1021-00006 · Client 1021 · Expert Work Product

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PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP Attorneys at Law 110 SE 6th Street, Suite 2800 Fort Lauderdale, FL 33301 Telephone: (954) 555-7200 Facsimile: (954) 555-7201 www.calderwoodharkness.com

December 12, 2022

Dr. Sharon Kettlewell, CPA/CFF, CFE Principal Ridgeline Forensic Advisory LLC 200 S. Biscayne Boulevard, Suite 1400 Miami, FL 33131

Re: Retention as Forensic Accounting and Damages Expert — *Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC et al.*, Case No. 1021-00006, Circuit Court of the 17th Judicial Circuit, Broward County, Florida

Dear Dr. Kettlewell:

1. Purpose and Confirmation of Retention

This letter confirms the engagement of Ridgeline Forensic Advisory LLC ("Ridgeline") by Calderwood & Harkness LLP ("C&H") on behalf of our client, Verimark Hospitality Group Inc. ("Verimark" or "VHG"), a Delaware corporation publicly traded on the Nasdaq Stock Market (ticker symbol: VHMK), with its principal executive offices located at 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, Florida 33301. C&H serves as lead litigation counsel for Verimark in the above-captioned matter, and this retention is made in furtherance of Verimark's interests in that proceeding.

Ridgeline is retained to serve as a forensic accounting and damages-quantification expert in connection with the above-captioned litigation currently pending in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. The engagement encompasses both litigation consulting and testifying expert work, as more fully described in Section 3 of this letter.

Dr. Sharon Kettlewell will serve as the lead expert and the designated testifying expert for Ridgeline in this engagement. In that capacity, Dr. Kettlewell may be asked to prepare one or more written expert reports, to provide sworn testimony at deposition, and to testify as an expert witness at trial before the trier of fact. Dr. Kettlewell's qualifications, including her designations as a Certified Public Accountant — Certified in Financial Forensics (CPA/CFF) and a Certified Fraud Examiner (CFE), are well known to this firm and formed a significant basis for Verimark's selection of Ridgeline for this engagement.

Please note that this engagement is made at the direction of counsel in anticipation of litigation and in connection with pending litigation. This letter, and all communications, analyses, and work product generated in connection with this engagement, are intended to be protected by the attorney-client privilege, the work-product doctrine, and any other applicable protections, to the fullest extent permitted by applicable law. The privilege and work-product protocols governing this engagement are set forth in greater detail in Section 6 below.

2. Background of the Litigation

To provide context for the scope of Ridgeline's engagement, we set forth below a summary of the factual and procedural background of this matter. This summary is intended as an overview for purposes of this retention letter and does not purport to be a comprehensive recitation of all facts, claims, or defenses at issue.

2.1 The Parties

Verimark Hospitality Group Inc. is a hospitality and real estate company that operates and franchises approximately 340 branded hotels across the southeastern United States. Verimark's portfolio encompasses three distinct hotel brands: "Verimark Suites" (an extended-stay, upper-midscale product), "Verimark Select" (a select-service, midscale product), and "Verimark Grand" (a full-service, upscale product). For the fiscal year ended December 31, 2021, Verimark reported consolidated revenue of approximately $1.42 billion, of which franchise-segment revenue accounted for approximately $218 million. Verimark's franchise operations are a critical driver of its business model, generating high-margin recurring revenue streams through royalties, marketing-fund contributions, and technology fees assessed on franchisees' gross room revenue.

Coastal Palms Franchise Holdings LLC ("Coastal Palms") is a Florida limited liability company with its principal office located at 9500 Gulf Shore Drive, Suite 450, Naples, Florida 34108. Coastal Palms is Verimark's largest single franchise operator, currently operating twenty-two (22) franchised hotel properties across the states of Florida and Georgia. Of these twenty-two properties, eighteen (18) operate under the Verimark Suites flag and four (4) operate under the Verimark Select flag. Together, these properties comprise approximately 3,740 total guest rooms. The Coastal Palms properties represent a significant concentration of Verimark's franchise system, and their revenue performance materially impacts Verimark's franchise-segment financial results.

Coastal Palms is managed by its Managing Member, Randall "Randy" Brecker, who holds a sixty percent (60%) equity interest. Additional members include Theresa Brecker, who holds a fifteen percent (15%) equity interest, and Nolan Prescott, who holds a twenty-five percent (25%) equity interest as a passive investor. Mr. Brecker exercises day-to-day management authority over Coastal Palms and its affiliated entities.

The twenty-two franchised hotel properties are held through various property-level entities, including, among others, Gulf Breeze Hospitality LLC, which holds six (6) hotel properties located in Southwest Florida, and Savannah Lodging Partners LLC, which holds four (4) hotel properties located in coastal Georgia. Additional property-level entities hold the remaining twelve properties, all of which are directly or indirectly controlled by Randall Brecker through Coastal Palms.

2.2 The Alleged Revenue-Diversion Scheme

Verimark alleges that Coastal Palms, acting through Randall Brecker and affiliated entities, systematically underreported Gross Room Revenue ("GRR") over a nine-year period spanning January 2013 through December 2021. This underreporting resulted in the underpayment of royalties, marketing-fund contributions, and technology fees owed to Verimark under the applicable Franchise License Agreements ("FLAs"). Verimark contends that the scheme was deliberate, concealed, and designed to divert substantial franchise fees that were contractually owed to Verimark.

According to Verimark's allegations, the revenue diversion was accomplished principally through an affiliated management entity, Suncoast Room Management Inc. ("Suncoast"), a Florida corporation also controlled by Randall Brecker. Suncoast operated as the property-management company for the Coastal Palms hotels and collected revenues from certain booking channels, specifically direct bookings consisting of walk-in guests, corporate-direct contract rates, and bookings made through an unbranded third-party website, gulfcoastrooms.com, which Suncoast operated independently of Verimark's brand-affiliated online presence. Suncoast retained a twelve percent (12%) "management fee" on these direct-booking revenues before remitting the balance to the property-level LLCs. Critically, neither Suncoast's collections nor the management fee retained by Suncoast were included in the GRR reports submitted by Coastal Palms to Verimark. Verimark contends that these revenues constitute GRR under the plain language of the FLAs and should have been reported and used as the basis for calculating all franchise fees.

In addition to the Suncoast-related diversion, Verimark alleges that Coastal Palms also underreported revenue derived from third-party online travel agency ("OTA") channels. Specifically, Coastal Palms classified net-rate OTA payments as "commissions receivable" and netted those amounts against GRR, rather than reporting gross OTA revenue as required by the FLAs. The effect of this accounting treatment was to reduce reported GRR by the amount of OTA commissions, further depressing the franchise fees remitted to Verimark.

2.3 discovery of the Scheme and Preliminary Investigation

The alleged underreporting came to Verimark's attention on November 8, 2021, when Janet Kerrigan, a former regional controller employed by Coastal Palms, contacted Verimark's confidential compliance hotline and reported the scheme. Ms. Kerrigan had been terminated by Coastal Palms in October 2021, reportedly in connection with her internal objections to the GRR-reporting practices described above.

Acting on the information provided by Ms. Kerrigan, Verimark engaged Thornbury & Associates CPAs LLP ("Thornbury") on November 22, 2021, to conduct a preliminary franchise-compliance audit of the top ten (10) revenue-generating Coastal Palms properties. The Thornbury engagement was led by Malcolm Thornbury, CPA, Lead Audit Partner, from Thornbury's office located at 1551 N. Flagler Drive, Suite 800, West Palm Beach, Florida 33401. Thornbury's preliminary findings were delivered to Verimark on January 18, 2022. Those findings indicated approximately twenty-six percent (26%) underreporting of GRR for the three-year period 2019 through 2021 at the ten audited properties. When extrapolated across all twenty-two Coastal Palms properties for the full nine-year period from 2013 through 2021, the estimated underreported GRR was approximately $197.8 million. These figures are preliminary and subject to verification and refinement, which is a central component of Ridgeline's scope of work.

2.4 Pre-Litigation Correspondence and Filing of Complaint

On February 4, 2022, Verimark issued a formal Notice of Material Breach to Coastal Palms, demanding a cure of the identified breaches within the thirty (30) day cure period specified in the FLAs. Coastal Palms retained Whitfield, Barrow & Crane LLP as counsel, and through its Senior Partner, Nathan Whitfield III, denied the allegations of breach in a response letter dated February 28, 2022. No cure was tendered within the contractual cure period, and Coastal Palms failed to take any remedial action whatsoever.

On March 7, 2022, Verimark filed its Complaint in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida, asserting ten (10) counts against Coastal Palms and certain affiliated individuals and entities. The Complaint seeks damages of approximately $150 million, including underpaid franchise fees, contractual late-payment interest, liquidated damages, and other relief.

