1021-00006 · Client 1021 · Pre-Litigation & Investigation

draft-notice-of-material-breach.docx DOCUMENT Litigation

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PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT DRAFT — FOR CLIENT REVIEW — NOT YET SENT

CALDERWOOD & HARKNESS LLP 110 SE 6th Street, Suite 2800 Fort Lauderdale, FL 33301 Telephone: (954) 555-1200 Facsimile: (954) 555-1201

January 25, 2022

Internal Matter Reference: 1021-00006

MEMORANDUM — INTERNAL TRANSMITTAL

TO: Renata Solis-Vega, Senior Vice President & General Counsel, Verimark Hospitality Group Inc. Deidre Langston, Senior Vice President, Franchise Operations, Verimark Hospitality Group Inc.

FROM: Yuki Nakamura (FL Bar No. 0119644), Associate, Calderwood & Harkness LLP Priya Anand (FL Bar No. 0087451), Partner, Calderwood & Harkness LLP

DATE: January 25, 2022

RE: Draft Notice of Material Breach — Coastal Palms Franchise Holdings LLC — All 22 Franchise License Agreements — For Client Review and Approval

Renata and Deidre:

Please find attached a draft of the formal Notice of Material Breach to be sent from Verimark Hospitality Group Inc. to Coastal Palms Franchise Holdings LLC. This draft has been prepared based upon the preliminary audit findings delivered by Thornbury & Associates CPAs LLP on January 18, 2022, and the review of all twenty-two (22) Franchise License Agreements on file with our office.

Delivery Instructions for Final Version:

Upon your approval and finalization, the executed Notice is to be transmitted simultaneously via the following methods:

1. Certified Mail, Return Receipt Requested, to:

Coastal Palms Franchise Holdings LLC 9500 Gulf Shore Drive, Suite 450 Naples, FL 34108

Attention: Randall Brecker, Managing Member

2. Electronic Mail, to Randall Brecker at the email address on file with Verimark Franchise Operations.

3. Certified Mail, Return Receipt Requested, to the registered agent:

Garrison Registered Agents LLC 100 S. Ashley Drive, Suite 600 Tampa, FL 33602

4. Certified Mail, Return Receipt Requested, to opposing counsel (if identified prior to sending):

Whitfield, Barrow & Crane LLP 1221 Brickell Avenue, Suite 3000 Miami, FL 33131

Attention: Nathan Whitfield III

We request your review and comments at your earliest convenience. We anticipate finalizing and sending this Notice on or about February 4, 2022, subject to your approval and confirmation of the final audit figures from Malcolm Thornbury. Please do not hesitate to contact Priya Anand directly at (954) 555-1218 or panand@calderwoodharkness.com with any questions or revisions.

PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT DRAFT — FOR CLIENT REVIEW — NOT YET SENT

NOTICE OF MATERIAL BREACH

January 25, 2022 [Date to be updated upon finalization]

Verimark Hospitality Group Inc. 2400 East Las Olas Boulevard, Suite 3100 Fort Lauderdale, FL 33301

Via Certified Mail, Return Receipt Requested and Electronic Mail

Coastal Palms Franchise Holdings LLC 9500 Gulf Shore Drive, Suite 450 Naples, FL 34108

Attention: Randall Brecker, Managing Member

RE: Notice of Material Breach of Franchise License Agreements between Verimark Hospitality Group Inc. and Coastal Palms Franchise Holdings LLC (All Twenty-Two (22) Franchise License Agreements, Dated June 15, 2007 Through September 3, 2019)

Dear Mr. Brecker:

1. Introduction and Purpose of Notice

This letter constitutes a formal Notice of Material Breach (this "Notice") issued pursuant to Section 14.1 of each of the twenty-two (22) Franchise License Agreements (individually, an "FLA," and collectively, the "FLAs") by and between Verimark Hospitality Group Inc. ("Verimark") and Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "Franchisee").

Verimark is a Delaware corporation, publicly traded on the Nasdaq Stock Market under the ticker symbol VHMK, with its principal offices located at 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, Florida 33301. Verimark is one of the nation's leading franchisors and operators of premium select-service and extended-stay hotel properties, with a portfolio encompassing over 1,200 franchised locations nationwide.

Coastal Palms is a Florida limited liability company with its principal office at 9500 Gulf Shore Drive, Suite 450, Naples, Florida 34108. Coastal Palms is the franchisee of record under each of the 22 FLAs referenced herein, and operates through various affiliated property-level entities, including but not limited to Gulf Breeze Hospitality LLC, a Florida limited liability company, and Savannah Lodging Partners LLC, a Georgia limited liability company.

The FLAs govern the operation of twenty-two (22) franchised hotel properties located across the states of Florida and Georgia, of which eighteen (18) are branded as "Verimark Suites" properties and four (4) are branded as "Verimark Select" properties (collectively, the "Hotels"). Together, the Hotels comprise approximately 3,740 total guest rooms. The first FLA between Verimark and Coastal Palms was executed on June 15, 2007, for a single Verimark Suites property located in Naples, Florida. The most recent FLA was executed on September 3, 2019. A complete schedule of all 22 FLAs, identifying each by date of execution, property name, property location, brand designation, and property-level operating entity, is attached hereto as Schedule A.

Each FLA has an initial term of twenty (20) years from the date of execution. Each FLA is governed by the laws of the State of Florida, and each FLA contains a mandatory venue provision requiring that any litigation arising under or related to the FLA be brought in Broward County, Florida.

By this Notice, Verimark hereby provides formal notice to Coastal Palms that Coastal Palms is in material breach of each of the twenty-two (22) FLAs, as more particularly described below, and demands that Coastal Palms cure the identified material breaches in the manner and within the time period set forth herein.

2. Relevant Contractual Provisions

For the convenience of Coastal Palms and its advisors, and without limitation or waiver, Verimark sets forth below a summary of the contractual provisions most directly relevant to the material breaches identified in this Notice. In the event of any inconsistency between the summaries below and the actual language of the FLAs, the FLAs shall control. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the FLAs.

2.1 Gross Room Revenue Definition and Reporting Obligations (FLA § 4.1)

Section 4.1 of each FLA defines "Gross Room Revenue" (or "GRR") as follows:

"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 breadth of this definition is both intentional and significant. It encompasses all booking channels without exception — including direct bookings, indirect bookings, online bookings, walk-in guests, corporate-direct contracts, online travel agency ("OTA") bookings, and bookings made through any website or reservation system — and it captures revenue regardless of which entity within the Franchisee's corporate structure, or any affiliate thereof, actually collects such revenue. The GRR definition was specifically drafted to prevent the precise form of revenue diversion described in Section 3 of this Notice.

Each FLA further requires the Franchisee to report GRR to Verimark on a monthly basis, no later than the fifteenth (15th) day of the calendar month following the month in which the revenue was earned, in a format prescribed by Verimark and certified by an authorized representative of Franchisee as accurate and complete.

2.2 Royalty Obligations (FLA § 4.1)

Under Section 4.1 of each FLA, Franchisee is obligated to pay to Verimark a continuing royalty equal to five percent (5%) of GRR, payable on a monthly basis, concurrent with the delivery of each monthly GRR report. This royalty obligation is a fundamental and material obligation of the Franchisee under each FLA, and the payment of royalties based on the full and accurate reporting of GRR constitutes a core element of the consideration for the franchise rights granted by Verimark.

2.3 Marketing-Fund Contribution (FLA § 4.2)

Under Section 4.2 of each FLA, Franchisee is obligated to contribute to the Verimark National Marketing Fund an amount equal to two and one-half percent (2.5%) of GRR, payable on a monthly basis, concurrent with the payment of royalties. These marketing-fund contributions are pooled with contributions from all Verimark franchisees system-wide and are deployed for the benefit of the entire Verimark brand system through national and regional advertising, digital marketing, brand-awareness initiatives, and reservation-system development. The underreporting of GRR by Coastal Palms has therefore not only deprived Verimark of contractually owed funds but has also reduced the resources available for the collective marketing efforts that benefit the entire Verimark franchise system.

2.4 Technology Fee (FLA § 4.3)

Under Section 4.3 of each FLA, Franchisee is obligated to pay a flat technology fee of Twelve Dollars and Fifty Cents ($12.50) per available room per month. This fee is adjusted annually in accordance with the Consumer Price Index for All Urban Consumers (CPI-U), as published by the U.S. Bureau of Labor Statistics, with such annual adjustment capped at a maximum of three percent (3%) per year. The technology fee supports the ongoing maintenance and enhancement of Verimark's centralized reservation system, property management system interfaces, guest loyalty platform, and related technology infrastructure. Accurate reporting of the total number of available rooms at each Hotel is a prerequisite for the proper calculation and payment of the technology fee.

