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

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

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CALDERWOOD & HARKNESS LLP Attorneys at Law

110 SE 6th Street, Suite 2800 Fort Lauderdale, Florida 33301 Telephone: (954) 761-8200 Facsimile: (954) 761-8201 www.calderwoodharkness.com

February 4, 2022

VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED, AND ELECTRONIC MAIL

Coastal Palms Franchise Holdings LLC

Attn: Randall Brecker, Managing Member

9500 Gulf Shore Drive, Suite 450 Naples, Florida 34108

Copy to:

Whitfield, Barrow & Crane LLP

Attn: Nathan Whitfield III, Esq.

1221 Brickell Avenue, Suite 3000 Miami, Florida 33131

Re: Notice of Material Breach of Franchise License Agreements between Verimark Hospitality Group Inc. and Coastal Palms Franchise Holdings LLC (22 Franchise License Agreements dated from June 15, 2007 through September 3, 2019)

Dear Mr. Brecker:

I. Introduction and Capacity

This firm represents Verimark Hospitality Group Inc. ("Verimark" or "VHG"), 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 largest franchised hospitality platforms in the southeastern United States. Through its wholly owned subsidiary, VHG Franchise Systems LLC, Verimark operates and franchises approximately 340 branded hotels across the southeastern United States under three distinct hospitality flags: "Verimark Suites," "Verimark Select," and "Verimark Grand." These brands collectively represent a portfolio of more than 48,000 guest rooms and generate annual system-wide gross room revenue in excess of $2.1 billion.

This letter constitutes a formal Notice of Material Breach (the "Notice") issued pursuant to Section 14.1 of the Franchise License Agreements (each, an "FLA," and collectively, the "FLAs") entered into between Verimark and Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "CPFH"), a Florida limited liability company organized and existing under the laws of the State of Florida. This Notice is directed to Coastal Palms and to its principals, including Randall Brecker, who serves as Managing Member and holds an approximately sixty percent (60%) equity interest in Coastal Palms; Theresa Brecker, who serves as a Member and holds an approximately fifteen percent (15%) equity interest; and Nolan Prescott, who serves as a Member and holds an approximately twenty-five percent (25%) equity interest.

As set forth in detail below, Verimark's investigation has revealed that Coastal Palms has engaged in a systematic, multi-year scheme to divert guest-room revenue away from the proper reporting channels contemplated by the FLAs and to underreport Gross Room Revenue owed to Verimark, resulting in material underpayments of royalties, marketing-fund contributions, and technology fees totaling tens of millions of dollars. This conduct constitutes a material breach of the FLAs that Verimark takes with the utmost seriousness.

II. Identification of the Franchise License Agreements

Coastal Palms and Verimark are parties to twenty-two (22) individual Franchise License Agreements, each governing the operation of a specific hotel property under one of Verimark's branded flags. These twenty-two FLAs cover hotel properties located throughout the State of Florida and the State of Georgia. The first of these FLAs was executed on June 15, 2007, for a single Verimark Suites property located in Naples, Florida (FLA No. VHG-FL-0715). The relationship between Verimark and Coastal Palms expanded significantly over the ensuing twelve years, with additional FLAs being executed at regular intervals as Coastal Palms grew its portfolio of franchised properties. The most recent FLA in the portfolio was executed on September 3, 2019 (FLA No. VHG-GA-1903), for a Verimark Select property located in Savannah, Georgia.

The combined portfolio encompasses eighteen (18) properties operating under the "Verimark Suites" flag and four (4) properties operating under the "Verimark Select" flag, representing a total of approximately 3,740 available guest rooms. These properties are located across multiple Florida markets — including Naples, Fort Myers, Tampa, Orlando, Jacksonville, and Pensacola — as well as locations in Savannah and Brunswick, Georgia.

Each of the twenty-two FLAs has a twenty (20)-year initial term, with options for renewal as specified therein. Each FLA is governed by the laws of the State of Florida, and each contains a mandatory venue provision designating Broward County, Florida as the exclusive forum for the resolution of any disputes arising under or in connection with the agreement. A complete list of the twenty-two FLAs, identified by property name, FLA execution date, and FLA identification number, is attached hereto as Enclosure A.

This Notice applies to each and every one of the twenty-two FLAs, individually and collectively. References herein to "the FLAs" or "the Franchise License Agreements" are to all twenty-two agreements unless otherwise specified. While the specific provisions cited below are substantively identical across all twenty-two FLAs, Verimark reserves the right to identify any variations in individual agreements that may bear on the rights and obligations of the parties.

III. Relevant FLA Provisions

The following provisions of the FLAs are material to the breaches identified in this Notice. The section numbers cited below are uniform across all twenty-two FLAs.

A. Gross Room Revenue Definition (FLA § 4.1)

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

"Gross Room Revenue" or "GRR" shall mean 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. For purposes of this definition, Gross Room Revenue shall be calculated on a gross basis, without deduction for commissions, fees, chargebacks, or other costs of collection.

The breadth of this definition is both deliberate and critical. It is designed to capture all revenue generated from the rental of guest rooms at each franchised property, irrespective of the booking channel through which the reservation was made — whether through Verimark's proprietary reservation system, third-party online travel agencies ("OTAs"), direct bookings via telephone or walk-in, corporate-direct contracts, or any other means. Equally important, the definition expressly applies "regardless of the entity collecting such revenue," a provision specifically intended to prevent franchisees from routing revenue through affiliated or third-party entities in order to avoid the reporting obligations that are the financial foundation of the franchise relationship.

B. Royalty Obligations (FLA § 4.1)

Under Section 4.1 of each FLA, the franchisee is obligated to pay to Verimark a continuing royalty fee equal to five percent (5%) of Gross Room Revenue, calculated and reported on a monthly basis. Royalty payments are due on or before the fifteenth (15th) day of each calendar month for the preceding calendar month's GRR. Each monthly royalty payment must be accompanied by a detailed GRR Report in the form prescribed by Verimark's Franchise Operations Manual.

C. Marketing-Fund Contribution (FLA § 4.2)

Section 4.2 of each FLA requires the franchisee to pay a marketing-fund contribution equal to two and one-half percent (2.5%) of Gross Room Revenue, calculated and reported monthly on the same schedule as the royalty fee. These contributions are deposited into the Verimark National Marketing Fund, which is utilized for system-wide advertising, brand development, and marketing initiatives that benefit all franchised properties within the Verimark system.