2.5 Defensive Pleadings and Counterclaim

On April 18, 2022, Coastal Palms filed its Answer, Affirmative Defenses, and Counterclaim. The Counterclaim asserts a claim for approximately $12 million, based on allegations that Verimark committed brand-standard violations affecting the Coastal Palms properties and engaged in over-billing for technology-platform fees and mandatory vendor programs. Verimark disputes these allegations and has filed an Answer to the Counterclaim denying all material allegations.

2.6 Current Procedural Posture

The matter is currently pending before the Honorable Richard M. Calloway, Circuit Judge. Defense counsel of record is Whitfield, Barrow & Crane LLP, located at 1221 Brickell Avenue, Suite 3000, Miami, Florida 33131. Discovery is actively in progress. Coastal Palms produced approximately 84,000 documents in its initial production on August 22, 2022. Following a successful Motion to Compel filed by C&H, which was granted by Judge Calloway on October 28, 2022, Coastal Palms produced approximately 312,000 additional documents on November 18, 2022. This supplemental production included, critically, financial records of Suncoast Room Management Inc. that Coastal Palms had previously resisted producing on the basis of purported relevance and third-party privacy objections. The Suncoast financial records are expected to be a primary source of data for Ridgeline's forensic analysis.

Fourteen (14) fact depositions are currently scheduled for the period January 9 through March 17, 2023. Deponents include Randall Brecker, Theresa Brecker, Nolan Prescott, Janet Kerrigan, and various property-level managers and accountants. The expert-disclosure deadlines have not yet been set by the Court; C&H anticipates that Ridgeline's expert report will be due in the second or third quarter of 2023, depending on the Court's case management order.

3. Scope of Engagement

Ridgeline's engagement encompasses the following principal areas of analysis, each of which is described in greater detail below. The scope of work may be expanded or modified by mutual agreement as the litigation progresses and as additional information becomes available through discovery.

3.1 Gross Room Revenue Reconstruction

Ridgeline will reconstruct the actual ("true") Gross Room Revenue for each of the twenty-two (22) Coastal Palms franchised hotel properties for the period January 2013 through December 2021 (the "Relevant Period"). This reconstruction is the foundational analysis upon which all subsequent damages calculations will be built.

For purposes of this engagement, GRR is defined as set forth in Section 4.1 of each applicable Franchise License Agreement. While the precise language varies slightly among the twenty-two FLAs, the operative definition in the most commonly used form provides that GRR means "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." This definition is broad and inclusive, and Verimark contends that it encompasses all revenues that Coastal Palms diverted through Suncoast and improperly netted through OTA commission offsets.

Ridgeline's GRR reconstruction analysis must encompass all booking channels through which room revenue was generated at the subject properties, including but not limited to: (a) Verimark's central reservation system ("CRS"); (b) third-party OTA channels (on a gross revenue basis, not on a net-rate basis); (c) Suncoast Room Management direct bookings, including walk-in guests, corporate-direct contract rates, and bookings made through the unbranded website gulfcoastrooms.com; and (d) any other sources of room revenue identified during the analysis.

To perform this reconstruction, Ridgeline will reconcile and cross-reference Suncoast financial records (general ledgers, bank statements, management-fee invoices, and booking logs), property-level property management system ("PMS") data, property-level and entity-level bank statements, OTA reconciliation reports and settlement statements, and applicable federal, state, and local tax filings (including sales and tourist-development tax returns and federal income tax returns). The objective is to establish, with reasonable precision, the total room revenue generated at each property for each month of the Relevant Period, regardless of the entity that collected or reported such revenue.

As part of this analysis, Ridgeline will identify and quantify all revenues that were improperly excluded from the GRR reports submitted by Coastal Palms to Verimark. This includes, without limitation, the twelve percent (12%) management fee retained by Suncoast on direct-booking revenues, which Verimark contends constitutes GRR that was never reported.

Ridgeline is expected to coordinate with, and to build upon, the preliminary audit work performed by Thornbury & Associates CPAs LLP. However, Ridgeline's analysis must be independent. Ridgeline should use the Thornbury preliminary findings as a reference point and a starting framework, but must independently verify all data, methodologies, and conclusions. Ridgeline's expert opinions must be based on Ridgeline's own independent analysis and professional judgment.

3.2 Underreporting Quantification

Based on the GRR reconstruction described in Section 3.1, Ridgeline will quantify the total underreported GRR for each of the twenty-two properties and for each year within the Relevant Period (2013 through 2021), as well as in the aggregate across all properties and all years.

As noted above, the preliminary estimate from Thornbury's audit indicates approximately $197.8 million in cumulative underreported GRR across all twenty-two properties for the nine-year period. Ridgeline is to independently verify, refine, or revise this figure based on its own comprehensive analysis of the complete data set, including the Suncoast financial records that were produced after the Thornbury preliminary audit was completed.

Ridgeline should express its underreporting quantification in multiple formats to facilitate clarity in expert testimony and judicial understanding. Specifically, the underreporting should be expressed as: (a) absolute dollar amounts of underreported GRR, presented on a property-by-property and year-by-year basis, as well as in total; and (b) as a percentage of reported GRR for each property and each year. The preliminary analysis conducted by Thornbury suggests that the underreporting percentage ranges from approximately twenty-two percent (22%) to approximately thirty-one percent (31%), depending on the individual property and the year in question. Ridgeline's analysis should confirm or adjust this range.

By way of illustration, the preliminary analysis for fiscal year 2021 alone indicates that Coastal Palms reported GRR of approximately $112.4 million across the twenty-two properties, whereas the estimated true GRR for the same period was approximately $145.6 million, implying underreporting of approximately $33.2 million for that single year. Ridgeline's analysis should verify these figures and extend the analysis across the full Relevant Period with comparable granularity.

3.3 Underpayment Calculation

Using the underreported GRR figures derived from the analysis described in Sections 3.1 and 3.2, Ridgeline will calculate the total underpaid franchise fees owed by Coastal Palms to Verimark. The underpayment calculation encompasses three distinct fee categories:

(a) Royalties. Ridgeline will calculate underpaid royalties at the contractual rate of five percent (5%) of underreported GRR, as specified in Section 4.1 of each applicable FLA. Based on the preliminary underreported GRR estimate of $197.8 million, the preliminary estimate of underpaid royalties is $9.89 million (calculated as 5% × $197.8 million).

(b) Marketing-Fund Contributions. Ridgeline will calculate underpaid marketing-fund contributions at the contractual rate of two and one-half percent (2.5%) of underreported GRR, as specified in Section 4.2 of each applicable FLA. Based on the preliminary underreported GRR estimate, the preliminary estimate of underpaid marketing-fund contributions is $4.945 million (calculated as 2.5% × $197.8 million).

(c) Technology Fees. Ridgeline will calculate underpaid technology fees at the contractual rate of $12.50 per available room per month, as specified in Section 4.3 of each applicable FLA, subject to annual CPI adjustment with a three percent (3%) annual cap. The technology-fee underpayment pertains specifically to rooms that were added to certain Coastal Palms properties without proper notice to Verimark, and for which technology fees were never assessed or paid. The preliminary estimate of underpaid technology fees is $1.26 million, based on approximately 214 unreported rooms across four (4) properties for an average period of approximately forty-seven (47) months. Ridgeline should verify the room counts, the applicable time periods, and the CPI-adjusted fee rates for each year.

The preliminary subtotal of direct underpayments across all three fee categories is $16.095 million, calculated as follows: $9.89 million (royalties) + $4.945 million (marketing-fund contributions) + $1.26 million (technology fees). Ridgeline's independent analysis will confirm or revise these figures.

3.4 Late-Payment Interest Calculation

Ridgeline will compute contractual late-payment interest on all underpaid franchise-fee amounts at the contractual rate of one and one-half percent (1.5%) per month, compounded monthly, as specified in Section 4.6 of each applicable FLA. This is a substantial component of Verimark's claimed damages and requires careful, month-by-month calculation.

Late-payment interest is to be calculated from the date each monthly payment was originally due under the terms of the applicable FLA (generally the fifteenth day of the month following the month in which the GRR was earned) through the projected judgment date. For purposes of Ridgeline's initial analysis, C&H will provide guidance on the assumed judgment date to be used; this assumption will be updated as the litigation progresses and a trial date is established.

The preliminary estimate of accrued late-payment interest, calculated through a projected judgment date in mid-2023, is approximately $28.4 million. Given the compounding nature of the interest provision and the length of the Relevant Period, Ridgeline should be prepared to explain the interest calculation methodology clearly and to present it in a format that is accessible to the trier of fact. Ridgeline should also be prepared to calculate interest through alternative dates (e.g., different potential trial dates or settlement-discussion dates) as requested by C&H.

3.5 Liquidated Damages Analysis

If requested by C&H, Ridgeline will provide supporting analysis for liquidated damages under Section 15.3 of each applicable FLA. The liquidated-damages provision provides that, upon a material breach resulting in termination of the FLA, the franchisee shall pay liquidated damages calculated as three times (3×) the trailing-twelve-month royalties for each property, computed using corrected (i.e., true) GRR figures.