2.5 Late-Payment Interest (FLA § 4.6)

Under Section 4.6 of each FLA, any amounts owed by Franchisee to Verimark that are not paid when due shall bear interest at the rate of one and one-half percent (1.5%) per month, compounded monthly, from the date such payment was due until the date such payment is received by Verimark in full. This provision applies to all underpayments of royalties, marketing-fund contributions, and technology fees, whether such underpayments arise from late payment, incomplete payment, or, as in this case, the systematic underreporting of the revenue base upon which such payments are calculated.

2.6 Audit Rights (FLA § 8.2)

Under Section 8.2 of each FLA, Verimark has the right, upon not less than ten (10) business days' prior written notice, to audit the Franchisee's books, records, accounts, tax returns, and financial statements as they pertain to the calculation and reporting of GRR and other amounts due under the FLA. The audit may be conducted by Verimark's internal personnel or by an independent accounting firm engaged by Verimark, at reasonable times and at the Franchisee's place of business. If any such audit reveals an underpayment of amounts due to Verimark that exceeds two percent (2%) of the GRR reported by the Franchisee for the period under audit, the Franchisee shall bear all costs and expenses of the audit, including professional fees, travel expenses, and the fees and expenses of any accounting firm retained by Verimark to conduct or assist with the audit.

2.7 Cure Provision (FLA § 14.1)

Section 14.1 of each FLA provides that, in the event of a material breach by the Franchisee of any provision of the FLA, Verimark shall provide written notice to the Franchisee specifying the nature of the breach and the actions required to cure the breach. Upon receipt of such written notice, the Franchisee shall have thirty (30) days to cure the identified breach to Verimark's reasonable satisfaction. If the Franchisee fails to cure the breach within the 30-day cure period, Verimark shall have the right to terminate the FLA in accordance with Section 14.2.

2.8 Incurable Material Breach (FLA § 14.2(c))

Section 14.2(c) of each FLA provides, in pertinent part:

"Notwithstanding Section 14.1, systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure, and Franchisor shall have the right to terminate this Agreement immediately upon written notice to Franchisee, without obligation to provide any cure period."

While Verimark is providing the thirty (30) day cure period under Section 14.1 out of contractual compliance and good faith, Verimark expressly reserves its position — and hereby places Coastal Palms on notice — that the breaches identified in this Notice constitute systematic underreporting of Gross Room Revenue within the meaning of Section 14.2(c) and, as such, constitute material breaches that are incapable of cure. The provision of a cure period herein shall not be construed as a waiver, abandonment, or modification of Verimark's position under Section 14.2(c), nor shall it be construed as an election of remedies or a representation that Verimark considers the identified breaches to be curable.

2.9 Liquidated Damages (FLA § 15.3)

Section 15.3 of each FLA provides that, upon termination of the FLA for cause by Verimark, the Franchisee shall pay to Verimark, as liquidated damages and not as a penalty, an amount equal to three times (3×) the total royalties paid or payable by the Franchisee to Verimark during the twelve (12) month period immediately preceding the effective date of termination (the "Trailing-Twelve-Month Royalties") for each terminated property. The parties acknowledged and agreed in each FLA that actual damages arising from early termination would be difficult to calculate with precision, and that the liquidated damages formula represents a reasonable approximation of the damages Verimark would suffer as a result of such termination.

Verimark expressly reserves all rights to seek liquidated damages under Section 15.3 of each FLA in the event of termination for cause. For the avoidance of doubt, the Trailing-Twelve-Month Royalties for purposes of Section 15.3 shall be calculated based upon actual GRR — not the underreported GRR figures submitted by Coastal Palms — for the applicable twelve-month period.

3. Factual Basis for the Material Breach

3.1 Overview of the Revenue Diversion Scheme

Verimark's investigation has revealed that Coastal Palms, through its principals and affiliated entities, has engaged in the systematic underreporting of Gross Room Revenue across all twenty-two (22) of its franchised Hotels over an extended period spanning at least from January 2013 through the present. The underreporting is not the result of inadvertent accounting errors or good-faith differences in the interpretation of the GRR definition. Rather, the evidence demonstrates a deliberate and coordinated scheme to divert substantial revenues outside the GRR reporting framework, thereby reducing the royalties, marketing-fund contributions, and technology fees payable to Verimark.

Verimark's investigation has identified two primary mechanisms by which Coastal Palms effected this revenue diversion:

(a) Diversion of revenue through Suncoast Room Management Inc. ("Suncoast"), an affiliated management company established and controlled by Randall Brecker, the Managing Member of Coastal Palms, which collected direct-booking revenues and retained a portion thereof without including any such revenues in GRR reports submitted to Verimark; and

(b) Improper netting of OTA revenues, through which Coastal Palms reported net-of-commission amounts received from online travel agencies rather than the gross revenues derived from the rental of guest rooms through OTA booking channels, as required by the GRR definition.

Each of these mechanisms is described in greater detail below.

3.2 Suncoast Room Management Inc. Revenue Diversion

Suncoast Room Management Inc. ("Suncoast") is a Florida corporation with its principal office at 9500 Gulf Shore Drive, Suite 455, Naples, Florida 34108 — an address that is in the same building as, and on the same floor as, Coastal Palms' principal office. Randall Brecker serves as the President and sole director of Suncoast. Mr. Brecker is also the Managing Member and holder of approximately sixty percent (60%) of the equity interests in Coastal Palms. Suncoast was incorporated with the Florida Division of Corporations on or about November 28, 2012, and commenced operations no later than January 2013.

Beginning no later than January 2013, Coastal Palms caused a material portion of direct-booking revenues generated at the Hotels to be collected by Suncoast rather than by the property-level operating entities that are parties to or affiliates under the FLAs. Specifically, Suncoast was designated as the collecting entity for revenues from the following booking channels:

(a) Walk-in guests at each of the 22 Hotels who paid at the front desk without a prior reservation;

(b) Corporate-direct contracts, pursuant to which certain corporate clients booked rooms at negotiated rates through agreements executed directly with Suncoast rather than through the Hotels' Verimark-branded reservation systems; and

(c) Bookings made through an unbranded website operated by Suncoast under the domain name "gulfcoastrooms.com," which marketed guest rooms at the Hotels without any reference to the Verimark brand or the Verimark reservation system.

Upon collecting these revenues, Suncoast retained a twelve percent (12%) "management fee" on all bookings processed through its channels, and forwarded the remaining eighty-eight percent (88%) of the collected revenue to the applicable property-level operating entities, including Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC. Critically, neither the gross revenues collected by Suncoast nor the twelve percent (12%) management fee retained by Suncoast were included in the monthly GRR reports submitted by Coastal Palms to Verimark. The revenues forwarded from Suncoast to the property-level entities were likewise excluded from GRR reporting.

This practice is in direct and unambiguous violation of Section 4.1 of each FLA. The GRR definition expressly encompasses "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 use of Suncoast as an intermediary collecting entity does not and cannot exclude these revenues from GRR. To the contrary, the "regardless of the entity collecting such revenue" language was specifically designed to capture exactly this type of arrangement, and Coastal Palms' establishment of Suncoast as a vehicle for collecting direct-booking revenues outside the GRR reporting framework constitutes a deliberate circumvention of the FLA's revenue-reporting requirements.

The property-level entities involved in this scheme include, but are not limited to:

(a) Gulf Breeze Hospitality LLC, a Florida limited liability company with its Managing Member identified as Randall Brecker, which operates six (6) Verimark Suites properties located in Southwest Florida; and

(b) Savannah Lodging Partners LLC, a Georgia limited liability company with its Managing Member identified as Randall Brecker, which operates four (4) Verimark Suites properties located in coastal Georgia.

Both Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC are affiliates of Coastal Palms, and their operations are subject to the FLAs to which they are parties or under which they operate.

3.3 OTA Revenue Netting

In addition to the Suncoast revenue diversion, Verimark's investigation has revealed that Coastal Palms has improperly reported revenues from third-party OTA booking channels on a net basis rather than on a gross basis. Specifically, Coastal Palms has classified net-rate payments received from OTAs — that is, the amounts remitted to the Hotels by OTA platforms after deduction of the OTA's commission or margin — as the full amount of guest room revenue attributable to such bookings. In its internal accounting records, Coastal Palms classified the differential between the rate charged to the guest by the OTA and the net-rate payment received by the Hotel as "commissions receivable" and netted this amount against GRR.

This netting practice is a clear violation of the GRR definition set forth in Section 4.1 of each FLA. The GRR definition requires reporting of "all revenues derived from or attributable to the rental of guest rooms at the Hotel," without any deduction for commissions, fees, or other costs incurred in generating such revenue. The revenue attributable to the rental of a guest room booked through an OTA is the full rate charged to the guest for the room, not the reduced net-rate payment received by the Hotel after the OTA has deducted its commission. By netting OTA commissions against GRR, Coastal Palms has systematically underreported GRR and underpaid the royalties, marketing-fund contributions, and other amounts calculated as a percentage of GRR.