D. Technology Fee (FLA § 4.3)

Section 4.3 of each FLA imposes a flat per-room, per-month technology fee of twelve dollars and fifty cents ($12.50) per available room. This fee is subject to annual adjustment based on the Consumer Price Index ("CPI"), with such adjustment capped at a maximum of three percent (3%) per year. The technology fee is intended to cover the costs associated with Verimark's proprietary reservation system, property management system interfaces, guest loyalty platform, and related technological infrastructure provided to each franchised property. Critically, the technology fee obligation extends to all available rooms at each property, including any rooms added to a property through expansion, renovation, or reclassification. Under Section 6.4 of each FLA, the franchisee is required to provide written notice to Verimark within thirty (30) days of any change in the number of available rooms at any franchised property.

E. Late-Payment Interest (FLA § 4.6)

Section 4.6 of each FLA provides that any underpayment or late payment of amounts owed under the FLA shall accrue interest at the rate of one and one-half percent (1.5%) per month, compounded monthly, from the date such payment was originally due until the date of actual payment. This provision applies to underpaid royalties, marketing-fund contributions, technology fees, and any other amounts due under the FLAs.

F. Audit Rights (FLA § 8.2)

Section 8.2 of each FLA grants Verimark the right to audit, inspect, and examine the franchisee's books, records, accounts, tax returns, and any other financial documentation related to the operation of the franchised property and the calculation and reporting of Gross Room Revenue. Verimark may exercise this right upon ten (10) business days' written notice to the franchisee. The FLAs further provide that if any such audit reveals an underpayment exceeding two percent (2%) of the reported Gross Room Revenue for the audited period, the franchisee shall bear all costs and expenses incurred by Verimark in connection with the audit, including the fees and expenses of the independent auditing firm retained by Verimark.

G. Cure Provisions and Material Breach (FLA §§ 14.1 and 14.2(c))

Section 14.1 of each FLA establishes a general cure mechanism, providing that upon written notice of a material breach by the franchisor, the franchisee shall have a period of thirty (30) calendar days from the date of receipt of such notice to cure the identified breach. If the breach is not cured within the thirty-day period, the franchisor shall be entitled to terminate the FLA and to pursue all available remedies.

However, Section 14.2(c) of each FLA carves out a critical exception to the general cure provision. Section 14.2(c) specifically provides:

"Notwithstanding Section 14.1, systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure, and the Franchisor may terminate this Agreement immediately upon written notice to the Franchisee."

This provision reflects the fundamental understanding of the parties that the accurate and complete reporting of Gross Room Revenue is the sine qua non of the franchise relationship. Systematic underreporting of GRR strikes at the very heart of the economic bargain embodied in the FLAs, and the parties have agreed that such conduct is so fundamentally destructive of the franchise relationship that it cannot be remedied by after-the-fact payment alone.

H. Liquidated Damages (FLA § 15.3)

Section 15.3 of each FLA provides that upon termination of the FLA for cause attributable to the franchisee, the franchisee shall be liable to pay liquidated damages in an amount equal to three times (3×) the trailing-twelve-month royalties paid or payable with respect to the terminated property. The parties have agreed that this liquidated damages provision represents a reasonable estimate of the damages Verimark would sustain as a result of the premature termination of the franchise relationship, including the loss of future royalty income, marketing-fund contributions, and the diminution in value of the Verimark brand.

IV. Facts Giving Rise to the Material Breach

A. The Whistleblower Report

On November 8, 2021, Janet Kerrigan, a former regional controller employed by Coastal Palms, contacted Verimark's compliance hotline. Ms. Kerrigan had served as a regional controller for Coastal Palms from approximately March 2016 until her termination by Coastal Palms in October 2021. During her tenure, Ms. Kerrigan was directly involved in the preparation and submission of monthly GRR reports to Verimark for multiple properties within the Coastal Palms portfolio.

Ms. Kerrigan reported to Verimark's compliance team that Coastal Palms had been engaged in a systematic and deliberate practice of diverting guest-room revenue through off-platform booking channels and through an affiliated management entity in order to avoid reporting the full Gross Room Revenue owed under the FLAs. Ms. Kerrigan provided specific and detailed information concerning the nature and mechanics of the revenue-diversion scheme, including the identity of the affiliated entity through which revenue was being routed, the approximate scope of the underreporting, and the individuals within the Coastal Palms organization who directed and oversaw the scheme. Ms. Kerrigan further stated that she had raised concerns about these practices internally on multiple occasions and that her termination was, she believed, retaliatory in nature.

Verimark treated Ms. Kerrigan's report with the utmost seriousness and immediately initiated an internal review under the oversight of Verimark's Senior Vice President and General Counsel, Renata Solis-Vega, and outside counsel at this firm.

B. Engagement of Independent Auditor

In response to the whistleblower report and the preliminary findings of Verimark's internal review, Verimark engaged Thornbury & Associates CPAs LLP ("Thornbury & Associates"), a regional accounting firm based in West Palm Beach, Florida with extensive experience in franchise-compliance auditing and hospitality-industry financial analysis, on November 22, 2021. Thornbury & Associates was retained to conduct a comprehensive franchise-compliance audit of Coastal Palms' top ten (10) properties by reported Gross Room Revenue, representing approximately fifty-five percent (55%) of the total reported GRR across the twenty-two-property portfolio.

The audit was conducted pursuant to Verimark's audit rights under FLA § 8.2. Written notice of the audit was provided to Coastal Palms on November 23, 2021, in compliance with the ten-business-day notice requirement. Thornbury & Associates commenced its on-site fieldwork on December 8, 2021, and its engagement encompassed a thorough examination of property-level financial records, bank statements, reservation system data, merchant processing statements, OTA remittance reports, and other relevant documentation for the period January 1, 2019 through December 31, 2021, with selective testing extending back to January 1, 2013.

We note that during the course of the audit, Coastal Palms' cooperation was inconsistent and, at times, obstructive. On at least three occasions, Thornbury & Associates' auditors were denied timely access to financial records and had to escalate requests through this firm and counsel for Coastal Palms before documents were produced.

C. Thornbury & Associates Preliminary Findings

Thornbury & Associates delivered its preliminary findings to Verimark and to this firm on January 18, 2022. A summary of those preliminary findings is attached hereto as Enclosure B. The findings are deeply troubling and confirm the substance of the whistleblower report in all material respects.

The Thornbury & Associates audit revealed that the ten audited properties had underreported Gross Room Revenue by approximately twenty-six percent (26%) for the three-year period 2019 through 2021. The underreporting was not the result of clerical error, accounting methodology differences, or good-faith interpretive disputes; rather, the audit revealed a deliberate and systematic scheme to divert revenue away from the GRR reporting channel through the use of an affiliated entity and the netting of OTA commissions, as described in detail below.

