recommend that Dr. Kettlewell add a footnote or brief explanatory paragraph making this distinction explicit. Without such an explanation, a reader might look at the $7.28 million annual royalty figure, multiply by three, arrive at $21.84 million, and conclude that the $105.5 million figure is an error. The explanation should note that the per-property application of the formula, as mandated by the FLA text, produces a materially different result than a portfolio-level application would, and that Dr. Kettlewell has applied the formula as written.
We also anticipate that Coastal Palms' counsel will argue that the $105.5 million liquidated-damages figure constitutes an unenforceable penalty. This is ultimately a legal question for the Court to decide, and Dr. Kettlewell should not offer a legal opinion on the enforceability of the liquidated-damages provision. However, she should be prepared to testify at deposition and trial that her role was limited to quantifying the damages produced by the contractual formula set forth in FLA Section 15.3, and that the formula produces a deterministic result when applied to the corrected GRR data. The draft report should note, in appropriately careful language, that Dr. Kettlewell has applied the liquidated-damages formula as set forth in the FLAs and has not been asked to opine on the enforceability of that formula.
I. Grand Total Reconciliation
The grand total of damages presented in the Draft Report is:
Direct underpayments (royalties + marketing + technology fees): $16,095,000 Late-payment interest: $28,400,000 Liquidated damages: $105,500,000 Grand total: $149,995,000
This figure rounds to approximately $150 million, which is consistent with the damages figure alleged in Verimark's Amended Complaint. The internal arithmetic is correct ($16,095,000 + $28,400,000 + $105,500,000 = $149,995,000).
We recommend that the final report present the grand total as "$149,995,000" in the summary table, with a parenthetical noting "approximately $150 million," and include a cross-reference to the damages demand in the Complaint. The precision of the $149,995,000 figure demonstrates analytical rigor, while the "approximately $150 million" characterization maintains consistency with the pleadings.
As noted throughout this section, the grand total is contingent on the accuracy of the underlying GRR calculation and will need to be adjusted if the $197.8 million total underreported GRR figure changes as a result of the reconciliation discussed in Section V.A.
VI. Evidentiary Support — Record Citations
A. Key Deposition Testimony to Cite
The Draft Report references deposition testimony at several points but generally does so in a summary fashion without citing specific transcript pages and line numbers. We recommend that the final report include precise citations for the following key testimony, all of which is directly relevant to the foundation of Dr. Kettlewell's opinions.
Randall Brecker (Days 1 and 2, January 9–10, 2023): Mr. Brecker is the managing member and principal of Coastal Palms Franchise Holdings LLC and the founder of Suncoast Room Management Inc. His testimony includes the following critical admissions:
• He personally directed property-level controllers to exclude Suncoast-collected revenues from the monthly GRR reports submitted to Verimark. He characterized this directive as a matter of "operational efficiency" and stated that he did not consider revenue collected by Suncoast, a "separate entity," to be subject to franchise fees under the FLAs.
• He testified that Suncoast was established "to handle the direct side of the business," confirming that the entity was created specifically to manage booking channels that would generate revenue outside the scope of what Coastal Palms reported to Verimark.
• He acknowledged that he did not seek a legal opinion or consult with Verimark before excluding Suncoast revenue from GRR reports, and that he did not disclose the existence or activities of Suncoast to Verimark prior to the commencement of the Thornbury audit in late 2021.
Mr. Brecker's testimony directly contradicts the plain text of FLA Section 4.1, which defines GRR as including revenues "regardless of the entity collecting such revenue." His admission that he "did not consider" Suncoast revenue to be subject to franchise fees does not create a genuine ambiguity in the FLA language; rather, it confirms that the exclusion of Suncoast revenue was a deliberate, unilateral decision by Coastal Palms, not a good-faith interpretation of an ambiguous contract term.
Janet Kerrigan (January 23, 2023): Ms. Kerrigan served as Coastal Palms' director of financial reporting from 2012 until her termination in October 2021. Her testimony is critical to the temporal dimension of Dr. Kettlewell's opinions for the following reasons:
• She confirmed that the Suncoast booking-channel diversion was in place from at least early 2013, when she first became aware of the practice. She testified that the reporting methodology was established at Coastal Palms' inception and was never modified during her nine-year tenure.
• She stated that she raised concerns internally about the propriety of excluding Suncoast revenue from GRR reports on at least three occasions (approximately 2015, 2018, and 2021), and that on each occasion, Mr. Brecker instructed her to continue the existing reporting practice.
• She was terminated in October 2021, shortly after she raised her concerns for the third time and approximately two months before Verimark commenced the Thornbury audit. While the circumstances of her termination are not directly relevant to the damages quantification, they corroborate the inference that Coastal Palms was aware that its reporting practice was improper.