The liquidated-damages calculation must be performed on a property-by-property basis, as each of the twenty-two properties is subject to a separate FLA with its own trailing-twelve-month royalty calculation. The preliminary total liquidated-damages estimate across all twenty-two properties, using the estimated corrected GRR for the twelve-month period ending December 2021, is approximately $105.5 million. Ridgeline's analysis will verify and, if necessary, revise this figure based on its independent GRR reconstruction.

C&H will advise Ridgeline whether and when to proceed with this component of the analysis, as the liquidated-damages claim is subject to certain legal issues regarding enforceability that are being addressed in the motion practice.

3.6 Review and Rebuttal of Opposing Expert

Ridgeline will review, analyze, and critique any expert report, analysis, or opinion offered by the defendant's damages expert. Based on information currently available to C&H, Coastal Palms is expected to retain Hargrove Economic Consulting Inc. as its damages expert, with Professor Grant Hargrove, PhD, CPA, serving as the testifying expert. Professor Hargrove is a well-known forensic economist who has testified in franchise disputes and commercial-damages matters in Florida and other jurisdictions.

Upon receipt of the defendant's expert report, Ridgeline will conduct a thorough review and analysis of the opposing expert's methodology, data sources, assumptions, calculations, and conclusions. Ridgeline will identify any errors, omissions, unsupported assumptions, or methodological deficiencies in the opposing expert's work. If warranted, Ridgeline will prepare a written rebuttal expert report responding to the opposing expert's opinions and explaining the basis for any disagreements. C&H will coordinate with Ridgeline regarding the timing and scope of any rebuttal work as the expert-disclosure schedule is established by the Court.

3.7 Expert Report and Testimony

Ridgeline will prepare a written expert report that complies with all requirements of the Florida Rules of Civil Procedure, including Rule 1.390, and any applicable case management order entered by Judge Calloway. The expert report will set forth Dr. Kettlewell's opinions, the bases for those opinions, the data and materials considered, the methodology employed, and the calculations performed. The report will be accompanied by all required exhibits, schedules, and supporting documentation.

Dr. Kettlewell will be available for deposition by opposing counsel at a mutually convenient time and location, as required by the Florida Rules of Civil Procedure and any applicable court order. C&H will coordinate with Ridgeline regarding deposition preparation.

Dr. Kettlewell will also be prepared to testify as an expert witness at trial if the matter proceeds to that stage. C&H will coordinate with Ridgeline regarding trial preparation, including the preparation of demonstrative exhibits and presentation materials suitable for use before the jury or the Court.

4. Materials and Data Access

C&H will provide Ridgeline with access to relevant documents and data from the case file. The principal categories of materials to be made available to Ridgeline include, but are not limited to, the following:

(a) All twenty-two (22) Franchise License Agreements between Verimark and Coastal Palms (and its property-level affiliates), including all amendments, addenda, and related correspondence. The first FLA in the portfolio was executed on June 15, 2007, and the most recent FLA was executed on September 3, 2019. Representative copies of the earliest and most recent FLAs are enclosed with this letter.

(b) Monthly GRR reports submitted by Coastal Palms (and its property-level affiliates) to Verimark for the period 2013 through 2021, along with any supporting documentation submitted with those reports.

(c) Financial records of Suncoast Room Management Inc., including general ledgers, bank statements, management-fee invoices, booking logs, corporate-direct contract files, and records related to the operation of the gulfcoastrooms.com website. These records were produced by Coastal Palms on November 18, 2022, pursuant to the Court's order of October 28, 2022, granting Verimark's Motion to Compel.

(d) OTA contracts and agreements between Coastal Palms (and its property-level affiliates) and third-party online travel agencies, together with net-rate reconciliation reports, commission statements, and settlement records for the Relevant Period.

(e) Property-level property management system ("PMS") data, including room-night counts, occupancy rates, average daily rates, revenue per available room, and related operational data, as well as property-level bank statements for each of the twenty-two properties.

(f) The preliminary audit report and working papers of Thornbury & Associates CPAs LLP, dated January 18, 2022, together with any supplemental analyses or correspondence generated by Thornbury in connection with its engagement.

(g) Deposition transcripts from the fourteen (14) fact depositions currently scheduled for the period January 9 through March 17, 2023. Deponents include Randall Brecker, Theresa Brecker, Nolan Prescott, Janet Kerrigan, and various property-level managers and accountants. Transcripts will be provided as they become available.

(h) Access to the complete document production from both parties, currently hosted by Nexagen Document Solutions LLC on its secure document-review platform. The production comprises approximately 2.3 million documents totaling approximately 1.1 terabytes on the Verimark side. C&H will coordinate with Nexagen to provide Ridgeline with appropriate access credentials and search functionality.

(i) Tax returns, financial statements, and any other financial records obtained through discovery or subpoena, including records obtained or to be obtained from Ironclad National Bank. Ironclad National Bank is the primary commercial lender to the Coastal Palms portfolio, holding first-lien mortgage loans of approximately $94 million secured by eighteen (18) of the twenty-two (22) properties. Financial records submitted to Ironclad in connection with those loan facilities may provide an independent benchmark for verifying GRR figures.

Additional materials will be provided to Ridgeline as they become available during the course of discovery. C&H will maintain an ongoing dialogue with Ridgeline regarding data needs and will endeavor to prioritize the production of materials most critical to Ridgeline's analysis. If Ridgeline identifies additional categories of documents or data that it requires in order to perform its analysis, Ridgeline should promptly notify C&H so that appropriate discovery requests or subpoenas can be issued.

5. Fee Arrangement

Ridgeline will bill for services rendered in connection with this engagement on an hourly basis, at the following rates:

The rates set forth above are effective as of the date of this letter. Any adjustments to these rates must be agreed upon in writing by C&H prior to implementation. To the extent Ridgeline proposes to assign junior staff or analysts to this engagement whose individual rates have not been pre-approved, Ridgeline shall submit the name, qualifications, and proposed hourly rate of each such individual to C&H for approval prior to the commencement of billable work.

Out-of-pocket expenses reasonably incurred in connection with this engagement, including but not limited to travel (airfare, hotel, ground transportation, and meals), data-processing and database costs, reproduction and printing, courier and delivery services, and specialized software or hardware required for the analysis, will be billed at cost with supporting documentation. Travel expenses should be reasonable and consistent with standard business-travel practices. Ridgeline should obtain advance approval from C&H for any single out-of-pocket expense exceeding $5,000.

Invoices shall be submitted monthly to Calderwood & Harkness LLP at the Fort Lauderdale office address set forth at the top of this letter, directed to the attention of Douglas Carmichael, Billing Partner. Each invoice shall include a detailed description of the services rendered, the time spent by each professional (in increments of one-tenth of an hour), and an itemization of out-of-pocket expenses with supporting receipts. Payment shall be due within thirty (30) days of receipt of each invoice. All invoices should reference the following matter name and case number: Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC et al., Case No. 1021-00006.

The engagement is expected to extend through trial if the matter does not resolve through settlement or other disposition. Based on the anticipated scope of work, including the GRR reconstruction analysis, underreporting quantification, underpayment calculations, late-payment interest computation, potential liquidated-damages analysis, opposing-expert rebuttal, expert-report preparation, deposition preparation and testimony, and trial preparation and testimony, the total engagement fee is currently estimated not to exceed $1.85 million, inclusive of all professional fees and expert testimony preparation. This estimate is provided for budgeting purposes only and is subject to revision based on the actual complexity of the analysis, the volume and quality of available data, the extent of opposing-expert rebuttal work required, and the overall course of the litigation. C&H will discuss any anticipated material changes to this estimate with Ridgeline as the engagement progresses.

Ridgeline's fees are not contingent upon the outcome of the litigation, the amount of any damages award or settlement, or the content of any opinions rendered by Dr. Kettlewell. Ridgeline's compensation is based solely on the time and effort expended in performing the engagement, consistent with the ethical and professional standards applicable to forensic accounting experts and testifying expert witnesses.

6. Privilege and Work-Product Protocols

This engagement is made at the direction of counsel for the dual purpose of providing litigation consulting services and expert testimony in connection with the above-captioned matter. The privilege and work-product protocols set forth in this section are designed to protect, to the fullest extent permitted by applicable law, the confidentiality of communications, analyses, and work product generated in connection with this engagement.

All communications between Ridgeline and C&H, and between Ridgeline and Verimark personnel conducted at C&H's direction, are intended to be protected by the attorney-client privilege and/or the work-product doctrine to the fullest extent permitted by law. Ridgeline should treat all such communications as privileged and confidential.