Extrapolating the audit findings across all twenty-two franchised properties and across the full suspected period of the scheme (2013 through 2021), Thornbury & Associates estimates that the total underreported Gross Room Revenue is approximately one hundred ninety-seven million eight hundred thousand dollars ($197,800,000). The underreporting percentage varied by property and by year, ranging from approximately twenty-two percent (22%) at the lower end to approximately thirty-one percent (31%) at the upper end. The fact that the underreporting was broadly consistent across properties and across years further supports the conclusion that this was a coordinated, system-wide practice directed from the highest levels of Coastal Palms' management.

D. The Revenue Diversion Scheme — Suncoast Room Management Inc.

The Thornbury & Associates audit has identified the primary mechanism of the revenue-diversion scheme. Beginning no later than January 2013, Coastal Palms established and operated a separate entity, Suncoast Room Management Inc. ("Suncoast"), a Florida corporation organized under the laws of the State of Florida. Randall Brecker, the Managing Member of Coastal Palms, serves as the President and sole director of Suncoast. Florida Division of Corporations records indicate that Suncoast was incorporated on October 3, 2012, approximately three months before the diversion scheme appears to have commenced.

Suncoast was utilized as a vehicle to collect guest-room revenues that should have been reported as Gross Room Revenue under the FLAs. Specifically, Suncoast collected revenues from direct bookings at the franchised properties, including but not limited to: (i) walk-in guests who booked rooms directly at the front desk; (ii) corporate-direct contracts with businesses and organizations that booked rooms outside of Verimark's proprietary reservation system; and (iii) bookings made through an unbranded website, gulfcoastrooms.com, which was registered to and operated by Suncoast.

The gulfcoastrooms.com website offered rooms at Coastal Palms' franchised properties — which are branded Verimark Suites and Verimark Select properties — without identifying them as such and without routing the bookings through Verimark's central reservation system. This practice not only deprived Verimark of the revenue reporting to which it is entitled, but also undermined the integrity of the Verimark brand by enabling an end-run around the quality assurance, rate-parity, and brand-standards provisions of the FLAs.

Upon receiving direct-booking revenues, Suncoast retained a twelve percent (12%) "management fee" on these transactions before forwarding the remaining balance to the property-level operating entities. These property-level entities include, among others, Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC, which serve as the direct operators of certain of the franchised properties. Critically, neither the revenues initially collected by Suncoast nor the management fee retained by Suncoast were included in the monthly Gross Room Revenue reports submitted by Coastal Palms to Verimark. In other words, substantial guest-room revenue was collected, a significant portion was siphoned off as a management fee to an entity controlled by Randall Brecker, and the remainder was passed through to the property-level entities without ever being reported to Verimark as GRR.

This practice is a direct and unambiguous violation of FLA § 4.1, which defines Gross Room Revenue as "all revenues derived from or attributable to the rental of guest rooms at the Hotel, including revenues from any booking channel, direct or indirect, and regardless of the entity collecting such revenue." The establishment of Suncoast as an intermediary to collect direct-booking revenues is precisely the type of scheme that the "regardless of the entity collecting such revenue" language in Section 4.1 was designed to prevent.

E. OTA Revenue Netting

In addition to the Suncoast diversion scheme, the Thornbury & Associates audit revealed that Coastal Palms systematically underreported revenue from third-party online travel agency ("OTA") channels — including Aldermere Technologies, Bramwell Holdings, Drayton Software, and other OTA platforms — by improperly classifying net-rate OTA payments as "commissions receivable" and netting the commission amounts against Gross Room Revenue before reporting GRR to Verimark.

By way of example: if a guest booked a room through an OTA platform at a rate of $200 per night, and the OTA retained a commission of $30, Coastal Palms would report only $170 as Gross Room Revenue. Under the plain language of FLA § 4.1, the full $200 should have been reported as GRR, because GRR is defined on a gross basis, without deduction for commissions, fees, or other costs of collection. The OTA commission is a cost of distribution borne by the franchisee; it does not reduce the gross revenue attributable to the rental of the guest room.

This practice of netting OTA commissions against GRR further understated the Gross Room Revenue reported to Verimark and correspondingly reduced the royalties, marketing-fund contributions, and other fees owed under the FLAs.

F. Unreported Room Additions

The Thornbury & Associates audit also revealed that Coastal Palms added approximately two hundred fourteen (214) guest rooms across four (4) franchised properties without providing the written notice required under Section 6.4 of the applicable FLAs. These room additions appear to have occurred incrementally between 2015 and 2020, in connection with property renovations and expansions. In no instance was Verimark notified of the additions, and technology fees for these unreported rooms were never paid.

The failure to report added rooms constitutes an independent breach of the FLAs and has resulted in the underpayment of technology fees over an extended period. Moreover, the failure to disclose room additions raises additional concerns about the accuracy of the occupancy and revenue data reported to Verimark during the relevant period, as the denominator for various performance metrics was understated throughout.

V. Quantification of Underpayments

Based on the preliminary findings of the Thornbury & Associates audit, Verimark has calculated the following estimated underpayments attributable to Coastal Palms' breaches of the FLAs:

To provide further context for the scale of the underreporting: for fiscal year 2021 alone, Coastal Palms reported aggregate Gross Room Revenue of one hundred twelve million four hundred thousand dollars ($112,400,000) across the twenty-two franchised properties. Verimark's forensic analysis, based on the Thornbury & Associates audit and corroborated by independent data sources including OTA remittance records, merchant processing statements, and Penmark Enterprises data, estimates that the true Gross Room Revenue for fiscal year 2021 was approximately one hundred forty-five million six hundred thousand dollars ($145,600,000). This means that approximately thirty-three million two hundred thousand dollars ($33,200,000) in Gross Room Revenue was underreported for fiscal year 2021 alone — an underreporting rate of approximately twenty-three percent (23%) for that single year.

The foregoing figures are preliminary and are based on the audit of ten of the twenty-two franchised properties, with extrapolation applied to the remaining twelve properties. Verimark's investigation is ongoing, and the final figures may be materially higher or lower than the estimates set forth above. Verimark expressly reserves the right to revise, supplement, and amend these calculations as the investigation continues and as additional information becomes available.