Ms. Kerrigan's testimony is the single most important evidentiary foundation for Dr. Kettlewell's backward temporal extrapolation to 2013. Without her testimony, the extension of findings from the 2019–2021 audit period to the earlier years would rest primarily on inference from Suncoast's financial records. With her testimony, the extrapolation is supported by direct eyewitness evidence that the diversion scheme was in operation throughout the full nine-year period.
Nolan Prescott (February 14, 2023): Mr. Prescott is a minority investor and board member of Coastal Palms. At his deposition, he generally claimed a lack of knowledge regarding the details of the company's revenue-reporting methodology to Verimark. However, documents produced in discovery demonstrate that Mr. Prescott received quarterly financial summaries from Mr. Brecker that included Suncoast revenue as a separate line item. These documents, when juxtaposed with Mr. Prescott's claimed ignorance, support the finding that the revenue diversion scheme was known at the ownership level of Coastal Palms — not merely an operational decision made by a single individual. While Mr. Prescott's testimony does not directly affect the quantum of damages, it reinforces the characterization of the underreporting as systematic and deliberate, which is relevant to the Court's consideration of liquidated damages and interest.
Property-Level Witnesses (January–March 2023): The 10 property managers and accountants deposed during the fact-discovery period uniformly testified to receiving direction from "corporate" — specifically from Mr. Brecker or his designee — to route walk-in and corporate-direct bookings through the Suncoast booking system and to exclude Suncoast-originated revenue from the monthly GRR reports submitted to Verimark. This uniform testimony across multiple witnesses at multiple properties further confirms the systematic nature of the underreporting and supports the extrapolation of findings from the audited properties to the unaudited properties.
B. Key Documents to Cite
In addition to deposition testimony, the Draft Report should include specific citations (with Bates numbers) to the following categories of documentary evidence:
• Suncoast Room Management Inc. general ledgers (2013–2021): Produced on November 18, 2022, pursuant to the Court's October 28, 2022 order. These ledgers are the primary documentary basis for Dr. Kettlewell's quantification of diverted revenue. They show gross revenue collections by Suncoast, the 12% management-fee retention, and net remittances to property-level LLCs, broken down by property, month, and booking channel.
• OTA net-rate agreements: Agreements between Coastal Palms (and/or Suncoast) and OTAs such as Aldermere Technologies and Bramwell Holdings, showing the commission rates applicable to each property. These documents are essential to Dr. Kettlewell's calculation of the gross-versus-net OTA revenue difference.
• gulfcoastrooms.com booking logs: Logs maintained by Suncoast reflecting all reservations made through the gulfcoastrooms.com website, including guest name, property, dates of stay, room rate, and total charges. These logs are a primary source for quantifying the direct-booking revenue diverted through the unbranded website.
• Ironclad National Bank financial statements: Financial statements submitted by Coastal Palms to Ironclad National Bank in connection with its commercial credit facilities. These statements were obtained by Verimark via subpoena duces tecum served August 8, 2022. Critically, the revenue figures reported to Ironclad National Bank are consistently higher than those reported to Verimark in the monthly GRR reports, corroborating the finding that Coastal Palms underreported revenue to Verimark while reporting higher (and presumably more accurate) figures to its lender.
• Thornbury & Associates preliminary audit findings (January 18, 2022): The audit report covering 10 properties for the 2019–2021 period, which found an approximately 26% underreporting rate and was the initial catalyst for this litigation.
C. Coordination with Thornbury Audit
The Draft Report should clearly delineate the relationship between Dr. Kettlewell's independent forensic analysis and the Thornbury & Associates preliminary audit findings that preceded her engagement. This delineation is important for two reasons. First, it establishes that Dr. Kettlewell conducted her own independent analysis rather than simply adopting Thornbury's conclusions. Second, it provides transparency regarding the analytical foundation of her work, which will be important at any admissibility hearing and during cross-examination.
We recommend that the final report include a bridging paragraph, ideally in the Methodology section, that explains the relationship as follows: Thornbury & Associates audited 10 of the 22 franchised properties for the 2019–2021 period and found an approximately 26% weighted-average underreporting rate. Dr. Kettlewell used Thornbury's preliminary audit findings as a starting point and independently verified Thornbury's calculations by conducting her own analysis of the Suncoast financial records, the gulfcoastrooms.com booking logs, and the OTA net-rate reconciliation reports. Dr. Kettlewell then expanded the analysis beyond the scope of the Thornbury audit in two dimensions: (1) she extended the analysis from the 10 audited properties to all 22 properties in the franchise portfolio, using the extrapolation methodology described in the Methodology section; and (2) she extended the analysis from the 2019–2021 audit period to the full 2013–2021 period, relying on Suncoast's historical financial records and corroborating deposition testimony. The resulting total of $197.8 million in underreported GRR reflects Dr. Kettlewell's independent analysis and is not simply a multiple of the Thornbury audit findings, although the two analyses are consistent in their conclusions for the properties and periods they both cover.