3.4 Unreported Room Additions

Verimark's investigation has further revealed that Coastal Palms added approximately two hundred fourteen (214) guest rooms across at least four (4) of the Hotels during the period under review without notifying Verimark of such additions. These room additions, which appear to have resulted from renovations and conversions of non-revenue spaces into rentable guest rooms, were not reflected in the room counts reported to Verimark. As a consequence, the per-room technology fees payable under Section 4.3 of the applicable FLAs have been calculated based on understated room counts, resulting in a systematic underpayment of technology fees for the affected properties over the period during which the additional rooms were in operation.

The failure to report these room additions also implicates Coastal Palms' obligations under other provisions of the FLAs, including but not limited to the brand-standards compliance obligations and the property-information reporting requirements. However, this Notice focuses on the financial impact of the unreported rooms as it relates to the technology fee underpayments.

3.5 Preliminary Audit Findings

On November 22, 2021, Verimark engaged the independent accounting firm of Thornbury & Associates CPAs LLP ("Thornbury"), lead audit partner Malcolm Thornbury, CPA, to conduct a franchise-compliance audit of Coastal Palms' Hotels pursuant to Verimark's audit rights under Section 8.2 of the FLAs. Thornbury was engaged to examine the books, records, financial statements, and tax returns of Coastal Palms and its affiliated entities, and to compare the revenues actually generated at the Hotels against the GRR reported to Verimark.

On January 18, 2022, Thornbury delivered its preliminary audit findings to Verimark. The preliminary findings are based on a detailed examination of the ten (10) highest-GRR Coastal Palms properties for the three-year period from January 1, 2019 through December 31, 2021. The key findings are summarized as follows:

(a) Underreporting Rate: The ten highest-GRR Coastal Palms properties underreported GRR by approximately twenty-six percent (26%) for the 2019–2021 period. The underreporting percentage ranged from approximately twenty-two percent (22%) to thirty-one percent (31%), varying by property and by year.

(b) 2% Threshold Exceeded: The audit revealed underreporting far exceeding the two percent (2%) threshold established in Section 8.2 of the FLAs, which triggers the Franchisee's obligation to bear all costs and expenses of the audit.

(c) FY 2021 Underreporting: For fiscal year 2021 alone, Coastal Palms reported aggregate GRR across all 22 Hotels of approximately $112.4 million. Verimark's investigation, corroborated by Thornbury's preliminary findings, estimates that the true aggregate GRR for the 22 Hotels for fiscal year 2021 was approximately $145.6 million, representing underreported GRR of approximately $33.2 million in a single year.

(d) Extrapolated Total Underreporting: Extrapolation of the audit findings across all 22 properties and the full period from January 2013 through December 2021 indicates total underreported GRR of approximately $197.8 million.

Based upon the preliminary audit findings and Verimark's own internal analysis, the estimated underpayments attributable to Coastal Palms' underreporting are as follows:

The foregoing figures are preliminary estimates based upon Thornbury's initial findings and are subject to adjustment upon completion of the comprehensive audit of all 22 properties for the full 2013–2021 period. Verimark reserves the right to supplement, modify, or increase these figures as additional information becomes available.

4. Identification of Breached Provisions

Based upon the facts set forth in Section 3 of this Notice, Verimark identifies the following specific provisions of the FLAs that Coastal Palms has materially breached:

(a) FLA § 4.1 — Royalty Obligations and GRR Reporting. Coastal Palms has failed to report and pay royalties on the full amount of Gross Room Revenue as defined in the FLAs by (i) systematically excluding from GRR all revenues collected by Suncoast Room Management Inc., including revenues from walk-in guests, corporate-direct contracts, and bookings through the unbranded website "gulfcoastrooms.com," and (ii) improperly netting OTA commissions and margins against GRR rather than reporting the gross amount of revenues derived from OTA bookings. These practices have resulted in the substantial underpayment of royalties over a period of approximately nine (9) years.

(b) FLA § 4.2 — Marketing-Fund Contributions. As a direct consequence of the underreporting of GRR described above, Coastal Palms has failed to pay marketing-fund contributions on the full amount of Gross Room Revenue, resulting in underpayment of marketing-fund contributions over the same period.

(c) FLA § 4.3 — Technology Fees. Coastal Palms has failed to report the addition of approximately 214 guest rooms across at least four (4) Hotels and has failed to pay technology fees on such unreported rooms, resulting in a systematic underpayment of per-room technology fees.

(d) FLA § 4.6 — Late-Payment Interest. As a result of the foregoing underpayments, Coastal Palms has accumulated and continues to accumulate unpaid late-payment interest at the rate of 1.5% per month, compounded monthly, on all underpaid amounts from the dates such amounts were due through the present.

(e) Implied Covenant of Good Faith and Fair Dealing. Coastal Palms' conduct in establishing Suncoast Room Management Inc. as a vehicle to collect direct-booking revenues outside of the GRR reporting framework, in operating an unbranded website to divert bookings away from the Verimark reservation system, and in retaining a 12% "management fee" through Suncoast on revenues that should have been reported as GRR, constitutes a deliberate and bad-faith circumvention of Coastal Palms' franchise obligations. This conduct violates the implied covenant of good faith and fair dealing inherent in each FLA.

Each of the foregoing breaches constitutes a material breach of the applicable FLA. The systematic nature of the underreporting — spanning all 22 franchised properties over a period of approximately nine (9) years from 2013 through 2021, involving the deliberate establishment of an affiliated entity to divert revenues, and resulting in aggregate underreported GRR of approximately $197.8 million — constitutes "systematic underreporting of Gross Room Revenue" within the meaning of Section 14.2(c) of each FLA.

5. Demand for Cure

Pursuant to Section 14.1 of each FLA, Verimark hereby demands that Coastal Palms cure the material breaches identified in this Notice within thirty (30) days of Coastal Palms' receipt of this Notice.

To effectuate cure, Coastal Palms must take each of the following actions within the 30-day cure period:

(a) Full Payment of All Underpaid Amounts. Coastal Palms shall pay to Verimark the full amount of all underpaid royalties, marketing-fund contributions, and technology fees for the entire period of underreporting, from January 2013 through the present, including without limitation (i) all amounts due with respect to revenues collected by Suncoast Room Management Inc. that were improperly excluded from GRR, (ii) all amounts due with respect to OTA revenues that were improperly reported on a net-of-commission basis rather than on a gross basis, and (iii) all amounts due with respect to the 214 unreported guest rooms for which technology fees were not paid, together with accrued late-payment interest at the rate of one and one-half percent (1.5%) per month, compounded monthly, from the date each such payment was originally due through the date of payment, as provided in Section 4.6 of each FLA.

(b) Reimbursement of Audit Costs. Coastal Palms shall reimburse Verimark for all costs and expenses incurred by Verimark in connection with the franchise-compliance audit conducted by Thornbury & Associates CPAs LLP, as required under Section 8.2 of each FLA. The audit having revealed underpayments far in excess of the two percent (2%) threshold established in Section 8.2, the obligation to bear audit costs falls squarely on Coastal Palms. Verimark will provide an itemized statement of audit costs upon request.

(c) Immediate Cessation of Underreporting Practices. Coastal Palms shall immediately cease all practices that have resulted in the underreporting of GRR, including without limitation (i) the exclusion of Suncoast-collected revenues from GRR reports, (ii) the netting of OTA commissions and margins against GRR, and (iii) the failure to report the actual number of available rooms at each Hotel.

(d) Implementation of Corrective Reporting Procedures. Coastal Palms shall implement corrective reporting procedures to ensure that all GRR, as defined in Section 4.1 of each FLA, is accurately and completely reported to Verimark on a going-forward basis. Such corrective measures shall include, at a minimum, the integration of all Suncoast booking channels (including the "gulfcoastrooms.com" website) and all direct-booking revenues into the monthly GRR reports submitted to Verimark, and the reporting of all OTA revenues on a gross basis.

(e) Submission to Comprehensive Audit. Coastal Palms shall submit to, and fully cooperate with, a comprehensive audit of all 22 franchised Hotels for the full period from January 2013 through the present, to be conducted by Thornbury & Associates CPAs LLP or another independent accounting firm selected by Verimark. All costs and expenses of such comprehensive audit shall be borne by Coastal Palms. Coastal Palms shall provide Thornbury and/or Verimark with complete and unrestricted access to all books, records, accounts, financial statements, bank records, tax returns, contracts (including all corporate-direct contracts executed through Suncoast), and any other documents or information reasonably requested in connection with the audit, for all entities involved in the operation of the Hotels, including Coastal Palms, Suncoast Room Management Inc., Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and any other affiliated entities.

Each of the foregoing actions is a necessary component of cure. Partial cure, or cure of some but not all of the identified breaches, shall not constitute cure within the meaning of Section 14.1 of any FLA.