Additionally, Verimark reserves all rights to liquidated damages under Section 15.3 of each FLA upon termination for cause. Under FLA § 15.3, liquidated damages are equal to three times (3×) the trailing-twelve-month royalties for each terminated property. Based on the true trailing-twelve-month royalties (calculated using corrected GRR for the twelve months ending December 31, 2021), Verimark estimates that the aggregate liquidated damages across all twenty-two properties, upon termination for cause, would be approximately one hundred five million five hundred thousand dollars ($105,500,000). Verimark does not seek these liquidated damages at this time, but expressly reserves the right to pursue them in the event of termination.

VI. Declaration of Material Breach

Based on the foregoing, Verimark hereby declares that Coastal Palms is in material breach of each of the twenty-two Franchise License Agreements.

The conduct described above — specifically, the systematic diversion of guest-room revenue through Suncoast Room Management Inc., the operation of the unbranded gulfcoastrooms.com booking channel as a mechanism to circumvent the GRR reporting requirements of the FLAs, the improper netting of OTA commissions against Gross Room Revenue, and the failure to report the addition of approximately 214 guest rooms across four franchised properties — constitutes a material breach of the FLAs, including but not limited to Sections 4.1, 4.2, 4.3, 6.4, and 8.2 thereof. This conduct further constitutes a violation of the duty of good faith and fair dealing implicit in every contractual relationship under Florida law.

The material breaches identified herein are not isolated incidents of inadvertent error. They reflect a deliberate, coordinated, and sustained pattern of conduct spanning nearly nine years, involving the creation of a separate corporate entity to serve as a revenue-diversion vehicle, the operation of an unbranded booking website, and the systematic manipulation of accounting classifications to reduce reported GRR. This pattern of conduct falls squarely within the scope of Section 14.2(c) of the FLAs, which provides that "systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure."

Notwithstanding the foregoing, and without waiving any of its rights under Section 14.2(c) or any other provision of the FLAs or applicable law, Verimark hereby provides Coastal Palms with notice of the material breaches described herein and an opportunity to respond within the thirty (30)-day period contemplated by Section 14.1 of the FLAs. Verimark provides this opportunity as a matter of considered judgment, not as a concession that the identified breaches are curable. Verimark's provision of a cure period shall not be construed, and shall not operate, as a waiver of Verimark's right to invoke Section 14.2(c) at any time.

VII. Demand for Cure

Verimark demands that within thirty (30) calendar days of the date of this Notice — that is, by no later than March 6, 2022 — Coastal Palms take the following actions in full and without reservation:

1. Immediate Cessation of Revenue Diversion. Coastal Palms shall immediately cease and permanently discontinue all practices of diverting guest-room revenue through Suncoast Room Management Inc., gulfcoastrooms.com, or any other entity, channel, or mechanism through which guest-room revenue is collected but not reported to Verimark as Gross Room Revenue. Coastal Palms shall take immediate steps to shut down the gulfcoastrooms.com website and to redirect all direct bookings through Verimark-approved reservation channels.

2. Corrected GRR Reports. Coastal Palms shall provide Verimark with complete, accurate, and verified Gross Room Revenue reports for all twenty-two (22) franchised properties for the entire period from January 1, 2013 through the date of this Notice. These corrected reports shall include all revenue previously diverted through Suncoast Room Management Inc. or otherwise excluded from prior GRR reports, and shall reflect GRR calculated on a gross basis without deduction for OTA commissions, management fees, or other costs of collection, in accordance with FLA § 4.1.

3. Payment of All Underpaid Amounts. Coastal Palms shall pay all underpaid royalties (at 5% of the corrected GRR), all underpaid marketing-fund contributions (at 2.5% of the corrected GRR), and all underpaid technology fees (including technology fees for the 214 unreported rooms), together with all accrued late-payment interest at the rate of 1.5% per month, compounded monthly, as provided under FLA § 4.6. Based on Verimark's preliminary calculations, the total amount presently owed, including accrued interest, is estimated at $44,495,000, subject to adjustment based on the corrected GRR reports.

4. Complete Access to Books and Records. Coastal Palms shall provide Verimark and its authorized representatives (including Thornbury & Associates and this firm) with complete, unrestricted, and immediate access to all books, records, financial statements, bank statements, tax returns, merchant processing records, OTA remittance records, reservation system data, and all other financial data and documentation of Coastal Palms Franchise Holdings LLC, Suncoast Room Management Inc., Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and all other property-level and affiliated entities, as required by FLA § 8.2. This access shall extend to all records from January 1, 2007 to the present.

5. Written Explanation of Revenue-Reporting Methodology. Coastal Palms shall provide Verimark with a detailed written explanation, certified as accurate by Randall Brecker in his capacity as Managing Member, of the revenue-reporting methodology employed by Coastal Palms and its affiliated entities since January 1, 2013. This explanation shall include: (a) a complete identification of all entities and booking channels through which guest-room revenue has been collected at any of the twenty-two franchised properties; (b) a complete description of the role of Suncoast Room Management Inc. in the collection and distribution of guest-room revenue; (c) a complete accounting of all management fees, commissions, or other amounts retained by Suncoast or any other affiliated entity; (d) the identity of all persons involved in the design, implementation, and oversight of the revenue-reporting practices described in this Notice; and (e) a complete description of any other practices that may have resulted in the underreporting of Gross Room Revenue.

Verimark emphasizes that partial compliance with the foregoing demands will not constitute a cure of the material breaches identified herein. Coastal Palms must satisfy each and every demand set forth above, in full, within the thirty-day cure period.

VIII. Reservation of Rights

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

• The right to terminate each of the twenty-two (22) FLAs for cause under Section 14.2(c), upon written notice, and to seek liquidated damages in the aggregate estimated amount of $105,500,000 under Section 15.3 of the FLAs, as set forth above;

• The right to pursue claims for breach of contract against Coastal Palms arising from Coastal Palms' systematic violations of Sections 4.1, 4.2, 4.3, 6.4, 8.2, and other provisions of the FLAs;

• The right to pursue claims for fraudulent concealment, based on Coastal Palms' deliberate concealment of the Suncoast revenue-diversion scheme, the gulfcoastrooms.com booking channel, and the true amount of Gross Room Revenue generated at the franchised properties;

• The right to pursue claims for negligent misrepresentation, based on Coastal Palms' submission of GRR reports that Coastal Palms knew or should have known to be materially inaccurate;

• The right to pursue claims for unjust enrichment, to the extent Coastal Palms or its affiliates have been unjustly enriched by the retention of amounts properly owed to Verimark;