Ridgeline should direct all substantive communications regarding this engagement to C&H. The primary points of contact at C&H for this engagement are:

• Priya Anand, Partner, Florida Bar No. 0087451 — Responsible Partner for the engagement

• Yuki Nakamura, Associate, Florida Bar No. 0119644 — Lead Associate for the engagement

• Carlos Espinoza, Associate, Florida Bar No. 0128903 — Damages analysis support

Ridgeline should not communicate directly with Verimark personnel regarding substantive matters relating to this engagement without prior coordination with and authorization from C&H. If Ridgeline requires access to Verimark personnel or data, such requests should be directed to C&H, which will facilitate the necessary communications while preserving applicable privileges.

All draft reports, preliminary analyses, memoranda, spreadsheets, working papers, and other documents prepared by Ridgeline in connection with this engagement should be clearly marked with the following legend:

"DRAFT — PRIVILEGED AND CONFIDENTIAL — PREPARED AT THE DIRECTION OF COUNSEL"

This marking should remain on all draft materials until a final version of any document is designated by C&H for disclosure to opposing parties in accordance with applicable discovery rules and court orders.

Ridgeline should maintain a clear and documented distinction between two categories of materials: (a) materials and analyses prepared for the purpose of forming expert opinions that Dr. Kettlewell will offer at trial, which may be discoverable under applicable rules of civil procedure and evidence; and (b) communications with counsel reflecting legal strategy, mental impressions, and case evaluation, which are protected by the attorney-client privilege and/or the work-product doctrine and are not subject to discovery. C&H will provide guidance regarding this distinction as the engagement progresses and as expert-disclosure deadlines approach.

Upon completion of the final expert report, Ridgeline should be prepared to produce documents and materials in accordance with the Florida Rules of Civil Procedure, including Rule 1.280(b)(5), and any applicable court orders regarding expert-disclosure obligations. C&H will coordinate with Ridgeline regarding the scope and timing of any required disclosures.

Ridgeline should retain all materials provided by C&H and all work product generated in connection with this engagement in a secure manner, both physically and electronically. All such materials should be segregated from Ridgeline's other client files and maintained in a manner that prevents unauthorized access. Ridgeline should implement appropriate information-security controls consistent with industry best practices for the handling of confidential legal materials and financial data.

7. Confidentiality

All information provided by C&H or Verimark to Ridgeline in connection with this engagement is confidential and proprietary. This includes, without limitation, information relating to Verimark's business operations, financial performance, franchise relationships, litigation strategy, and settlement considerations, as well as information relating to Coastal Palms, its affiliates, and their business operations and financial records obtained through discovery.

Ridgeline agrees not to disclose any such information to any third party without the prior written consent of C&H, except as may be required by law, by order of a court of competent jurisdiction, or in connection with providing deposition or trial testimony in this matter. In the event that Ridgeline receives a subpoena or other legal process seeking disclosure of information relating to this engagement, Ridgeline shall promptly notify C&H so that appropriate protective measures may be taken.

Ridgeline acknowledges that Verimark is a publicly traded company listed on the Nasdaq Stock Market under the ticker symbol VHMK, and that certain information provided to Ridgeline in connection with this engagement may constitute material non-public information ("MNPI") within the meaning of the federal securities laws. Ridgeline and all of its personnel who have access to information relating to this engagement shall not trade in Verimark securities (or securities of any other entity about which they obtain MNPI through this engagement) or disclose such information to any person, in each case in violation of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, or any other applicable federal or state securities laws and regulations. Ridgeline shall take appropriate steps to ensure that all personnel assigned to this engagement are aware of and comply with these restrictions.

8. Conflicts of Interest

Ridgeline confirms that it has conducted a thorough conflict check encompassing the parties, their principals, affiliated entities, and the law firms and expert firms involved in this matter, and that it has no current or prior engagement with any of the following that would impair its independence or objectivity in this engagement:

• Coastal Palms Franchise Holdings LLC

• Randall "Randy" Brecker

• Theresa Brecker

• Nolan Prescott

• Suncoast Room Management Inc.

• Gulf Breeze Hospitality LLC

• Savannah Lodging Partners LLC

• Whitfield, Barrow & Crane LLP

• Hargrove Economic Consulting Inc.

Ridgeline further represents that it is not aware of any other relationship, interest, or circumstance that would create a conflict of interest or an appearance of bias that could compromise its ability to provide independent and objective expert services in this matter.

Ridgeline agrees to notify C&H promptly if any potential conflict of interest arises during the course of the engagement, including but not limited to any new engagement, business relationship, or personal relationship involving any of the parties, entities, firms, or individuals identified above or otherwise involved in this litigation.

9. Independence and Objectivity

Ridgeline's role in this engagement is to provide independent, objective forensic accounting analysis and expert opinions based on the facts and data available to it. Ridgeline is retained as an independent expert, not as an advocate for Verimark's litigation position.

Ridgeline's opinions will be based solely on its professional judgment, its forensic accounting expertise, its analysis of the available evidence, and applicable professional standards and methodologies. Ridgeline's opinions will not be influenced by the interests of any party to this litigation, by the amount of fees to be earned in connection with this engagement, or by any desired litigation outcome.

C&H and Verimark understand and acknowledge that Ridgeline's findings and conclusions may not support all of Verimark's litigation positions. Ridgeline is obligated to report its findings accurately and completely, whether or not those findings are favorable to Verimark. If Ridgeline's independent analysis produces conclusions that differ materially from the preliminary estimates set forth in this letter or from Verimark's litigation claims, Ridgeline will communicate those conclusions to C&H promptly so that the litigation strategy can be adjusted accordingly.

10. Termination

Either party may terminate this engagement upon thirty (30) days' written notice to the other party. C&H's written notice should be directed to Dr. Sharon Kettlewell at Ridgeline's address set forth above, and Ridgeline's written notice should be directed to Priya Anand at C&H's address set forth above.

Upon termination of the engagement for any reason, Ridgeline will be compensated for all professional services performed and all out-of-pocket expenses incurred through the effective date of termination. Ridgeline shall submit a final invoice within thirty (30) days of the effective date of termination, and payment shall be due within thirty (30) days of receipt thereof.

Upon termination, all materials provided by C&H to Ridgeline in connection with this engagement shall be returned to C&H or destroyed at C&H's direction, with written confirmation of destruction. Ridgeline may retain one archival copy of its own work product for professional-records purposes, subject to the continuing confidentiality obligations set forth in Section 7 of this letter and any applicable rules of professional conduct.

11. Key Engagement Contacts

The following individuals are the principal contacts for this engagement:

Calderwood & Harkness LLP:

Verimark Hospitality Group Inc. (all communications to be coordinated through C&H):

All substantive communications regarding this engagement should be directed to Priya Anand or Yuki Nakamura at C&H. Billing inquiries should be directed to Douglas Carmichael. Ridgeline should not contact Verimark personnel directly without prior coordination with C&H, as set forth in Section 6 above.

12. Acceptance and Countersignature

We are enthusiastic about working with you and the Ridgeline team on this important engagement. If the foregoing accurately reflects your understanding of the terms of Ridgeline's retention, please sign and return a copy of this letter to my attention. Upon receipt of the countersigned letter, we will arrange for initial document delivery and schedule a kickoff meeting at your earliest convenience.

We look forward to your prompt response and to a productive collaboration.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Priya Anand Partner Florida Bar No. 0087451

AGREED AND ACCEPTED

The undersigned, on behalf of Ridgeline Forensic Advisory LLC, hereby confirms acceptance of the terms of this engagement as set forth in this letter.

RIDGELINE FORENSIC ADVISORY LLC

By: ________

Dr. Sharon Kettlewell, CPA/CFF, CFE Principal

Date: ________

Enclosures:

(1) Copies of representative Franchise License Agreements (first FLA dated June 15, 2007; most recent FLA dated September 3, 2019)

(2) Thornbury & Associates CPAs LLP Preliminary Audit Report (January 18, 2022)

(3) Complaint filed March 7, 2022

(4) Index of document production currently available on the Nexagen Document Solutions LLC platform

cc: Douglas Carmichael, Calderwood & Harkness LLP cc: Yuki Nakamura, Calderwood & Harkness LLP cc: Carlos Espinoza, Calderwood & Harkness LLP

Professional	Rate
Dr. Sharon Kettlewell, Principal / Lead Expert	$475 per hour
Senior staff professionals	$325 per hour
Junior staff and analysts	$175 – $250 per hour (rates to be agreed upon in advance on a per-individual basis)
Name	Role	Email
Priya Anand	Responsible Partner	panand@calderwoodharkness.com
Douglas Carmichael	Billing Partner	dcarmichael@calderwoodharkness.com
Yuki Nakamura	Lead Associate	ynakamura@calderwoodharkness.com
Carlos Espinoza	Working Associate	cespinoza@calderwoodharkness.com
Name	Title
Renata Solis-Vega	SVP & General Counsel
Martin Holcomb	EVP & Chief Financial Officer
Deidre Langston	SVP, Franchise Operations

PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Attorneys at Law 110 SE 6th Street, Suite 2800 Fort Lauderdale, FL 33301 Telephone: (954) 555-7200 Facsimile: (954) 555-7201 www.calderwoodharkness.com
December 12, 2022
Dr. Sharon Kettlewell, CPA/CFF, CFE Principal Ridgeline Forensic Advisory LLC 200 S. Biscayne Boulevard, Suite 1400 Miami, FL 33131
Re: Retention as Forensic Accounting and Damages Expert — *Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC et al.*, Case No. 1021-00006, Circuit Court of the 17th Judicial Circuit, Broward County, Florida
Dear Dr. Kettlewell:
1. Purpose and Confirmation of Retention
This letter confirms the engagement of Ridgeline Forensic Advisory LLC ("Ridgeline") by Calderwood & Harkness LLP ("C&H") on behalf of our client, Verimark Hospitality Group Inc. ("Verimark" or "VHG"), a Delaware corporation publicly traded on the Nasdaq Stock Market (ticker symbol: VHMK), with its principal executive offices located at 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, Florida 33301. C&H serves as lead litigation counsel for Verimark in the above-captioned matter, and this retention is made in furtherance of Verimark's interests in that proceeding.
Ridgeline is retained to serve as a forensic accounting and damages-quantification expert in connection with the above-captioned litigation currently pending in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. The engagement encompasses both litigation consulting and testifying expert work, as more fully described in Section 3 of this letter.
Dr. Sharon Kettlewell will serve as the lead expert and the designated testifying expert for Ridgeline in this engagement. In that capacity, Dr. Kettlewell may be asked to prepare one or more written expert reports, to provide sworn testimony at deposition, and to testify as an expert witness at trial before the trier of fact. Dr. Kettlewell's qualifications, including her designations as a Certified Public Accountant — Certified in Financial Forensics (CPA/CFF) and a Certified Fraud Examiner (CFE), are well known to this firm and formed a significant basis for Verimark's selection of Ridgeline for this engagement.
Please note that this engagement is made at the direction of counsel in anticipation of litigation and in connection with pending litigation. This letter, and all communications, analyses, and work product generated in connection with this engagement, are intended to be protected by the attorney-client privilege, the work-product doctrine, and any other applicable protections, to the fullest extent permitted by applicable law. The privilege and work-product protocols governing this engagement are set forth in greater detail in Section 6 below.
2. Background of the Litigation
To provide context for the scope of Ridgeline's engagement, we set forth below a summary of the factual and procedural background of this matter. This summary is intended as an overview for purposes of this retention letter and does not purport to be a comprehensive recitation of all facts, claims, or defenses at issue.
2.1 The Parties
Verimark Hospitality Group Inc. is a hospitality and real estate company that operates and franchises approximately 340 branded hotels across the southeastern United States. Verimark's portfolio encompasses three distinct hotel brands: "Verimark Suites" (an extended-stay, upper-midscale product), "Verimark Select" (a select-service, midscale product), and "Verimark Grand" (a full-service, upscale product). For the fiscal year ended December 31, 2021, Verimark reported consolidated revenue of approximately $1.42 billion, of which franchise-segment revenue accounted for approximately $218 million. Verimark's franchise operations are a critical driver of its business model, generating high-margin recurring revenue streams through royalties, marketing-fund contributions, and technology fees assessed on franchisees' gross room revenue.
Coastal Palms Franchise Holdings LLC ("Coastal Palms") is a Florida limited liability company with its principal office located at 9500 Gulf Shore Drive, Suite 450, Naples, Florida 34108. Coastal Palms is Verimark's largest single franchise operator, currently operating twenty-two (22) franchised hotel properties across the states of Florida and Georgia. Of these twenty-two properties, eighteen (18) operate under the Verimark Suites flag and four (4) operate under the Verimark Select flag. Together, these properties comprise approximately 3,740 total guest rooms. The Coastal Palms properties represent a significant concentration of Verimark's franchise system, and their revenue performance materially impacts Verimark's franchise-segment financial results.
Coastal Palms is managed by its Managing Member, Randall "Randy" Brecker, who holds a sixty percent (60%) equity interest. Additional members include Theresa Brecker, who holds a fifteen percent (15%) equity interest, and Nolan Prescott, who holds a twenty-five percent (25%) equity interest as a passive investor. Mr. Brecker exercises day-to-day management authority over Coastal Palms and its affiliated entities.
The twenty-two franchised hotel properties are held through various property-level entities, including, among others, Gulf Breeze Hospitality LLC, which holds six (6) hotel properties located in Southwest Florida, and Savannah Lodging Partners LLC, which holds four (4) hotel properties located in coastal Georgia. Additional property-level entities hold the remaining twelve properties, all of which are directly or indirectly controlled by Randall Brecker through Coastal Palms.
2.2 The Alleged Revenue-Diversion Scheme
Verimark alleges that Coastal Palms, acting through Randall Brecker and affiliated entities, systematically underreported Gross Room Revenue ("GRR") over a nine-year period spanning January 2013 through December 2021. This underreporting resulted in the underpayment of royalties, marketing-fund contributions, and technology fees owed to Verimark under the applicable Franchise License Agreements ("FLAs"). Verimark contends that the scheme was deliberate, concealed, and designed to divert substantial franchise fees that were contractually owed to Verimark.
According to Verimark's allegations, the revenue diversion was accomplished principally through an affiliated management entity, Suncoast Room Management Inc. ("Suncoast"), a Florida corporation also controlled by Randall Brecker. Suncoast operated as the property-management company for the Coastal Palms hotels and collected revenues from certain booking channels, specifically direct bookings consisting of walk-in guests, corporate-direct contract rates, and bookings made through an unbranded third-party website, gulfcoastrooms.com, which Suncoast operated independently of Verimark's brand-affiliated online presence. Suncoast retained a twelve percent (12%) "management fee" on these direct-booking revenues before remitting the balance to the property-level LLCs. Critically, neither Suncoast's collections nor the management fee retained by Suncoast were included in the GRR reports submitted by Coastal Palms to Verimark. Verimark contends that these revenues constitute GRR under the plain language of the FLAs and should have been reported and used as the basis for calculating all franchise fees.
In addition to the Suncoast-related diversion, Verimark alleges that Coastal Palms also underreported revenue derived from third-party online travel agency ("OTA") channels. Specifically, Coastal Palms classified net-rate OTA payments as "commissions receivable" and netted those amounts against GRR, rather than reporting gross OTA revenue as required by the FLAs. The effect of this accounting treatment was to reduce reported GRR by the amount of OTA commissions, further depressing the franchise fees remitted to Verimark.
2.3 discovery of the Scheme and Preliminary Investigation
The alleged underreporting came to Verimark's attention on November 8, 2021, when Janet Kerrigan, a former regional controller employed by Coastal Palms, contacted Verimark's confidential compliance hotline and reported the scheme. Ms. Kerrigan had been terminated by Coastal Palms in October 2021, reportedly in connection with her internal objections to the GRR-reporting practices described above.
Acting on the information provided by Ms. Kerrigan, Verimark engaged Thornbury & Associates CPAs LLP ("Thornbury") on November 22, 2021, to conduct a preliminary franchise-compliance audit of the top ten (10) revenue-generating Coastal Palms properties. The Thornbury engagement was led by Malcolm Thornbury, CPA, Lead Audit Partner, from Thornbury's office located at 1551 N. Flagler Drive, Suite 800, West Palm Beach, Florida 33401. Thornbury's preliminary findings were delivered to Verimark on January 18, 2022. Those findings indicated approximately twenty-six percent (26%) underreporting of GRR for the three-year period 2019 through 2021 at the ten audited properties. When extrapolated across all twenty-two Coastal Palms properties for the full nine-year period from 2013 through 2021, the estimated underreported GRR was approximately $197.8 million. These figures are preliminary and subject to verification and refinement, which is a central component of Ridgeline's scope of work.
2.4 Pre-Litigation Correspondence and Filing of Complaint
On February 4, 2022, Verimark issued a formal Notice of Material Breach to Coastal Palms, demanding a cure of the identified breaches within the thirty (30) day cure period specified in the FLAs. Coastal Palms retained Whitfield, Barrow & Crane LLP as counsel, and through its Senior Partner, Nathan Whitfield III, denied the allegations of breach in a response letter dated February 28, 2022. No cure was tendered within the contractual cure period, and Coastal Palms failed to take any remedial action whatsoever.
On March 7, 2022, Verimark filed its Complaint in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida, asserting ten (10) counts against Coastal Palms and certain affiliated individuals and entities. The Complaint seeks damages of approximately $150 million, including underpaid franchise fees, contractual late-payment interest, liquidated damages, and other relief.
2.5 Defensive Pleadings and Counterclaim
On April 18, 2022, Coastal Palms filed its Answer, Affirmative Defenses, and Counterclaim. The Counterclaim asserts a claim for approximately $12 million, based on allegations that Verimark committed brand-standard violations affecting the Coastal Palms properties and engaged in over-billing for technology-platform fees and mandatory vendor programs. Verimark disputes these allegations and has filed an Answer to the Counterclaim denying all material allegations.
2.6 Current Procedural Posture