6. Reservation of Rights

Verimark expressly reserves all rights and remedies available to it under the FLAs, at law, and in equity, including but not limited to the following:

(a) Termination for Cause. Verimark reserves the right to terminate each of the twenty-two (22) FLAs for cause upon expiration of the 30-day cure period if cure is not tendered in full, or at any time if the breaches identified herein are determined to be incurable under Section 14.2(c) of the FLAs.

(b) Liquidated Damages. Upon any termination for cause, Verimark reserves the right to seek and recover liquidated damages under Section 15.3 of each terminated FLA, in the amount of three times (3×) the Trailing-Twelve-Month Royalties for each terminated property. For the avoidance of doubt, the Trailing-Twelve-Month Royalties shall be calculated based upon actual GRR, not the underreported GRR figures submitted by Coastal Palms.

(c) Actual, Consequential, and Compensatory Damages. Verimark reserves the right to seek and recover all actual, consequential, and compensatory damages arising from Coastal Palms' breaches, to the extent such damages exceed or are in addition to the liquidated damages provided under the FLAs.

(d) Equitable Relief. Verimark reserves the right to seek equitable relief, including but not limited to an accounting of all revenues generated at the Hotels and collected by Suncoast, Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and any other affiliated entities, as well as injunctive relief to prevent the continued diversion of revenues.

(e) Litigation. Verimark reserves the right to initiate legal proceedings against Coastal Palms and its affiliated entities, including but not limited to Suncoast Room Management Inc., Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and their respective principals, in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida, as provided in the mandatory venue provisions of each FLA, or in any other court of competent jurisdiction.

Nothing in this Notice, including the provision of a 30-day cure period, constitutes or shall be construed as a waiver, modification, or abandonment of Verimark's position that the breaches identified herein constitute systematic underreporting of Gross Room Revenue that is incapable of cure under Section 14.2(c) of each FLA. Verimark provides the cure period herein out of contractual compliance and good faith, and without prejudice to its rights under Section 14.2(c) or any other provision of the FLAs.

Verimark does not waive any of its rights, claims, or remedies by providing this Notice, by any delay in exercising its rights, by any prior course of dealing, or by any failure to exercise any right at any earlier time. All rights, claims, and remedies of Verimark are cumulative and not exclusive.

This Notice shall apply to each of the twenty-two (22) individual FLAs between Verimark and Coastal Palms and/or its affiliated property-level entities, including without limitation Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC. Each FLA is separately and independently subject to this Notice, and a cure with respect to one FLA shall not constitute a cure with respect to any other FLA unless all required actions set forth in Section 5 of this Notice have been completed with respect to all 22 FLAs.

7. Direction Regarding Communications

All communications regarding this Notice, the breaches identified herein, and any proposed cure shall be directed to:

Renata Solis-Vega Senior Vice President & General Counsel Verimark Hospitality Group Inc. 2400 East Las Olas Boulevard, Suite 3100 Fort Lauderdale, FL 33301 Telephone: (954) 555-8400

Email: rsolis-vega@verimark.com

With a copy to:

Priya Anand, Partner Calderwood & Harkness LLP 110 SE 6th Street, Suite 2800 Fort Lauderdale, FL 33301 Telephone: (954) 555-1218

Email: panand@calderwoodharkness.com

FL Bar No. 0087451

Coastal Palms is advised that Verimark has retained Calderwood & Harkness LLP as outside counsel with respect to this matter, and that Calderwood & Harkness LLP is authorized to communicate with Coastal Palms and its representatives on behalf of Verimark. If Coastal Palms has retained or intends to retain legal counsel, please advise Verimark and Calderwood & Harkness LLP of the identity and contact information of such counsel at the earliest opportunity so that communications may be appropriately directed.

[Remainder of Page Intentionally Left Blank — Signature Page Follows]

Very truly yours,

VERIMARK HOSPITALITY GROUP INC.

By: ________

Name: Renata Solis-Vega

Title: Senior Vice President & General Counsel

Date: ________

[DRAFT — SIGNATURE TO BE AFFIXED UPON FINALIZATION]

Enclosures:

1. Schedule A — List of All Twenty-Two (22) Franchise License Agreements (identifying each FLA by date of execution, property name, property location, brand designation (Verimark Suites or Verimark Select), and property-level operating entity) [To be attached to final version]

2. Summary of Thornbury & Associates CPAs LLP Preliminary Audit Findings dated January 18, 2022 (summary reference only; full audit report and work papers reserved as confidential and privileged) [To be attached to final version]

cc:

Randall Brecker, individually Nolan Prescott, Member, Coastal Palms Franchise Holdings LLC Theresa Brecker, Member, Coastal Palms Franchise Holdings LLC [Opposing counsel — to be added if identified prior to sending] Priya Anand, Calderwood & Harkness LLP Douglas Carmichael, Calderwood & Harkness LLP Deidre Langston, SVP Franchise Operations, Verimark Hospitality Group Inc. Martin Holcomb, EVP & CFO, Verimark Hospitality Group Inc.

INTERNAL DRAFTING NOTES — FOR CALDERWOOD & HARKNESS TEAM ONLY TO BE REMOVED IN THEIR ENTIRETY BEFORE FINALIZATION PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT

From: Yuki Nakamura To: Priya Anand Date: January 25, 2022 Re: Drafting Notes — Coastal Palms Notice of Material Breach (Matter No. 1021-00006)

Priya — the following notes accompany this draft for your review:

1. Audit Figures. This draft is prepared based on the Thornbury preliminary findings delivered January 18, 2022. The $197.8 million total underreported GRR figure and all derivative calculations (underpaid royalties, marketing-fund contributions, technology fees) are based on Thornbury's extrapolation methodology as described in their preliminary report. Before we finalize and send this Notice, we should confirm all final numbers directly with Malcolm Thornbury. I have a call scheduled with his team for January 31 to walk through any refinements. If Thornbury's final figures differ materially from the preliminary numbers, we will need to revise Section 3.5 and the table accordingly.

2. Timing — Cure Period. If this Notice is sent on or about February 4, 2022, the 30-day cure period under FLA § 14.1 would expire on or about March 6, 2022 (assuming receipt on the date of sending or within one to two business days thereafter). We can begin preparing the complaint for filing promptly after the cure deadline passes, assuming cure is not tendered. I recommend we have a substantially complete draft complaint ready by approximately February 20 so that we are prepared to file within days of the cure deadline expiration if needed.

3. Whistleblower — Janet Kerrigan. This draft intentionally does not reference Janet Kerrigan by name, nor does it reference the November 8, 2021 whistleblower complaint through which Verimark initially became aware of the Suncoast revenue diversion scheme. The factual basis section references only the Thornbury audit findings and Verimark's own investigation. This approach is designed to protect Ms. Kerrigan's identity and avoid potential retaliation claims. If we proceed to litigation, we will need to evaluate at what stage Ms. Kerrigan's identity may need to be disclosed in discovery, and we should discuss with Renata and Deidre the appropriate protections (e.g., protective order, confidential designation) at that time.

4. FLA § 14.2(c) — Strategic Positioning. The strategic decision to provide the 30-day cure period under § 14.1 while simultaneously reserving the incurable-breach position under § 14.2(c) is intentional and has been discussed with Renata. This approach provides maximum flexibility for our litigation posture. By offering the cure period, we foreclose any argument by Coastal Palms that Verimark failed to comply with the contractual notice-and-cure prerequisites. At the same time, by expressly reserving the § 14.2(c) position, we preserve the argument that the breaches are incurable and that Verimark has the right to terminate immediately. In litigation, this positions us to argue either (a) Coastal Palms failed to cure within the 30-day period and termination is proper under § 14.1/14.2, or alternatively (b) the breaches were incurable under § 14.2(c) and Verimark was entitled to terminate at any time, with the cure period having been offered as a courtesy and not as a concession.

5. Client Approval. This draft should be circulated to Renata Solis-Vega (SVP & General Counsel) and Deidre Langston (SVP, Franchise Operations) for client approval before finalization. I will send the transmittal memorandum and draft to both of them today for review. Please let me know if you would like to schedule a call with the client team to walk through the draft before finalizing.