• The right to pursue an equitable accounting of all revenues collected by Coastal Palms, Suncoast Room Management Inc., Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and all other affiliated and property-level entities;

• The right to pursue claims for civil conspiracy against Randall Brecker individually, Suncoast Room Management Inc., and any other persons or entities that participated in, directed, or facilitated the revenue-diversion scheme;

• The right to pursue claims directly against Randall Brecker in his individual capacity, including but not limited to claims based on Mr. Brecker's personal guaranty obligations under the FLAs, his role as President and sole director of Suncoast Room Management Inc., and his direct participation in and direction of the revenue-diversion scheme;

• The right to seek temporary and permanent injunctive relief, including an order enjoining Coastal Palms and its affiliates from continuing to operate the gulfcoastrooms.com website, from diverting guest-room revenue through Suncoast or any other entity, and from destroying, altering, or concealing any books, records, or financial data;

• The right to seek any other equitable remedies available under Florida law, including constructive trust, disgorgement, and specific performance;

• The right to recover all audit costs incurred by Verimark in connection with the Thornbury & Associates compliance audit, as required under FLA § 8.2, given that the audit has revealed an underpayment vastly exceeding two percent (2%) of reported Gross Room Revenue; and

• The right to recover all attorneys' fees and costs incurred by Verimark in connection with the enforcement of the FLAs and the prosecution of claims against Coastal Palms and its affiliates, to the extent permitted by the FLAs or applicable law.

Nothing in this Notice, and nothing in Verimark's provision of a thirty-day cure period, shall be construed as a waiver, modification, limitation, or relinquishment of any right or remedy available to Verimark under the FLAs, applicable law, or equity. Verimark's issuance of this Notice and its provision of a cure period shall not be deemed an acknowledgment, admission, or concession that the material breaches identified herein are capable of cure. To the contrary, Verimark expressly maintains its position that the systematic underreporting of Gross Room Revenue described herein constitutes a material breach that is incapable of cure under FLA § 14.2(c), and Verimark reserves its right to invoke that provision at any time, including during or after the expiration of the thirty-day cure period.

Verimark's investigation into Coastal Palms' revenue-reporting practices is ongoing. Verimark reserves the right to identify additional breaches of the FLAs and to assert additional claims as the investigation progresses. Nothing in this Notice shall be construed as a comprehensive or exclusive statement of all breaches or claims that Verimark may assert.

IX. Consequences of Failure to Cure

If Coastal Palms fails to fully cure the material breaches identified herein within the thirty (30)-day cure period — that is, by March 6, 2022 — Verimark will pursue all available remedies with the full force and resources at its disposal, including without limitation:

• Immediate termination of each of the twenty-two (22) Franchise License Agreements for cause, with all consequences attendant thereto, including the imposition of liquidated damages, the immediate cessation of Coastal Palms' right to use the Verimark trademarks and brand identifiers, and the de-flagging of all twenty-two properties;

• The commencement of litigation against Coastal Palms Franchise Holdings LLC, Randall Brecker individually, Suncoast Room Management Inc., and all other responsible parties, seeking compensatory damages in excess of one hundred fifty million dollars ($150,000,000), including underpaid fees, late-payment interest, liquidated damages, audit costs, attorneys' fees, and such other relief as the court may deem just and appropriate; and

• Such other and further remedies as may be appropriate under the circumstances, including the pursuit of emergency injunctive relief and the reporting of relevant findings to appropriate regulatory and law enforcement authorities, as Verimark may deem warranted.

Verimark takes no pleasure in the prospect of terminating a franchise relationship of fifteen years' standing. However, the integrity of the Verimark franchise system — and the fair treatment of the hundreds of franchisees who accurately report their Gross Room Revenue and faithfully pay their contractual obligations — demands that Verimark take decisive action to address the conduct described in this Notice. Verimark's brand, its system-wide standards, and the trust of its franchise partners require nothing less.

X. Direction for Response

Any and all responses to this Notice, and all further communications regarding this matter, should be directed exclusively to the undersigned at the following address:

Priya Anand, Partner Calderwood & Harkness LLP 110 SE 6th Street, Suite 2800 Fort Lauderdale, Florida 33301 Telephone: (954) 761-8217

Email: panand@calderwoodharkness.com

Coastal Palms and its counsel should direct all communications regarding this matter to counsel. Neither Coastal Palms nor its representatives should contact Verimark's officers, directors, or employees directly regarding the subject matter of this Notice.

Verimark expects a substantive response from Coastal Palms, through its counsel, within the thirty-day cure period. Silence or a failure to respond will be treated as a failure to cure.

This Notice is issued in good faith and in the exercise of Verimark's contractual rights under the Franchise License Agreements. Verimark remains prepared to engage in a constructive dialogue regarding the resolution of the matters described herein, provided that Coastal Palms demonstrates a genuine willingness to acknowledge and remediate the identified breaches in their entirety and without further delay.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Priya Anand, Partner Florida Bar No. 0087451

On behalf of Verimark Hospitality Group Inc.

cc: (via electronic mail)

Renata Solis-Vega, Senior Vice President & General Counsel, Verimark Hospitality Group Inc., 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, FL 33301

Martin Holcomb, Executive Vice President & Chief Financial Officer, Verimark Hospitality Group Inc., 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, FL 33301

Deidre Langston, Senior Vice President, Franchise Operations, Verimark Hospitality Group Inc., 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, FL 33301

Nathan Whitfield III, Esq., Whitfield, Barrow & Crane LLP, 1221 Brickell Avenue, Suite 3000, Miami, FL 33131 (Counsel for Coastal Palms Franchise Holdings LLC)

Enclosures:

Enclosure A: List of 22 Franchise License Agreements (identified by property name, FLA execution date, and FLA identification number)

Enclosure B: Summary of Thornbury & Associates CPAs LLP Preliminary Audit Findings (dated January 18, 2022)

Category	Estimated Amount
Cumulative Underreported GRR (2013–2021)	$197,800,000
Underpaid Royalties (5% of Underreported GRR)	$9,890,000
Underpaid Marketing-Fund Contributions (2.5% of Underreported GRR)	$4,945,000
Underpaid Technology Fees (214 rooms × $12.50/room/month × avg. 47 months)	$1,260,000
Subtotal — Direct Underpayments	$16,095,000
Accrued Late-Payment Interest (1.5%/month, compounded, per FLA § 4.6)	$28,400,000
Total Estimated Underpayments (including interest)	$44,495,000