The matter is currently pending before the Honorable Richard M. Calloway, Circuit Judge. Defense counsel of record is Whitfield, Barrow & Crane LLP, located at 1221 Brickell Avenue, Suite 3000, Miami, Florida 33131. Discovery is actively in progress. Coastal Palms produced approximately 84,000 documents in its initial production on August 22, 2022. Following a successful Motion to Compel filed by C&H, which was granted by Judge Calloway on October 28, 2022, Coastal Palms produced approximately 312,000 additional documents on November 18, 2022. This supplemental production included, critically, financial records of Suncoast Room Management Inc. that Coastal Palms had previously resisted producing on the basis of purported relevance and third-party privacy objections. The Suncoast financial records are expected to be a primary source of data for Ridgeline's forensic analysis.
Fourteen (14) fact depositions are currently scheduled for the period January 9 through March 17, 2023. Deponents include Randall Brecker, Theresa Brecker, Nolan Prescott, Janet Kerrigan, and various property-level managers and accountants. The expert-disclosure deadlines have not yet been set by the Court; C&H anticipates that Ridgeline's expert report will be due in the second or third quarter of 2023, depending on the Court's case management order.
3. Scope of Engagement
Ridgeline's engagement encompasses the following principal areas of analysis, each of which is described in greater detail below. The scope of work may be expanded or modified by mutual agreement as the litigation progresses and as additional information becomes available through discovery.
3.1 Gross Room Revenue Reconstruction
Ridgeline will reconstruct the actual ("true") Gross Room Revenue for each of the twenty-two (22) Coastal Palms franchised hotel properties for the period January 2013 through December 2021 (the "Relevant Period"). This reconstruction is the foundational analysis upon which all subsequent damages calculations will be built.
For purposes of this engagement, GRR is defined as set forth in Section 4.1 of each applicable Franchise License Agreement. While the precise language varies slightly among the twenty-two FLAs, the operative definition in the most commonly used form provides that GRR means "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." This definition is broad and inclusive, and Verimark contends that it encompasses all revenues that Coastal Palms diverted through Suncoast and improperly netted through OTA commission offsets.
Ridgeline's GRR reconstruction analysis must encompass all booking channels through which room revenue was generated at the subject properties, including but not limited to: (a) Verimark's central reservation system ("CRS"); (b) third-party OTA channels (on a gross revenue basis, not on a net-rate basis); (c) Suncoast Room Management direct bookings, including walk-in guests, corporate-direct contract rates, and bookings made through the unbranded website gulfcoastrooms.com; and (d) any other sources of room revenue identified during the analysis.
To perform this reconstruction, Ridgeline will reconcile and cross-reference Suncoast financial records (general ledgers, bank statements, management-fee invoices, and booking logs), property-level property management system ("PMS") data, property-level and entity-level bank statements, OTA reconciliation reports and settlement statements, and applicable federal, state, and local tax filings (including sales and tourist-development tax returns and federal income tax returns). The objective is to establish, with reasonable precision, the total room revenue generated at each property for each month of the Relevant Period, regardless of the entity that collected or reported such revenue.
As part of this analysis, Ridgeline will identify and quantify all revenues that were improperly excluded from the GRR reports submitted by Coastal Palms to Verimark. This includes, without limitation, the twelve percent (12%) management fee retained by Suncoast on direct-booking revenues, which Verimark contends constitutes GRR that was never reported.
Ridgeline is expected to coordinate with, and to build upon, the preliminary audit work performed by Thornbury & Associates CPAs LLP. However, Ridgeline's analysis must be independent. Ridgeline should use the Thornbury preliminary findings as a reference point and a starting framework, but must independently verify all data, methodologies, and conclusions. Ridgeline's expert opinions must be based on Ridgeline's own independent analysis and professional judgment.
3.2 Underreporting Quantification
Based on the GRR reconstruction described in Section 3.1, Ridgeline will quantify the total underreported GRR for each of the twenty-two properties and for each year within the Relevant Period (2013 through 2021), as well as in the aggregate across all properties and all years.
As noted above, the preliminary estimate from Thornbury's audit indicates approximately $197.8 million in cumulative underreported GRR across all twenty-two properties for the nine-year period. Ridgeline is to independently verify, refine, or revise this figure based on its own comprehensive analysis of the complete data set, including the Suncoast financial records that were produced after the Thornbury preliminary audit was completed.
Ridgeline should express its underreporting quantification in multiple formats to facilitate clarity in expert testimony and judicial understanding. Specifically, the underreporting should be expressed as: (a) absolute dollar amounts of underreported GRR, presented on a property-by-property and year-by-year basis, as well as in total; and (b) as a percentage of reported GRR for each property and each year. The preliminary analysis conducted by Thornbury suggests that the underreporting percentage ranges from approximately twenty-two percent (22%) to approximately thirty-one percent (31%), depending on the individual property and the year in question. Ridgeline's analysis should confirm or adjust this range.
By way of illustration, the preliminary analysis for fiscal year 2021 alone indicates that Coastal Palms reported GRR of approximately $112.4 million across the twenty-two properties, whereas the estimated true GRR for the same period was approximately $145.6 million, implying underreporting of approximately $33.2 million for that single year. Ridgeline's analysis should verify these figures and extend the analysis across the full Relevant Period with comparable granularity.
3.3 Underpayment Calculation
Using the underreported GRR figures derived from the analysis described in Sections 3.1 and 3.2, Ridgeline will calculate the total underpaid franchise fees owed by Coastal Palms to Verimark. The underpayment calculation encompasses three distinct fee categories:
(a) Royalties. Ridgeline will calculate underpaid royalties at the contractual rate of five percent (5%) of underreported GRR, as specified in Section 4.1 of each applicable FLA. Based on the preliminary underreported GRR estimate of $197.8 million, the preliminary estimate of underpaid royalties is $9.89 million (calculated as 5% × $197.8 million).
(b) Marketing-Fund Contributions. Ridgeline will calculate underpaid marketing-fund contributions at the contractual rate of two and one-half percent (2.5%) of underreported GRR, as specified in Section 4.2 of each applicable FLA. Based on the preliminary underreported GRR estimate, the preliminary estimate of underpaid marketing-fund contributions is $4.945 million (calculated as 2.5% × $197.8 million).
(c) Technology Fees. Ridgeline will calculate underpaid technology fees at the contractual rate of $12.50 per available room per month, as specified in Section 4.3 of each applicable FLA, subject to annual CPI adjustment with a three percent (3%) annual cap. The technology-fee underpayment pertains specifically to rooms that were added to certain Coastal Palms properties without proper notice to Verimark, and for which technology fees were never assessed or paid. The preliminary estimate of underpaid technology fees is $1.26 million, based on approximately 214 unreported rooms across four (4) properties for an average period of approximately forty-seven (47) months. Ridgeline should verify the room counts, the applicable time periods, and the CPI-adjusted fee rates for each year.
The preliminary subtotal of direct underpayments across all three fee categories is $16.095 million, calculated as follows: $9.89 million (royalties) + $4.945 million (marketing-fund contributions) + $1.26 million (technology fees). Ridgeline's independent analysis will confirm or revise these figures.
3.4 Late-Payment Interest Calculation
Ridgeline will compute contractual late-payment interest on all underpaid franchise-fee amounts at the contractual rate of one and one-half percent (1.5%) per month, compounded monthly, as specified in Section 4.6 of each applicable FLA. This is a substantial component of Verimark's claimed damages and requires careful, month-by-month calculation.
Late-payment interest is to be calculated from the date each monthly payment was originally due under the terms of the applicable FLA (generally the fifteenth day of the month following the month in which the GRR was earned) through the projected judgment date. For purposes of Ridgeline's initial analysis, C&H will provide guidance on the assumed judgment date to be used; this assumption will be updated as the litigation progresses and a trial date is established.
The preliminary estimate of accrued late-payment interest, calculated through a projected judgment date in mid-2023, is approximately $28.4 million. Given the compounding nature of the interest provision and the length of the Relevant Period, Ridgeline should be prepared to explain the interest calculation methodology clearly and to present it in a format that is accessible to the trier of fact. Ridgeline should also be prepared to calculate interest through alternative dates (e.g., different potential trial dates or settlement-discussion dates) as requested by C&H.
3.5 Liquidated Damages Analysis
If requested by C&H, Ridgeline will provide supporting analysis for liquidated damages under Section 15.3 of each applicable FLA. The liquidated-damages provision provides that, upon a material breach resulting in termination of the FLA, the franchisee shall pay liquidated damages calculated as three times (3×) the trailing-twelve-month royalties for each property, computed using corrected (i.e., true) GRR figures.