END OF INTERNAL DRAFTING NOTES

Category	Calculation Basis	Estimated Amount
Underpaid Royalties (FLA § 4.1)	5% of $197.8 million underreported GRR	$9,890,000
Underpaid Marketing-Fund Contributions (FLA § 4.2)	2.5% of $197.8 million underreported GRR	$4,945,000
Underpaid Technology Fees (FLA § 4.3)	214 unreported rooms × $12.50/room/month × approx. 47 months average	$1,260,000
Subtotal — Direct Underpayments	$16,095,000
Late-Payment Interest (FLA § 4.6)	1.5% per month, compounded monthly	Accruing; to be calculated through the date of cure or judgment

PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT DRAFT — FOR CLIENT REVIEW — NOT YET SENT
CALDERWOOD & HARKNESS LLP 110 SE 6th Street, Suite 2800 Fort Lauderdale, FL 33301 Telephone: (954) 555-1200 Facsimile: (954) 555-1201
January 25, 2022
Internal Matter Reference: 1021-00006
MEMORANDUM — INTERNAL TRANSMITTAL
TO: Renata Solis-Vega, Senior Vice President & General Counsel, Verimark Hospitality Group Inc. Deidre Langston, Senior Vice President, Franchise Operations, Verimark Hospitality Group Inc.
FROM: Yuki Nakamura (FL Bar No. 0119644), Associate, Calderwood & Harkness LLP Priya Anand (FL Bar No. 0087451), Partner, Calderwood & Harkness LLP
DATE: January 25, 2022
RE: Draft Notice of Material Breach — Coastal Palms Franchise Holdings LLC — All 22 Franchise License Agreements — For Client Review and Approval
Renata and Deidre:
Please find attached a draft of the formal Notice of Material Breach to be sent from Verimark Hospitality Group Inc. to Coastal Palms Franchise Holdings LLC. This draft has been prepared based upon the preliminary audit findings delivered by Thornbury & Associates CPAs LLP on January 18, 2022, and the review of all twenty-two (22) Franchise License Agreements on file with our office.
Delivery Instructions for Final Version:
Upon your approval and finalization, the executed Notice is to be transmitted simultaneously via the following methods:
1.  Certified Mail, Return Receipt Requested, to:
Coastal Palms Franchise Holdings LLC 9500 Gulf Shore Drive, Suite 450 Naples, FL 34108
Attention: Randall Brecker, Managing Member
2.  Electronic Mail, to Randall Brecker at the email address on file with Verimark Franchise Operations.
3.  Certified Mail, Return Receipt Requested, to the registered agent:
Garrison Registered Agents LLC 100 S. Ashley Drive, Suite 600 Tampa, FL 33602
4.  Certified Mail, Return Receipt Requested, to opposing counsel (if identified prior to sending):
Whitfield, Barrow & Crane LLP 1221 Brickell Avenue, Suite 3000 Miami, FL 33131
Attention: Nathan Whitfield III
We request your review and comments at your earliest convenience. We anticipate finalizing and sending this Notice on or about February 4, 2022, subject to your approval and confirmation of the final audit figures from Malcolm Thornbury. Please do not hesitate to contact Priya Anand directly at (954) 555-1218 or panand@calderwoodharkness.com with any questions or revisions.
PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT DRAFT — FOR CLIENT REVIEW — NOT YET SENT
NOTICE OF MATERIAL BREACH
January 25, 2022 [Date to be updated upon finalization]
Verimark Hospitality Group Inc. 2400 East Las Olas Boulevard, Suite 3100 Fort Lauderdale, FL 33301
Via Certified Mail, Return Receipt Requested and Electronic Mail
Coastal Palms Franchise Holdings LLC 9500 Gulf Shore Drive, Suite 450 Naples, FL 34108
Attention: Randall Brecker, Managing Member
RE: Notice of Material Breach of Franchise License Agreements between Verimark Hospitality Group Inc. and Coastal Palms Franchise Holdings LLC (All Twenty-Two (22) Franchise License Agreements, Dated June 15, 2007 Through September 3, 2019)
Dear Mr. Brecker:
1. Introduction and Purpose of Notice
This letter constitutes a formal Notice of Material Breach (this "Notice") issued pursuant to Section 14.1 of each of the twenty-two (22) Franchise License Agreements (individually, an "FLA," and collectively, the "FLAs") by and between Verimark Hospitality Group Inc. ("Verimark") and Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "Franchisee").
Verimark is a Delaware corporation, publicly traded on the Nasdaq Stock Market under the ticker symbol VHMK, with its principal offices located at 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, Florida 33301. Verimark is one of the nation's leading franchisors and operators of premium select-service and extended-stay hotel properties, with a portfolio encompassing over 1,200 franchised locations nationwide.
Coastal Palms is a Florida limited liability company with its principal office at 9500 Gulf Shore Drive, Suite 450, Naples, Florida 34108. Coastal Palms is the franchisee of record under each of the 22 FLAs referenced herein, and operates through various affiliated property-level entities, including but not limited to Gulf Breeze Hospitality LLC, a Florida limited liability company, and Savannah Lodging Partners LLC, a Georgia limited liability company.
The FLAs govern the operation of twenty-two (22) franchised hotel properties located across the states of Florida and Georgia, of which eighteen (18) are branded as "Verimark Suites" properties and four (4) are branded as "Verimark Select" properties (collectively, the "Hotels"). Together, the Hotels comprise approximately 3,740 total guest rooms. The first FLA between Verimark and Coastal Palms was executed on June 15, 2007, for a single Verimark Suites property located in Naples, Florida. The most recent FLA was executed on September 3, 2019. A complete schedule of all 22 FLAs, identifying each by date of execution, property name, property location, brand designation, and property-level operating entity, is attached hereto as Schedule A.
Each FLA has an initial term of twenty (20) years from the date of execution. Each FLA is governed by the laws of the State of Florida, and each FLA contains a mandatory venue provision requiring that any litigation arising under or related to the FLA be brought in Broward County, Florida.
By this Notice, Verimark hereby provides formal notice to Coastal Palms that Coastal Palms is in material breach of each of the twenty-two (22) FLAs, as more particularly described below, and demands that Coastal Palms cure the identified material breaches in the manner and within the time period set forth herein.
2. Relevant Contractual Provisions
For the convenience of Coastal Palms and its advisors, and without limitation or waiver, Verimark sets forth below a summary of the contractual provisions most directly relevant to the material breaches identified in this Notice. In the event of any inconsistency between the summaries below and the actual language of the FLAs, the FLAs shall control. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the FLAs.
2.1 Gross Room Revenue Definition and Reporting Obligations (FLA § 4.1)
Section 4.1 of each FLA defines "Gross Room Revenue" (or "GRR") as follows:
"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 breadth of this definition is both intentional and significant. It encompasses all booking channels without exception — including direct bookings, indirect bookings, online bookings, walk-in guests, corporate-direct contracts, online travel agency ("OTA") bookings, and bookings made through any website or reservation system — and it captures revenue regardless of which entity within the Franchisee's corporate structure, or any affiliate thereof, actually collects such revenue. The GRR definition was specifically drafted to prevent the precise form of revenue diversion described in Section 3 of this Notice.
Each FLA further requires the Franchisee to report GRR to Verimark on a monthly basis, no later than the fifteenth (15th) day of the calendar month following the month in which the revenue was earned, in a format prescribed by Verimark and certified by an authorized representative of Franchisee as accurate and complete.
2.2 Royalty Obligations (FLA § 4.1)
Under Section 4.1 of each FLA, Franchisee is obligated to pay to Verimark a continuing royalty equal to five percent (5%) of GRR, payable on a monthly basis, concurrent with the delivery of each monthly GRR report. This royalty obligation is a fundamental and material obligation of the Franchisee under each FLA, and the payment of royalties based on the full and accurate reporting of GRR constitutes a core element of the consideration for the franchise rights granted by Verimark.
2.3 Marketing-Fund Contribution (FLA § 4.2)
Under Section 4.2 of each FLA, Franchisee is obligated to contribute to the Verimark National Marketing Fund an amount equal to two and one-half percent (2.5%) of GRR, payable on a monthly basis, concurrent with the payment of royalties. These marketing-fund contributions are pooled with contributions from all Verimark franchisees system-wide and are deployed for the benefit of the entire Verimark brand system through national and regional advertising, digital marketing, brand-awareness initiatives, and reservation-system development. The underreporting of GRR by Coastal Palms has therefore not only deprived Verimark of contractually owed funds but has also reduced the resources available for the collective marketing efforts that benefit the entire Verimark franchise system.
2.4 Technology Fee (FLA § 4.3)
Under Section 4.3 of each FLA, Franchisee is obligated to pay a flat technology fee of Twelve Dollars and Fifty Cents ($12.50) per available room per month. This fee is adjusted annually in accordance with the Consumer Price Index for All Urban Consumers (CPI-U), as published by the U.S. Bureau of Labor Statistics, with such annual adjustment capped at a maximum of three percent (3%) per year. The technology fee supports the ongoing maintenance and enhancement of Verimark's centralized reservation system, property management system interfaces, guest loyalty platform, and related technology infrastructure. Accurate reporting of the total number of available rooms at each Hotel is a prerequisite for the proper calculation and payment of the technology fee.
2.5 Late-Payment Interest (FLA § 4.6)
Under Section 4.6 of each FLA, any amounts owed by Franchisee to Verimark that are not paid when due shall bear interest at the rate of one and one-half percent (1.5%) per month, compounded monthly, from the date such payment was due until the date such payment is received by Verimark in full. This provision applies to all underpayments of royalties, marketing-fund contributions, and technology fees, whether such underpayments arise from late payment, incomplete payment, or, as in this case, the systematic underreporting of the revenue base upon which such payments are calculated.