CALDERWOOD & HARKNESS LLP Attorneys at Law
110 SE 6th Street, Suite 2800 Fort Lauderdale, Florida 33301 Telephone: (954) 761-8200 Facsimile: (954) 761-8201 www.calderwoodharkness.com
February 4, 2022
VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED, AND ELECTRONIC MAIL
Coastal Palms Franchise Holdings LLC
Attn: Randall Brecker, Managing Member
9500 Gulf Shore Drive, Suite 450 Naples, Florida 34108
Copy to:
Whitfield, Barrow & Crane LLP
Attn: Nathan Whitfield III, Esq.
1221 Brickell Avenue, Suite 3000 Miami, Florida 33131
Re: Notice of Material Breach of Franchise License Agreements between Verimark Hospitality Group Inc. and Coastal Palms Franchise Holdings LLC (22 Franchise License Agreements dated from June 15, 2007 through September 3, 2019)
Dear Mr. Brecker:
I. Introduction and Capacity
This firm represents Verimark Hospitality Group Inc. ("Verimark" or "VHG"), 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 largest franchised hospitality platforms in the southeastern United States. Through its wholly owned subsidiary, VHG Franchise Systems LLC, Verimark operates and franchises approximately 340 branded hotels across the southeastern United States under three distinct hospitality flags: "Verimark Suites," "Verimark Select," and "Verimark Grand." These brands collectively represent a portfolio of more than 48,000 guest rooms and generate annual system-wide gross room revenue in excess of $2.1 billion.
This letter constitutes a formal Notice of Material Breach (the "Notice") issued pursuant to Section 14.1 of the Franchise License Agreements (each, an "FLA," and collectively, the "FLAs") entered into between Verimark and Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "CPFH"), a Florida limited liability company organized and existing under the laws of the State of Florida. This Notice is directed to Coastal Palms and to its principals, including Randall Brecker, who serves as Managing Member and holds an approximately sixty percent (60%) equity interest in Coastal Palms; Theresa Brecker, who serves as a Member and holds an approximately fifteen percent (15%) equity interest; and Nolan Prescott, who serves as a Member and holds an approximately twenty-five percent (25%) equity interest.
As set forth in detail below, Verimark's investigation has revealed that Coastal Palms has engaged in a systematic, multi-year scheme to divert guest-room revenue away from the proper reporting channels contemplated by the FLAs and to underreport Gross Room Revenue owed to Verimark, resulting in material underpayments of royalties, marketing-fund contributions, and technology fees totaling tens of millions of dollars. This conduct constitutes a material breach of the FLAs that Verimark takes with the utmost seriousness.
II. Identification of the Franchise License Agreements
Coastal Palms and Verimark are parties to twenty-two (22) individual Franchise License Agreements, each governing the operation of a specific hotel property under one of Verimark's branded flags. These twenty-two FLAs cover hotel properties located throughout the State of Florida and the State of Georgia. The first of these FLAs was executed on June 15, 2007, for a single Verimark Suites property located in Naples, Florida (FLA No. VHG-FL-0715). The relationship between Verimark and Coastal Palms expanded significantly over the ensuing twelve years, with additional FLAs being executed at regular intervals as Coastal Palms grew its portfolio of franchised properties. The most recent FLA in the portfolio was executed on September 3, 2019 (FLA No. VHG-GA-1903), for a Verimark Select property located in Savannah, Georgia.
The combined portfolio encompasses eighteen (18) properties operating under the "Verimark Suites" flag and four (4) properties operating under the "Verimark Select" flag, representing a total of approximately 3,740 available guest rooms. These properties are located across multiple Florida markets — including Naples, Fort Myers, Tampa, Orlando, Jacksonville, and Pensacola — as well as locations in Savannah and Brunswick, Georgia.
Each of the twenty-two FLAs has a twenty (20)-year initial term, with options for renewal as specified therein. Each FLA is governed by the laws of the State of Florida, and each contains a mandatory venue provision designating Broward County, Florida as the exclusive forum for the resolution of any disputes arising under or in connection with the agreement. A complete list of the twenty-two FLAs, identified by property name, FLA execution date, and FLA identification number, is attached hereto as Enclosure A.
This Notice applies to each and every one of the twenty-two FLAs, individually and collectively. References herein to "the FLAs" or "the Franchise License Agreements" are to all twenty-two agreements unless otherwise specified. While the specific provisions cited below are substantively identical across all twenty-two FLAs, Verimark reserves the right to identify any variations in individual agreements that may bear on the rights and obligations of the parties.
III. Relevant FLA Provisions
The following provisions of the FLAs are material to the breaches identified in this Notice. The section numbers cited below are uniform across all twenty-two FLAs.
A. Gross Room Revenue Definition (FLA § 4.1)
Section 4.1 of each FLA defines "Gross Room Revenue" (or "GRR") as follows:
"Gross Room Revenue" or "GRR" shall mean 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. For purposes of this definition, Gross Room Revenue shall be calculated on a gross basis, without deduction for commissions, fees, chargebacks, or other costs of collection.
The breadth of this definition is both deliberate and critical. It is designed to capture all revenue generated from the rental of guest rooms at each franchised property, irrespective of the booking channel through which the reservation was made — whether through Verimark's proprietary reservation system, third-party online travel agencies ("OTAs"), direct bookings via telephone or walk-in, corporate-direct contracts, or any other means. Equally important, the definition expressly applies "regardless of the entity collecting such revenue," a provision specifically intended to prevent franchisees from routing revenue through affiliated or third-party entities in order to avoid the reporting obligations that are the financial foundation of the franchise relationship.
B. Royalty Obligations (FLA § 4.1)
Under Section 4.1 of each FLA, the franchisee is obligated to pay to Verimark a continuing royalty fee equal to five percent (5%) of Gross Room Revenue, calculated and reported on a monthly basis. Royalty payments are due on or before the fifteenth (15th) day of each calendar month for the preceding calendar month's GRR. Each monthly royalty payment must be accompanied by a detailed GRR Report in the form prescribed by Verimark's Franchise Operations Manual.
C. Marketing-Fund Contribution (FLA § 4.2)
Section 4.2 of each FLA requires the franchisee to pay a marketing-fund contribution equal to two and one-half percent (2.5%) of Gross Room Revenue, calculated and reported monthly on the same schedule as the royalty fee. These contributions are deposited into the Verimark National Marketing Fund, which is utilized for system-wide advertising, brand development, and marketing initiatives that benefit all franchised properties within the Verimark system.
D. Technology Fee (FLA § 4.3)