The liquidated-damages calculation must be performed on a property-by-property basis, as each of the twenty-two properties is subject to a separate FLA with its own trailing-twelve-month royalty calculation. The preliminary total liquidated-damages estimate across all twenty-two properties, using the estimated corrected GRR for the twelve-month period ending December 2021, is approximately $105.5 million. Ridgeline's analysis will verify and, if necessary, revise this figure based on its independent GRR reconstruction.
C&H will advise Ridgeline whether and when to proceed with this component of the analysis, as the liquidated-damages claim is subject to certain legal issues regarding enforceability that are being addressed in the motion practice.
3.6 Review and Rebuttal of Opposing Expert
Ridgeline will review, analyze, and critique any expert report, analysis, or opinion offered by the defendant's damages expert. Based on information currently available to C&H, Coastal Palms is expected to retain Hargrove Economic Consulting Inc. as its damages expert, with Professor Grant Hargrove, PhD, CPA, serving as the testifying expert. Professor Hargrove is a well-known forensic economist who has testified in franchise disputes and commercial-damages matters in Florida and other jurisdictions.
Upon receipt of the defendant's expert report, Ridgeline will conduct a thorough review and analysis of the opposing expert's methodology, data sources, assumptions, calculations, and conclusions. Ridgeline will identify any errors, omissions, unsupported assumptions, or methodological deficiencies in the opposing expert's work. If warranted, Ridgeline will prepare a written rebuttal expert report responding to the opposing expert's opinions and explaining the basis for any disagreements. C&H will coordinate with Ridgeline regarding the timing and scope of any rebuttal work as the expert-disclosure schedule is established by the Court.
3.7 Expert Report and Testimony
Ridgeline will prepare a written expert report that complies with all requirements of the Florida Rules of Civil Procedure, including Rule 1.390, and any applicable case management order entered by Judge Calloway. The expert report will set forth Dr. Kettlewell's opinions, the bases for those opinions, the data and materials considered, the methodology employed, and the calculations performed. The report will be accompanied by all required exhibits, schedules, and supporting documentation.
Dr. Kettlewell will be available for deposition by opposing counsel at a mutually convenient time and location, as required by the Florida Rules of Civil Procedure and any applicable court order. C&H will coordinate with Ridgeline regarding deposition preparation.
Dr. Kettlewell will also be prepared to testify as an expert witness at trial if the matter proceeds to that stage. C&H will coordinate with Ridgeline regarding trial preparation, including the preparation of demonstrative exhibits and presentation materials suitable for use before the jury or the Court.
4. Materials and Data Access
C&H will provide Ridgeline with access to relevant documents and data from the case file. The principal categories of materials to be made available to Ridgeline include, but are not limited to, the following:
(a) All twenty-two (22) Franchise License Agreements between Verimark and Coastal Palms (and its property-level affiliates), including all amendments, addenda, and related correspondence. The first FLA in the portfolio was executed on June 15, 2007, and the most recent FLA was executed on September 3, 2019. Representative copies of the earliest and most recent FLAs are enclosed with this letter.
(b) Monthly GRR reports submitted by Coastal Palms (and its property-level affiliates) to Verimark for the period 2013 through 2021, along with any supporting documentation submitted with those reports.
(c) Financial records of Suncoast Room Management Inc., including general ledgers, bank statements, management-fee invoices, booking logs, corporate-direct contract files, and records related to the operation of the gulfcoastrooms.com website. These records were produced by Coastal Palms on November 18, 2022, pursuant to the Court's order of October 28, 2022, granting Verimark's Motion to Compel.
(d) OTA contracts and agreements between Coastal Palms (and its property-level affiliates) and third-party online travel agencies, together with net-rate reconciliation reports, commission statements, and settlement records for the Relevant Period.
(e) Property-level property management system ("PMS") data, including room-night counts, occupancy rates, average daily rates, revenue per available room, and related operational data, as well as property-level bank statements for each of the twenty-two properties.
(f) The preliminary audit report and working papers of Thornbury & Associates CPAs LLP, dated January 18, 2022, together with any supplemental analyses or correspondence generated by Thornbury in connection with its engagement.
(g) Deposition transcripts from the fourteen (14) fact depositions currently scheduled for the period January 9 through March 17, 2023. Deponents include Randall Brecker, Theresa Brecker, Nolan Prescott, Janet Kerrigan, and various property-level managers and accountants. Transcripts will be provided as they become available.
(h) Access to the complete document production from both parties, currently hosted by Nexagen Document Solutions LLC on its secure document-review platform. The production comprises approximately 2.3 million documents totaling approximately 1.1 terabytes on the Verimark side. C&H will coordinate with Nexagen to provide Ridgeline with appropriate access credentials and search functionality.
(i) Tax returns, financial statements, and any other financial records obtained through discovery or subpoena, including records obtained or to be obtained from Ironclad National Bank. Ironclad National Bank is the primary commercial lender to the Coastal Palms portfolio, holding first-lien mortgage loans of approximately $94 million secured by eighteen (18) of the twenty-two (22) properties. Financial records submitted to Ironclad in connection with those loan facilities may provide an independent benchmark for verifying GRR figures.
Additional materials will be provided to Ridgeline as they become available during the course of discovery. C&H will maintain an ongoing dialogue with Ridgeline regarding data needs and will endeavor to prioritize the production of materials most critical to Ridgeline's analysis. If Ridgeline identifies additional categories of documents or data that it requires in order to perform its analysis, Ridgeline should promptly notify C&H so that appropriate discovery requests or subpoenas can be issued.
5. Fee Arrangement
Ridgeline will bill for services rendered in connection with this engagement on an hourly basis, at the following rates:
The rates set forth above are effective as of the date of this letter. Any adjustments to these rates must be agreed upon in writing by C&H prior to implementation. To the extent Ridgeline proposes to assign junior staff or analysts to this engagement whose individual rates have not been pre-approved, Ridgeline shall submit the name, qualifications, and proposed hourly rate of each such individual to C&H for approval prior to the commencement of billable work.
Out-of-pocket expenses reasonably incurred in connection with this engagement, including but not limited to travel (airfare, hotel, ground transportation, and meals), data-processing and database costs, reproduction and printing, courier and delivery services, and specialized software or hardware required for the analysis, will be billed at cost with supporting documentation. Travel expenses should be reasonable and consistent with standard business-travel practices. Ridgeline should obtain advance approval from C&H for any single out-of-pocket expense exceeding $5,000.
Invoices shall be submitted monthly to Calderwood & Harkness LLP at the Fort Lauderdale office address set forth at the top of this letter, directed to the attention of Douglas Carmichael, Billing Partner. Each invoice shall include a detailed description of the services rendered, the time spent by each professional (in increments of one-tenth of an hour), and an itemization of out-of-pocket expenses with supporting receipts. Payment shall be due within thirty (30) days of receipt of each invoice. All invoices should reference the following matter name and case number: Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC et al., Case No. 1021-00006.
The engagement is expected to extend through trial if the matter does not resolve through settlement or other disposition. Based on the anticipated scope of work, including the GRR reconstruction analysis, underreporting quantification, underpayment calculations, late-payment interest computation, potential liquidated-damages analysis, opposing-expert rebuttal, expert-report preparation, deposition preparation and testimony, and trial preparation and testimony, the total engagement fee is currently estimated not to exceed $1.85 million, inclusive of all professional fees and expert testimony preparation. This estimate is provided for budgeting purposes only and is subject to revision based on the actual complexity of the analysis, the volume and quality of available data, the extent of opposing-expert rebuttal work required, and the overall course of the litigation. C&H will discuss any anticipated material changes to this estimate with Ridgeline as the engagement progresses.
Ridgeline's fees are not contingent upon the outcome of the litigation, the amount of any damages award or settlement, or the content of any opinions rendered by Dr. Kettlewell. Ridgeline's compensation is based solely on the time and effort expended in performing the engagement, consistent with the ethical and professional standards applicable to forensic accounting experts and testifying expert witnesses.
6. Privilege and Work-Product Protocols
This engagement is made at the direction of counsel for the dual purpose of providing litigation consulting services and expert testimony in connection with the above-captioned matter. The privilege and work-product protocols set forth in this section are designed to protect, to the fullest extent permitted by applicable law, the confidentiality of communications, analyses, and work product generated in connection with this engagement.
All communications between Ridgeline and C&H, and between Ridgeline and Verimark personnel conducted at C&H's direction, are intended to be protected by the attorney-client privilege and/or the work-product doctrine to the fullest extent permitted by law. Ridgeline should treat all such communications as privileged and confidential.
Ridgeline should direct all substantive communications regarding this engagement to C&H. The primary points of contact at C&H for this engagement are:
•  Priya Anand, Partner, Florida Bar No. 0087451 — Responsible Partner for the engagement