2.6 Audit Rights (FLA § 8.2)
Under Section 8.2 of each FLA, Verimark has the right, upon not less than ten (10) business days' prior written notice, to audit the Franchisee's books, records, accounts, tax returns, and financial statements as they pertain to the calculation and reporting of GRR and other amounts due under the FLA. The audit may be conducted by Verimark's internal personnel or by an independent accounting firm engaged by Verimark, at reasonable times and at the Franchisee's place of business. If any such audit reveals an underpayment of amounts due to Verimark that exceeds two percent (2%) of the GRR reported by the Franchisee for the period under audit, the Franchisee shall bear all costs and expenses of the audit, including professional fees, travel expenses, and the fees and expenses of any accounting firm retained by Verimark to conduct or assist with the audit.
2.7 Cure Provision (FLA § 14.1)
Section 14.1 of each FLA provides that, in the event of a material breach by the Franchisee of any provision of the FLA, Verimark shall provide written notice to the Franchisee specifying the nature of the breach and the actions required to cure the breach. Upon receipt of such written notice, the Franchisee shall have thirty (30) days to cure the identified breach to Verimark's reasonable satisfaction. If the Franchisee fails to cure the breach within the 30-day cure period, Verimark shall have the right to terminate the FLA in accordance with Section 14.2.
2.8 Incurable Material Breach (FLA § 14.2(c))
Section 14.2(c) of each FLA provides, in pertinent part:
"Notwithstanding Section 14.1, systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure, and Franchisor shall have the right to terminate this Agreement immediately upon written notice to Franchisee, without obligation to provide any cure period."
While Verimark is providing the thirty (30) day cure period under Section 14.1 out of contractual compliance and good faith, Verimark expressly reserves its position — and hereby places Coastal Palms on notice — that the breaches identified in this Notice constitute systematic underreporting of Gross Room Revenue within the meaning of Section 14.2(c) and, as such, constitute material breaches that are incapable of cure. The provision of a cure period herein shall not be construed as a waiver, abandonment, or modification of Verimark's position under Section 14.2(c), nor shall it be construed as an election of remedies or a representation that Verimark considers the identified breaches to be curable.
2.9 Liquidated Damages (FLA § 15.3)
Section 15.3 of each FLA provides that, upon termination of the FLA for cause by Verimark, the Franchisee shall pay to Verimark, as liquidated damages and not as a penalty, an amount equal to three times (3×) the total royalties paid or payable by the Franchisee to Verimark during the twelve (12) month period immediately preceding the effective date of termination (the "Trailing-Twelve-Month Royalties") for each terminated property. The parties acknowledged and agreed in each FLA that actual damages arising from early termination would be difficult to calculate with precision, and that the liquidated damages formula represents a reasonable approximation of the damages Verimark would suffer as a result of such termination.
Verimark expressly reserves all rights to seek liquidated damages under Section 15.3 of each FLA in the event of termination for cause. For the avoidance of doubt, the Trailing-Twelve-Month Royalties for purposes of Section 15.3 shall be calculated based upon actual GRR — not the underreported GRR figures submitted by Coastal Palms — for the applicable twelve-month period.
3. Factual Basis for the Material Breach
3.1 Overview of the Revenue Diversion Scheme
Verimark's investigation has revealed that Coastal Palms, through its principals and affiliated entities, has engaged in the systematic underreporting of Gross Room Revenue across all twenty-two (22) of its franchised Hotels over an extended period spanning at least from January 2013 through the present. The underreporting is not the result of inadvertent accounting errors or good-faith differences in the interpretation of the GRR definition. Rather, the evidence demonstrates a deliberate and coordinated scheme to divert substantial revenues outside the GRR reporting framework, thereby reducing the royalties, marketing-fund contributions, and technology fees payable to Verimark.
Verimark's investigation has identified two primary mechanisms by which Coastal Palms effected this revenue diversion:
(a) Diversion of revenue through Suncoast Room Management Inc. ("Suncoast"), an affiliated management company established and controlled by Randall Brecker, the Managing Member of Coastal Palms, which collected direct-booking revenues and retained a portion thereof without including any such revenues in GRR reports submitted to Verimark; and
(b) Improper netting of OTA revenues, through which Coastal Palms reported net-of-commission amounts received from online travel agencies rather than the gross revenues derived from the rental of guest rooms through OTA booking channels, as required by the GRR definition.
Each of these mechanisms is described in greater detail below.
3.2 Suncoast Room Management Inc. Revenue Diversion
Suncoast Room Management Inc. ("Suncoast") is a Florida corporation with its principal office at 9500 Gulf Shore Drive, Suite 455, Naples, Florida 34108 — an address that is in the same building as, and on the same floor as, Coastal Palms' principal office. Randall Brecker serves as the President and sole director of Suncoast. Mr. Brecker is also the Managing Member and holder of approximately sixty percent (60%) of the equity interests in Coastal Palms. Suncoast was incorporated with the Florida Division of Corporations on or about November 28, 2012, and commenced operations no later than January 2013.
Beginning no later than January 2013, Coastal Palms caused a material portion of direct-booking revenues generated at the Hotels to be collected by Suncoast rather than by the property-level operating entities that are parties to or affiliates under the FLAs. Specifically, Suncoast was designated as the collecting entity for revenues from the following booking channels:
(a) Walk-in guests at each of the 22 Hotels who paid at the front desk without a prior reservation;
(b) Corporate-direct contracts, pursuant to which certain corporate clients booked rooms at negotiated rates through agreements executed directly with Suncoast rather than through the Hotels' Verimark-branded reservation systems; and
(c) Bookings made through an unbranded website operated by Suncoast under the domain name "gulfcoastrooms.com," which marketed guest rooms at the Hotels without any reference to the Verimark brand or the Verimark reservation system.
Upon collecting these revenues, Suncoast retained a twelve percent (12%) "management fee" on all bookings processed through its channels, and forwarded the remaining eighty-eight percent (88%) of the collected revenue to the applicable property-level operating entities, including Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC. Critically, neither the gross revenues collected by Suncoast nor the twelve percent (12%) management fee retained by Suncoast were included in the monthly GRR reports submitted by Coastal Palms to Verimark. The revenues forwarded from Suncoast to the property-level entities were likewise excluded from GRR reporting.
This practice is in direct and unambiguous violation of Section 4.1 of each FLA. The GRR definition expressly encompasses "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 use of Suncoast as an intermediary collecting entity does not and cannot exclude these revenues from GRR. To the contrary, the "regardless of the entity collecting such revenue" language was specifically designed to capture exactly this type of arrangement, and Coastal Palms' establishment of Suncoast as a vehicle for collecting direct-booking revenues outside the GRR reporting framework constitutes a deliberate circumvention of the FLA's revenue-reporting requirements.
The property-level entities involved in this scheme include, but are not limited to:
(a) Gulf Breeze Hospitality LLC, a Florida limited liability company with its Managing Member identified as Randall Brecker, which operates six (6) Verimark Suites properties located in Southwest Florida; and
(b) Savannah Lodging Partners LLC, a Georgia limited liability company with its Managing Member identified as Randall Brecker, which operates four (4) Verimark Suites properties located in coastal Georgia.
Both Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC are affiliates of Coastal Palms, and their operations are subject to the FLAs to which they are parties or under which they operate.
3.3 OTA Revenue Netting
In addition to the Suncoast revenue diversion, Verimark's investigation has revealed that Coastal Palms has improperly reported revenues from third-party OTA booking channels on a net basis rather than on a gross basis. Specifically, Coastal Palms has classified net-rate payments received from OTAs — that is, the amounts remitted to the Hotels by OTA platforms after deduction of the OTA's commission or margin — as the full amount of guest room revenue attributable to such bookings. In its internal accounting records, Coastal Palms classified the differential between the rate charged to the guest by the OTA and the net-rate payment received by the Hotel as "commissions receivable" and netted this amount against GRR.
This netting practice is a clear violation of the GRR definition set forth in Section 4.1 of each FLA. The GRR definition requires reporting of "all revenues derived from or attributable to the rental of guest rooms at the Hotel," without any deduction for commissions, fees, or other costs incurred in generating such revenue. The revenue attributable to the rental of a guest room booked through an OTA is the full rate charged to the guest for the room, not the reduced net-rate payment received by the Hotel after the OTA has deducted its commission. By netting OTA commissions against GRR, Coastal Palms has systematically underreported GRR and underpaid the royalties, marketing-fund contributions, and other amounts calculated as a percentage of GRR.