Section 4.3 of each FLA imposes a flat per-room, per-month technology fee of twelve dollars and fifty cents ($12.50) per available room. This fee is subject to annual adjustment based on the Consumer Price Index ("CPI"), with such adjustment capped at a maximum of three percent (3%) per year. The technology fee is intended to cover the costs associated with Verimark's proprietary reservation system, property management system interfaces, guest loyalty platform, and related technological infrastructure provided to each franchised property. Critically, the technology fee obligation extends to all available rooms at each property, including any rooms added to a property through expansion, renovation, or reclassification. Under Section 6.4 of each FLA, the franchisee is required to provide written notice to Verimark within thirty (30) days of any change in the number of available rooms at any franchised property.
E. Late-Payment Interest (FLA § 4.6)
Section 4.6 of each FLA provides that any underpayment or late payment of amounts owed under the FLA shall accrue interest at the rate of one and one-half percent (1.5%) per month, compounded monthly, from the date such payment was originally due until the date of actual payment. This provision applies to underpaid royalties, marketing-fund contributions, technology fees, and any other amounts due under the FLAs.
F. Audit Rights (FLA § 8.2)
Section 8.2 of each FLA grants Verimark the right to audit, inspect, and examine the franchisee's books, records, accounts, tax returns, and any other financial documentation related to the operation of the franchised property and the calculation and reporting of Gross Room Revenue. Verimark may exercise this right upon ten (10) business days' written notice to the franchisee. The FLAs further provide that if any such audit reveals an underpayment exceeding two percent (2%) of the reported Gross Room Revenue for the audited period, the franchisee shall bear all costs and expenses incurred by Verimark in connection with the audit, including the fees and expenses of the independent auditing firm retained by Verimark.
G. Cure Provisions and Material Breach (FLA §§ 14.1 and 14.2(c))
Section 14.1 of each FLA establishes a general cure mechanism, providing that upon written notice of a material breach by the franchisor, the franchisee shall have a period of thirty (30) calendar days from the date of receipt of such notice to cure the identified breach. If the breach is not cured within the thirty-day period, the franchisor shall be entitled to terminate the FLA and to pursue all available remedies.
However, Section 14.2(c) of each FLA carves out a critical exception to the general cure provision. Section 14.2(c) specifically provides:
"Notwithstanding Section 14.1, systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure, and the Franchisor may terminate this Agreement immediately upon written notice to the Franchisee."
This provision reflects the fundamental understanding of the parties that the accurate and complete reporting of Gross Room Revenue is the sine qua non of the franchise relationship. Systematic underreporting of GRR strikes at the very heart of the economic bargain embodied in the FLAs, and the parties have agreed that such conduct is so fundamentally destructive of the franchise relationship that it cannot be remedied by after-the-fact payment alone.
H. Liquidated Damages (FLA § 15.3)
Section 15.3 of each FLA provides that upon termination of the FLA for cause attributable to the franchisee, the franchisee shall be liable to pay liquidated damages in an amount equal to three times (3×) the trailing-twelve-month royalties paid or payable with respect to the terminated property. The parties have agreed that this liquidated damages provision represents a reasonable estimate of the damages Verimark would sustain as a result of the premature termination of the franchise relationship, including the loss of future royalty income, marketing-fund contributions, and the diminution in value of the Verimark brand.
IV. Facts Giving Rise to the Material Breach
A. The Whistleblower Report
On November 8, 2021, Janet Kerrigan, a former regional controller employed by Coastal Palms, contacted Verimark's compliance hotline. Ms. Kerrigan had served as a regional controller for Coastal Palms from approximately March 2016 until her termination by Coastal Palms in October 2021. During her tenure, Ms. Kerrigan was directly involved in the preparation and submission of monthly GRR reports to Verimark for multiple properties within the Coastal Palms portfolio.
Ms. Kerrigan reported to Verimark's compliance team that Coastal Palms had been engaged in a systematic and deliberate practice of diverting guest-room revenue through off-platform booking channels and through an affiliated management entity in order to avoid reporting the full Gross Room Revenue owed under the FLAs. Ms. Kerrigan provided specific and detailed information concerning the nature and mechanics of the revenue-diversion scheme, including the identity of the affiliated entity through which revenue was being routed, the approximate scope of the underreporting, and the individuals within the Coastal Palms organization who directed and oversaw the scheme. Ms. Kerrigan further stated that she had raised concerns about these practices internally on multiple occasions and that her termination was, she believed, retaliatory in nature.
Verimark treated Ms. Kerrigan's report with the utmost seriousness and immediately initiated an internal review under the oversight of Verimark's Senior Vice President and General Counsel, Renata Solis-Vega, and outside counsel at this firm.
B. Engagement of Independent Auditor
In response to the whistleblower report and the preliminary findings of Verimark's internal review, Verimark engaged Thornbury & Associates CPAs LLP ("Thornbury & Associates"), a regional accounting firm based in West Palm Beach, Florida with extensive experience in franchise-compliance auditing and hospitality-industry financial analysis, on November 22, 2021. Thornbury & Associates was retained to conduct a comprehensive franchise-compliance audit of Coastal Palms' top ten (10) properties by reported Gross Room Revenue, representing approximately fifty-five percent (55%) of the total reported GRR across the twenty-two-property portfolio.
The audit was conducted pursuant to Verimark's audit rights under FLA § 8.2. Written notice of the audit was provided to Coastal Palms on November 23, 2021, in compliance with the ten-business-day notice requirement. Thornbury & Associates commenced its on-site fieldwork on December 8, 2021, and its engagement encompassed a thorough examination of property-level financial records, bank statements, reservation system data, merchant processing statements, OTA remittance reports, and other relevant documentation for the period January 1, 2019 through December 31, 2021, with selective testing extending back to January 1, 2013.
We note that during the course of the audit, Coastal Palms' cooperation was inconsistent and, at times, obstructive. On at least three occasions, Thornbury & Associates' auditors were denied timely access to financial records and had to escalate requests through this firm and counsel for Coastal Palms before documents were produced.
C. Thornbury & Associates Preliminary Findings
Thornbury & Associates delivered its preliminary findings to Verimark and to this firm on January 18, 2022. A summary of those preliminary findings is attached hereto as Enclosure B. The findings are deeply troubling and confirm the substance of the whistleblower report in all material respects.
The Thornbury & Associates audit revealed that the ten audited properties had underreported Gross Room Revenue by approximately twenty-six percent (26%) for the three-year period 2019 through 2021. The underreporting was not the result of clerical error, accounting methodology differences, or good-faith interpretive disputes; rather, the audit revealed a deliberate and systematic scheme to divert revenue away from the GRR reporting channel through the use of an affiliated entity and the netting of OTA commissions, as described in detail below.