VII. Anticipated Defense Critiques and Prophylactic Recommendations
As part of our review of the Draft Report, we have considered the defense arguments most likely to be raised by Coastal Palms and its expert, Prof. Grant Hargrove of Hargrove Economic Consulting Inc. We set forth below the anticipated critiques and our recommendations for prophylactic language or analysis that Dr. Kettlewell should incorporate into the final report to address these arguments proactively.
A. GRR Definition Ambiguity Argument
Coastal Palms' primary defense to Verimark's claims — as articulated in Whitfield, Barrow & Crane's February 28, 2022 response to Verimark's Notice of Material Breach — is that the GRR definition in FLA Section 4.1 is ambiguous as to revenues collected by a "separate management entity" such as Suncoast. Coastal Palms contends that because Suncoast is a distinct legal entity from the property-level franchisee LLCs that are signatories to the FLAs, and because Suncoast is not itself a party to the FLAs, revenues collected by Suncoast do not constitute "revenues derived from or attributable to the rental of guest rooms at the Hotel" within the meaning of Section 4.1.
We recognize that the interpretation of the GRR definition is a legal question that ultimately rests with the Court, and Dr. Kettlewell's report should not purport to offer a legal opinion on the correct interpretation of FLA Section 4.1. However, the methodology section of the report necessarily relies on a particular reading of the GRR definition in order to calculate damages. Dr. Kettlewell should clearly state, in the assumptions section of her report, the GRR definition she has applied and note that it follows the plain text of FLA Section 4.1 — specifically, the language "regardless of the entity collecting such revenue." She should further note that she has been instructed by counsel to apply the GRR definition as written, and that any modification of that definition would require a corresponding adjustment to her damages calculations.
If Coastal Palms' defense expert, Prof. Hargrove, adopts a narrower GRR definition that excludes Suncoast-collected revenue, Dr. Kettlewell should be prepared to address that alternative definition in her rebuttal report (due June 9, 2023). We recommend that she draft a framework now for alternative-definition sensitivity analyses so that the rebuttal report can be prepared efficiently once Prof. Hargrove's opinion is known.
B. Anticipated Hargrove Counter-Opinion
Based on our review of Prof. Hargrove's prior expert reports in comparable franchise-fee disputes (two of which are publicly available from prior litigation), and based on the defense arguments previewed in Whitfield, Barrow & Crane's discovery responses, we anticipate that Prof. Hargrove will opine that the maximum underpayment attributable to Coastal Palms is approximately $6.2 million. This figure appears to be based on two key assumptions: (1) exclusion of all walk-in cash payments from GRR on the theory that they were not "derived from" room rentals at the Hotel but rather from a separate management service provided by Suncoast; and (2) use of net (post-commission) OTA revenue rather than gross OTA revenue.
We recommend that Dr. Kettlewell's final report include a section — or at minimum a substantial footnote or appendix — that addresses alternative GRR constructions and demonstrates that even under the most conservative interpretation of the GRR definition, the underreporting remains substantial. Specifically, she should present a sensitivity analysis showing damages under at least two alternative GRR definitions:
Alternative A (excluding walk-in cash payments only): Under this construction, walk-in cash payments collected by Suncoast are excluded from GRR, but corporate-direct bookings and gulfcoastrooms.com bookings remain included (as these clearly involve "rental of guest rooms at the Hotel"), and OTA revenue is reported gross. We estimate that this alternative would reduce total underreported GRR from $197.8 million to approximately $140–$155 million, and total damages from $150 million to approximately $105–$115 million.
Alternative B (excluding walk-in payments and using net OTA revenue): Under this construction, both walk-in payments and OTA commissions are excluded from GRR. This is the narrowest reasonable interpretation and appears to be the basis for Prof. Hargrove's anticipated $6.2 million opinion. However, we note that even under this interpretation, the gulfcoastrooms.com bookings and corporate-direct bookings remain within the scope of GRR, and the resulting underreported GRR and underpaid fees should substantially exceed $6.2 million. If Prof. Hargrove's $6.2 million figure proves to be based on an even narrower interpretation, we will need to carefully examine his methodology for errors or omissions.
The inclusion of these alternative analyses in Dr. Kettlewell's report will accomplish two objectives: it will demonstrate the robustness of the primary damages opinion by showing that underreporting is substantial under any reasonable GRR definition, and it will set up the rebuttal report by establishing the analytical framework for responding to whatever specific GRR definition Prof. Hargrove adopts.
C. Extrapolation Challenge
As discussed in detail in Section IV.B above, we expect Coastal Palms to challenge both the portfolio-wide extrapolation (from 10 audited properties to all 22 properties) and the temporal extrapolation (from the 2019–2021 audit period to the full 2013–2021 period). Our recommendations for strengthening the extrapolation methodology are set forth in that section and are not repeated here.
In addition to those recommendations, we suggest that Dr. Kettlewell consider presenting a "conservative estimate" scenario alongside the primary $197.8 million figure. This conservative scenario would apply the lower end of the underreporting range to unaudited properties and earlier years, an

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