3.4 Unreported Room Additions
Verimark's investigation has further revealed that Coastal Palms added approximately two hundred fourteen (214) guest rooms across at least four (4) of the Hotels during the period under review without notifying Verimark of such additions. These room additions, which appear to have resulted from renovations and conversions of non-revenue spaces into rentable guest rooms, were not reflected in the room counts reported to Verimark. As a consequence, the per-room technology fees payable under Section 4.3 of the applicable FLAs have been calculated based on understated room counts, resulting in a systematic underpayment of technology fees for the affected properties over the period during which the additional rooms were in operation.
The failure to report these room additions also implicates Coastal Palms' obligations under other provisions of the FLAs, including but not limited to the brand-standards compliance obligations and the property-information reporting requirements. However, this Notice focuses on the financial impact of the unreported rooms as it relates to the technology fee underpayments.
3.5 Preliminary Audit Findings
On November 22, 2021, Verimark engaged the independent accounting firm of Thornbury & Associates CPAs LLP ("Thornbury"), lead audit partner Malcolm Thornbury, CPA, to conduct a franchise-compliance audit of Coastal Palms' Hotels pursuant to Verimark's audit rights under Section 8.2 of the FLAs. Thornbury was engaged to examine the books, records, financial statements, and tax returns of Coastal Palms and its affiliated entities, and to compare the revenues actually generated at the Hotels against the GRR reported to Verimark.
On January 18, 2022, Thornbury delivered its preliminary audit findings to Verimark. The preliminary findings are based on a detailed examination of the ten (10) highest-GRR Coastal Palms properties for the three-year period from January 1, 2019 through December 31, 2021. The key findings are summarized as follows:
(a) Underreporting Rate: The ten highest-GRR Coastal Palms properties underreported GRR by approximately twenty-six percent (26%) for the 2019–2021 period. The underreporting percentage ranged from approximately twenty-two percent (22%) to thirty-one percent (31%), varying by property and by year.
(b) 2% Threshold Exceeded: The audit revealed underreporting far exceeding the two percent (2%) threshold established in Section 8.2 of the FLAs, which triggers the Franchisee's obligation to bear all costs and expenses of the audit.
(c) FY 2021 Underreporting: For fiscal year 2021 alone, Coastal Palms reported aggregate GRR across all 22 Hotels of approximately $112.4 million. Verimark's investigation, corroborated by Thornbury's preliminary findings, estimates that the true aggregate GRR for the 22 Hotels for fiscal year 2021 was approximately $145.6 million, representing underreported GRR of approximately $33.2 million in a single year.
(d) Extrapolated Total Underreporting: Extrapolation of the audit findings across all 22 properties and the full period from January 2013 through December 2021 indicates total underreported GRR of approximately $197.8 million.
Based upon the preliminary audit findings and Verimark's own internal analysis, the estimated underpayments attributable to Coastal Palms' underreporting are as follows:
The foregoing figures are preliminary estimates based upon Thornbury's initial findings and are subject to adjustment upon completion of the comprehensive audit of all 22 properties for the full 2013–2021 period. Verimark reserves the right to supplement, modify, or increase these figures as additional information becomes available.
4. Identification of Breached Provisions
Based upon the facts set forth in Section 3 of this Notice, Verimark identifies the following specific provisions of the FLAs that Coastal Palms has materially breached:
(a) FLA § 4.1 — Royalty Obligations and GRR Reporting. Coastal Palms has failed to report and pay royalties on the full amount of Gross Room Revenue as defined in the FLAs by (i) systematically excluding from GRR all revenues collected by Suncoast Room Management Inc., including revenues from walk-in guests, corporate-direct contracts, and bookings through the unbranded website "gulfcoastrooms.com," and (ii) improperly netting OTA commissions and margins against GRR rather than reporting the gross amount of revenues derived from OTA bookings. These practices have resulted in the substantial underpayment of royalties over a period of approximately nine (9) years.
(b) FLA § 4.2 — Marketing-Fund Contributions. As a direct consequence of the underreporting of GRR described above, Coastal Palms has failed to pay marketing-fund contributions on the full amount of Gross Room Revenue, resulting in underpayment of marketing-fund contributions over the same period.
(c) FLA § 4.3 — Technology Fees. Coastal Palms has failed to report the addition of approximately 214 guest rooms across at least four (4) Hotels and has failed to pay technology fees on such unreported rooms, resulting in a systematic underpayment of per-room technology fees.
(d) FLA § 4.6 — Late-Payment Interest. As a result of the foregoing underpayments, Coastal Palms has accumulated and continues to accumulate unpaid late-payment interest at the rate of 1.5% per month, compounded monthly, on all underpaid amounts from the dates such amounts were due through the present.
(e) Implied Covenant of Good Faith and Fair Dealing. Coastal Palms' conduct in establishing Suncoast Room Management Inc. as a vehicle to collect direct-booking revenues outside of the GRR reporting framework, in operating an unbranded website to divert bookings away from the Verimark reservation system, and in retaining a 12% "management fee" through Suncoast on revenues that should have been reported as GRR, constitutes a deliberate and bad-faith circumvention of Coastal Palms' franchise obligations. This conduct violates the implied covenant of good faith and fair dealing inherent in each FLA.
Each of the foregoing breaches constitutes a material breach of the applicable FLA. The systematic nature of the underreporting — spanning all 22 franchised properties over a period of approximately nine (9) years from 2013 through 2021, involving the deliberate establishment of an affiliated entity to divert revenues, and resulting in aggregate underreported GRR of approximately $197.8 million — constitutes "systematic underreporting of Gross Room Revenue" within the meaning of Section 14.2(c) of each FLA.
5. Demand for Cure
Pursuant to Section 14.1 of each FLA, Verimark hereby demands that Coastal Palms cure the material breaches identified in this Notice within thirty (30) days of Coastal Palms' receipt of this Notice.
To effectuate cure, Coastal Palms must take each of the following actions within the 30-day cure period:
(a) Full Payment of All Underpaid Amounts. Coastal Palms shall pay to Verimark the full amount of all underpaid royalties, marketing-fund contributions, and technology fees for the entire period of underreporting, from January 2013 through the present, including without limitation (i) all amounts due with respect to revenues collected by Suncoast Room Management Inc. that were improperly excluded from GRR, (ii) all amounts due with respect to OTA revenues that were improperly reported on a net-of-commission basis rather than on a gross basis, and (iii) all amounts due with respect to the 214 unreported guest rooms for which technology fees were not paid, together with accrued late-payment interest at the rate of one and one-half percent (1.5%) per month, compounded monthly, from the date each such payment was originally due through the date of payment, as provided in Section 4.6 of each FLA.
(b) Reimbursement of Audit Costs. Coastal Palms shall reimburse Verimark for all costs and expenses incurred by Verimark in connection with the franchise-compliance audit conducted by Thornbury & Associates CPAs LLP, as required under Section 8.2 of each FLA. The audit having revealed underpayments far in excess of the two percent (2%) threshold established in Section 8.2, the obligation to bear audit costs falls squarely on Coastal Palms. Verimark will provide an itemized statement of audit costs upon request.
(c) Immediate Cessation of Underreporting Practices. Coastal Palms shall immediately cease all practices that have resulted in the underreporting of GRR, including without limitation (i) the exclusion of Suncoast-collected revenues from GRR reports, (ii) the netting of OTA commissions and margins against GRR, and (iii) the failure to report the actual number of available rooms at each Hotel.
(d) Implementation of Corrective Reporting Procedures. Coastal Palms shall implement corrective reporting procedures to ensure that all GRR, as defined in Section 4.1 of each FLA, is accurately and completely reported to Verimark on a going-forward basis. Such corrective measures shall include, at a minimum, the integration of all Suncoast booking channels (including the "gulfcoastrooms.com" website) and all direct-booking revenues into the monthly GRR reports submitted to Verimark, and the reporting of all OTA revenues on a gross basis.
(e) Submission to Comprehensive Audit. Coastal Palms shall submit to, and fully cooperate with, a comprehensive audit of all 22 franchised Hotels for the full period from January 2013 through the present, to be conducted by Thornbury & Associates CPAs LLP or another independent accounting firm selected by Verimark. All costs and expenses of such comprehensive audit shall be borne by Coastal Palms. Coastal Palms shall provide Thornbury and/or Verimark with complete and unrestricted access to all books, records, accounts, financial statements, bank records, tax returns, contracts (including all corporate-direct contracts executed through Suncoast), and any other documents or information reasonably requested in connection with the audit, for all entities involved in the operation of the Hotels, including Coastal Palms, Suncoast Room Management Inc., Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and any other affiliated entities.