•  Yuki Nakamura, Associate, Florida Bar No. 0119644 — Lead Associate for the engagement
•  Carlos Espinoza, Associate, Florida Bar No. 0128903 — Damages analysis support
Ridgeline should not communicate directly with Verimark personnel regarding substantive matters relating to this engagement without prior coordination with and authorization from C&H. If Ridgeline requires access to Verimark personnel or data, such requests should be directed to C&H, which will facilitate the necessary communications while preserving applicable privileges.
All draft reports, preliminary analyses, memoranda, spreadsheets, working papers, and other documents prepared by Ridgeline in connection with this engagement should be clearly marked with the following legend:
"DRAFT — PRIVILEGED AND CONFIDENTIAL — PREPARED AT THE DIRECTION OF COUNSEL"
This marking should remain on all draft materials until a final version of any document is designated by C&H for disclosure to opposing parties in accordance with applicable discovery rules and court orders.
Ridgeline should maintain a clear and documented distinction between two categories of materials: (a) materials and analyses prepared for the purpose of forming expert opinions that Dr. Kettlewell will offer at trial, which may be discoverable under applicable rules of civil procedure and evidence; and (b) communications with counsel reflecting legal strategy, mental impressions, and case evaluation, which are protected by the attorney-client privilege and/or the work-product doctrine and are not subject to discovery. C&H will provide guidance regarding this distinction as the engagement progresses and as expert-disclosure deadlines approach.
Upon completion of the final expert report, Ridgeline should be prepared to produce documents and materials in accordance with the Florida Rules of Civil Procedure, including Rule 1.280(b)(5), and any applicable court orders regarding expert-disclosure obligations. C&H will coordinate with Ridgeline regarding the scope and timing of any required disclosures.
Ridgeline should retain all materials provided by C&H and all work product generated in connection with this engagement in a secure manner, both physically and electronically. All such materials should be segregated from Ridgeline's other client files and maintained in a manner that prevents unauthorized access. Ridgeline should implement appropriate information-security controls consistent with industry best practices for the handling of confidential legal materials and financial data.
7. Confidentiality
All information provided by C&H or Verimark to Ridgeline in connection with this engagement is confidential and proprietary. This includes, without limitation, information relating to Verimark's business operations, financial performance, franchise relationships, litigation strategy, and settlement considerations, as well as information relating to Coastal Palms, its affiliates, and their business operations and financial records obtained through discovery.
Ridgeline agrees not to disclose any such information to any third party without the prior written consent of C&H, except as may be required by law, by order of a court of competent jurisdiction, or in connection with providing deposition or trial testimony in this matter. In the event that Ridgeline receives a subpoena or other legal process seeking disclosure of information relating to this engagement, Ridgeline shall promptly notify C&H so that appropriate protective measures may be taken.
Ridgeline acknowledges that Verimark is a publicly traded company listed on the Nasdaq Stock Market under the ticker symbol VHMK, and that certain information provided to Ridgeline in connection with this engagement may constitute material non-public information ("MNPI") within the meaning of the federal securities laws. Ridgeline and all of its personnel who have access to information relating to this engagement shall not trade in Verimark securities (or securities of any other entity about which they obtain MNPI through this engagement) or disclose such information to any person, in each case in violation of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, or any other applicable federal or state securities laws and regulations. Ridgeline shall take appropriate steps to ensure that all personnel assigned to this engagement are aware of and comply with these restrictions.
8. Conflicts of Interest
Ridgeline confirms that it has conducted a thorough conflict check encompassing the parties, their principals, affiliated entities, and the law firms and expert firms involved in this matter, and that it has no current or prior engagement with any of the following that would impair its independence or objectivity in this engagement:
•  Coastal Palms Franchise Holdings LLC
•  Randall "Randy" Brecker
•  Theresa Brecker
•  Nolan Prescott
•  Suncoast Room Management Inc.
•  Gulf Breeze Hospitality LLC
•  Savannah Lodging Partners LLC
•  Whitfield, Barrow & Crane LLP
•  Hargrove Economic Consulting Inc.
Ridgeline further represents that it is not aware of any other relationship, interest, or circumstance that would create a conflict of interest or an appearance of bias that could compromise its ability to provide independent and objective expert services in this matter.
Ridgeline agrees to notify C&H promptly if any potential conflict of interest arises during the course of the engagement, including but not limited to any new engagement, business relationship, or personal relationship involving any of the parties, entities, firms, or individuals identified above or otherwise involved in this litigation.
9. Independence and Objectivity
Ridgeline's role in this engagement is to provide independent, objective forensic accounting analysis and expert opinions based on the facts and data available to it. Ridgeline is retained as an independent expert, not as an advocate for Verimark's litigation position.
Ridgeline's opinions will be based solely on its professional judgment, its forensic accounting expertise, its analysis of the available evidence, and applicable professional standards and methodologies. Ridgeline's opinions will not be influenced by the interests of any party to this litigation, by the amount of fees to be earned in connection with this engagement, or by any desired litigation outcome.
C&H and Verimark understand and acknowledge that Ridgeline's findings and conclusions may not support all of Verimark's litigation positions. Ridgeline is obligated to report its findings accurately and completely, whether or not those findings are favorable to Verimark. If Ridgeline's independent analysis produces conclusions that differ materially from the preliminary estimates set forth in this letter or from Verimark's litigation claims, Ridgeline will communicate those conclusions to C&H promptly so that the litigation strategy can be adjusted accordingly.
10. Termination
Either party may terminate this engagement upon thirty (30) days' written notice to the other party. C&H's written notice should be directed to Dr. Sharon Kettlewell at Ridgeline's address set forth above, and Ridgeline's written notice should be directed to Priya Anand at C&H's address set forth above.
Upon termination of the engagement for any reason, Ridgeline will be compensated for all professional services performed and all out-of-pocket expenses incurred through the effective date of termination. Ridgeline shall submit a final invoice within thirty (30) days of the effective date of termination, and payment shall be due within thirty (30) days of receipt thereof.
Upon termination, all materials provided by C&H to Ridgeline in connection with this engagement shall be returned to C&H or destroyed at C&H's direction, with written confirmation of destruction. Ridgeline may retain one archival copy of its own work product for professional-records purposes, subject to the continuing confidentiality obligations set forth in Section 7 of this letter and any applicable rules of professional conduct.
11. Key Engagement Contacts
The following individuals are the principal contacts for this engagement:
Calderwood & Harkness LLP:
Verimark Hospitality Group Inc. (all communications to be coordinated through C&H):
All substantive communications regarding this engagement should be directed to Priya Anand or Yuki Nakamura at C&H. Billing inquiries should be directed to Douglas Carmichael. Ridgeline should not contact Verimark personnel directly without prior coordination with C&H, as set forth in Section 6 above.
12. Acceptance and Countersignature
We are enthusiastic about working with you and the Ridgeline team on this important engagement. If the foregoing accurately reflects your understanding of the terms of Ridgeline's retention, please sign and return a copy of this letter to my attention. Upon receipt of the countersigned letter, we will arrange for initial document delivery and schedule a kickoff meeting at your earliest convenience.
We look forward to your prompt response and to a productive collaboration.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Priya Anand Partner Florida Bar No. 0087451
AGREED AND ACCEPTED
The undersigned, on behalf of Ridgeline Forensic Advisory LLC, hereby confirms acceptance of the terms of this engagement as set forth in this letter.
RIDGELINE FORENSIC ADVISORY LLC
By: ________
Dr. Sharon Kettlewell, CPA/CFF, CFE Principal
Date: ________
Enclosures:
(1) Copies of representative Franchise License Agreements (first FLA dated June 15, 2007; most recent FLA dated September 3, 2019)
(2) Thornbury & Associates CPAs LLP Preliminary Audit Report (January 18, 2022)
(3) Complaint filed March 7, 2022
(4) Index of document production currently available on the Nexagen Document Solutions LLC platform
cc: Douglas Carmichael, Calderwood & Harkness LLP cc: Yuki Nakamura, Calderwood & Harkness LLP cc: Carlos Espinoza, Calderwood & Harkness LLP
Professional | Rate
Dr. Sharon Kettlewell, Principal / Lead Expert | $475 per hour
Senior staff professionals | $325 per hour
Junior staff and analysts | $175 – $250 per hour (rates to be agreed upon in advance on a per-individual basis)
Name | Role | Email
Priya Anand | Responsible Partner | panand@calderwoodharkness.com
Douglas Carmichael | Billing Partner | dcarmichael@calderwoodharkness.com
Yuki Nakamura | Lead Associate | ynakamura@calderwoodharkness.com
Carlos Espinoza | Working Associate | cespinoza@calderwoodharkness.com
Name | Title
Renata Solis-Vega | SVP & General Counsel
Martin Holcomb | EVP & Chief Financial Officer
Deidre Langston | SVP, Franchise Operations

PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP

AGREED AND ACCEPTED

RIDGELINE FORENSIC ADVISORY LLC

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