Each of the foregoing actions is a necessary component of cure. Partial cure, or cure of some but not all of the identified breaches, shall not constitute cure within the meaning of Section 14.1 of any FLA.
6. Reservation of Rights
Verimark expressly reserves all rights and remedies available to it under the FLAs, at law, and in equity, including but not limited to the following:
(a) Termination for Cause. Verimark reserves the right to terminate each of the twenty-two (22) FLAs for cause upon expiration of the 30-day cure period if cure is not tendered in full, or at any time if the breaches identified herein are determined to be incurable under Section 14.2(c) of the FLAs.
(b) Liquidated Damages. Upon any termination for cause, Verimark reserves the right to seek and recover liquidated damages under Section 15.3 of each terminated FLA, in the amount of three times (3×) the Trailing-Twelve-Month Royalties for each terminated property. For the avoidance of doubt, the Trailing-Twelve-Month Royalties shall be calculated based upon actual GRR, not the underreported GRR figures submitted by Coastal Palms.
(c) Actual, Consequential, and Compensatory Damages. Verimark reserves the right to seek and recover all actual, consequential, and compensatory damages arising from Coastal Palms' breaches, to the extent such damages exceed or are in addition to the liquidated damages provided under the FLAs.
(d) Equitable Relief. Verimark reserves the right to seek equitable relief, including but not limited to an accounting of all revenues generated at the Hotels and collected by Suncoast, Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and any other affiliated entities, as well as injunctive relief to prevent the continued diversion of revenues.
(e) Litigation. Verimark reserves the right to initiate legal proceedings against Coastal Palms and its affiliated entities, including but not limited to Suncoast Room Management Inc., Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and their respective principals, in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida, as provided in the mandatory venue provisions of each FLA, or in any other court of competent jurisdiction.
Nothing in this Notice, including the provision of a 30-day cure period, constitutes or shall be construed as a waiver, modification, or abandonment of Verimark's position that the breaches identified herein constitute systematic underreporting of Gross Room Revenue that is incapable of cure under Section 14.2(c) of each FLA. Verimark provides the cure period herein out of contractual compliance and good faith, and without prejudice to its rights under Section 14.2(c) or any other provision of the FLAs.
Verimark does not waive any of its rights, claims, or remedies by providing this Notice, by any delay in exercising its rights, by any prior course of dealing, or by any failure to exercise any right at any earlier time. All rights, claims, and remedies of Verimark are cumulative and not exclusive.
This Notice shall apply to each of the twenty-two (22) individual FLAs between Verimark and Coastal Palms and/or its affiliated property-level entities, including without limitation Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC. Each FLA is separately and independently subject to this Notice, and a cure with respect to one FLA shall not constitute a cure with respect to any other FLA unless all required actions set forth in Section 5 of this Notice have been completed with respect to all 22 FLAs.
7. Direction Regarding Communications
All communications regarding this Notice, the breaches identified herein, and any proposed cure shall be directed to:
Renata Solis-Vega Senior Vice President & General Counsel Verimark Hospitality Group Inc. 2400 East Las Olas Boulevard, Suite 3100 Fort Lauderdale, FL 33301 Telephone: (954) 555-8400
Email: rsolis-vega@verimark.com
With a copy to:
Priya Anand, Partner Calderwood & Harkness LLP 110 SE 6th Street, Suite 2800 Fort Lauderdale, FL 33301 Telephone: (954) 555-1218
Email: panand@calderwoodharkness.com
FL Bar No. 0087451
Coastal Palms is advised that Verimark has retained Calderwood & Harkness LLP as outside counsel with respect to this matter, and that Calderwood & Harkness LLP is authorized to communicate with Coastal Palms and its representatives on behalf of Verimark. If Coastal Palms has retained or intends to retain legal counsel, please advise Verimark and Calderwood & Harkness LLP of the identity and contact information of such counsel at the earliest opportunity so that communications may be appropriately directed.
[Remainder of Page Intentionally Left Blank — Signature Page Follows]
Very truly yours,
VERIMARK HOSPITALITY GROUP INC.
By: ________
Name: Renata Solis-Vega
Title: Senior Vice President & General Counsel
Date: ________
[DRAFT — SIGNATURE TO BE AFFIXED UPON FINALIZATION]
Enclosures:
1.  Schedule A — List of All Twenty-Two (22) Franchise License Agreements (identifying each FLA by date of execution, property name, property location, brand designation (Verimark Suites or Verimark Select), and property-level operating entity) [To be attached to final version]
2.  Summary of Thornbury & Associates CPAs LLP Preliminary Audit Findings dated January 18, 2022 (summary reference only; full audit report and work papers reserved as confidential and privileged) [To be attached to final version]
cc:
Randall Brecker, individually Nolan Prescott, Member, Coastal Palms Franchise Holdings LLC Theresa Brecker, Member, Coastal Palms Franchise Holdings LLC [Opposing counsel — to be added if identified prior to sending] Priya Anand, Calderwood & Harkness LLP Douglas Carmichael, Calderwood & Harkness LLP Deidre Langston, SVP Franchise Operations, Verimark Hospitality Group Inc. Martin Holcomb, EVP & CFO, Verimark Hospitality Group Inc.
INTERNAL DRAFTING NOTES — FOR CALDERWOOD & HARKNESS TEAM ONLY TO BE REMOVED IN THEIR ENTIRETY BEFORE FINALIZATION PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
From: Yuki Nakamura To: Priya Anand Date: January 25, 2022 Re: Drafting Notes — Coastal Palms Notice of Material Breach (Matter No. 1021-00006)
Priya — the following notes accompany this draft for your review:
1.  Audit Figures. This draft is prepared based on the Thornbury preliminary findings delivered January 18, 2022. The $197.8 million total underreported GRR figure and all derivative calculations (underpaid royalties, marketing-fund contributions, technology fees) are based on Thornbury's extrapolation methodology as described in their preliminary report. Before we finalize and send this Notice, we should confirm all final numbers directly with Malcolm Thornbury. I have a call scheduled with his team for January 31 to walk through any refinements. If Thornbury's final figures differ materially from the preliminary numbers, we will need to revise Section 3.5 and the table accordingly.
2.  Timing — Cure Period. If this Notice is sent on or about February 4, 2022, the 30-day cure period under FLA § 14.1 would expire on or about March 6, 2022 (assuming receipt on the date of sending or within one to two business days thereafter). We can begin preparing the complaint for filing promptly after the cure deadline passes, assuming cure is not tendered. I recommend we have a substantially complete draft complaint ready by approximately February 20 so that we are prepared to file within days of the cure deadline expiration if needed.
3.  Whistleblower — Janet Kerrigan. This draft intentionally does not reference Janet Kerrigan by name, nor does it reference the November 8, 2021 whistleblower complaint through which Verimark initially became aware of the Suncoast revenue diversion scheme. The factual basis section references only the Thornbury audit findings and Verimark's own investigation. This approach is designed to protect Ms. Kerrigan's identity and avoid potential retaliation claims. If we proceed to litigation, we will need to evaluate at what stage Ms. Kerrigan's identity may need to be disclosed in discovery, and we should discuss with Renata and Deidre the appropriate protections (e.g., protective order, confidential designation) at that time.
4.  FLA § 14.2(c) — Strategic Positioning. The strategic decision to provide the 30-day cure period under § 14.1 while simultaneously reserving the incurable-breach position under § 14.2(c) is intentional and has been discussed with Renata. This approach provides maximum flexibility for our litigation posture. By offering the cure period, we foreclose any argument by Coastal Palms that Verimark failed to comply with the contractual notice-and-cure prerequisites. At the same time, by expressly reserving the § 14.2(c) position, we preserve the argument that the breaches are incurable and that Verimark has the right to terminate immediately. In litigation, this positions us to argue either (a) Coastal Palms failed to cure within the 30-day period and termination is proper under § 14.1/14.2, or alternatively (b) the breaches were incurable under § 14.2(c) and Verimark was entitled to terminate at any time, with the cure period having been offered as a courtesy and not as a concession.
5.  Client Approval. This draft should be circulated to Renata Solis-Vega (SVP & General Counsel) and Deidre Langston (SVP, Franchise Operations) for client approval before finalization. I will send the transmittal memorandum and draft to both of them today for review. Please let me know if you would like to schedule a call with the client team to walk through the draft before finalizing.
END OF INTERNAL DRAFTING NOTES
Category | Calculation Basis | Estimated Amount
Underpaid Royalties (FLA § 4.1) | 5% of $197.8 million underreported GRR | $9,890,000
Underpaid Marketing-Fund Contributions (FLA § 4.2) | 2.5% of $197.8 million underreported GRR | $4,945,000
Underpaid Technology Fees (FLA § 4.3) | 214 unreported rooms × $12.50/room/month × approx. 47 months average | $1,260,000
Subtotal — Direct Underpayments | $16,095,000
Late-Payment Interest (FLA § 4.6) | 1.5% per month, compounded monthly | Accruing; to be calculated through the date of cure or judgment

PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT DRAFT — FOR CLIENT REVIEW — NOT YET SENT

NOTICE OF MATERIAL BREACH

VERIMARK HOSPITALITY GROUP INC.

END OF INTERNAL DRAFTING NOTES

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