Extrapolating the audit findings across all twenty-two franchised properties and across the full suspected period of the scheme (2013 through 2021), Thornbury & Associates estimates that the total underreported Gross Room Revenue is approximately one hundred ninety-seven million eight hundred thousand dollars ($197,800,000). The underreporting percentage varied by property and by year, ranging from approximately twenty-two percent (22%) at the lower end to approximately thirty-one percent (31%) at the upper end. The fact that the underreporting was broadly consistent across properties and across years further supports the conclusion that this was a coordinated, system-wide practice directed from the highest levels of Coastal Palms' management.
D. The Revenue Diversion Scheme — Suncoast Room Management Inc.
The Thornbury & Associates audit has identified the primary mechanism of the revenue-diversion scheme. Beginning no later than January 2013, Coastal Palms established and operated a separate entity, Suncoast Room Management Inc. ("Suncoast"), a Florida corporation organized under the laws of the State of Florida. Randall Brecker, the Managing Member of Coastal Palms, serves as the President and sole director of Suncoast. Florida Division of Corporations records indicate that Suncoast was incorporated on October 3, 2012, approximately three months before the diversion scheme appears to have commenced.
Suncoast was utilized as a vehicle to collect guest-room revenues that should have been reported as Gross Room Revenue under the FLAs. Specifically, Suncoast collected revenues from direct bookings at the franchised properties, including but not limited to: (i) walk-in guests who booked rooms directly at the front desk; (ii) corporate-direct contracts with businesses and organizations that booked rooms outside of Verimark's proprietary reservation system; and (iii) bookings made through an unbranded website, gulfcoastrooms.com, which was registered to and operated by Suncoast.
The gulfcoastrooms.com website offered rooms at Coastal Palms' franchised properties — which are branded Verimark Suites and Verimark Select properties — without identifying them as such and without routing the bookings through Verimark's central reservation system. This practice not only deprived Verimark of the revenue reporting to which it is entitled, but also undermined the integrity of the Verimark brand by enabling an end-run around the quality assurance, rate-parity, and brand-standards provisions of the FLAs.
Upon receiving direct-booking revenues, Suncoast retained a twelve percent (12%) "management fee" on these transactions before forwarding the remaining balance to the property-level operating entities. These property-level entities include, among others, Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC, which serve as the direct operators of certain of the franchised properties. Critically, neither the revenues initially collected by Suncoast nor the management fee retained by Suncoast were included in the monthly Gross Room Revenue reports submitted by Coastal Palms to Verimark. In other words, substantial guest-room revenue was collected, a significant portion was siphoned off as a management fee to an entity controlled by Randall Brecker, and the remainder was passed through to the property-level entities without ever being reported to Verimark as GRR.
This practice is a direct and unambiguous violation of FLA § 4.1, which defines Gross Room Revenue as "all revenues derived from or attributable to the rental of guest rooms at the Hotel, including revenues from any booking channel, direct or indirect, and regardless of the entity collecting such revenue." The establishment of Suncoast as an intermediary to collect direct-booking revenues is precisely the type of scheme that the "regardless of the entity collecting such revenue" language in Section 4.1 was designed to prevent.
E. OTA Revenue Netting
In addition to the Suncoast diversion scheme, the Thornbury & Associates audit revealed that Coastal Palms systematically underreported revenue from third-party online travel agency ("OTA") channels — including Aldermere Technologies, Bramwell Holdings, Drayton Software, and other OTA platforms — by improperly classifying net-rate OTA payments as "commissions receivable" and netting the commission amounts against Gross Room Revenue before reporting GRR to Verimark.
By way of example: if a guest booked a room through an OTA platform at a rate of $200 per night, and the OTA retained a commission of $30, Coastal Palms would report only $170 as Gross Room Revenue. Under the plain language of FLA § 4.1, the full $200 should have been reported as GRR, because GRR is defined on a gross basis, without deduction for commissions, fees, or other costs of collection. The OTA commission is a cost of distribution borne by the franchisee; it does not reduce the gross revenue attributable to the rental of the guest room.
This practice of netting OTA commissions against GRR further understated the Gross Room Revenue reported to Verimark and correspondingly reduced the royalties, marketing-fund contributions, and other fees owed under the FLAs.
F. Unreported Room Additions
The Thornbury & Associates audit also revealed that Coastal Palms added approximately two hundred fourteen (214) guest rooms across four (4) franchised properties without providing the written notice required under Section 6.4 of the applicable FLAs. These room additions appear to have occurred incrementally between 2015 and 2020, in connection with property renovations and expansions. In no instance was Verimark notified of the additions, and technology fees for these unreported rooms were never paid.
The failure to report added rooms constitutes an independent breach of the FLAs and has resulted in the underpayment of technology fees over an extended period. Moreover, the failure to disclose room additions raises additional concerns about the accuracy of the occupancy and revenue data reported to Verimark during the relevant period, as the denominator for various performance metrics was understated throughout.
V. Quantification of Underpayments
Based on the preliminary findings of the Thornbury & Associates audit, Verimark has calculated the following estimated underpayments attributable to Coastal Palms' breaches of the FLAs:
To provide further context for the scale of the underreporting: for fiscal year 2021 alone, Coastal Palms reported aggregate Gross Room Revenue of one hundred twelve million four hundred thousand dollars ($112,400,000) across the twenty-two franchised properties. Verimark's forensic analysis, based on the Thornbury & Associates audit and corroborated by independent data sources including OTA remittance records, merchant processing statements, and Penmark Enterprises data, estimates that the true Gross Room Revenue for fiscal year 2021 was approximately one hundred forty-five million six hundred thousand dollars ($145,600,000). This means that approximately thirty-three million two hundred thousand dollars ($33,200,000) in Gross Room Revenue was underreported for fiscal year 2021 alone — an underreporting rate of approximately twenty-three percent (23%) for that single year.
The foregoing figures are preliminary and are based on the audit of ten of the twenty-two franchised properties, with extrapolation applied to the remaining twelve properties. Verimark's investigation is ongoing, and the final figures may be materially higher or lower than the estimates set forth above. Verimark expressly reserves the right to revise, supplement, and amend these calculations as the investigation continues and as additional information becomes available.
Additionally, Verimark reserves all rights to liquidated damages under Section 15.3 of each FLA upon termination for cause. Under FLA § 15.3, liquidated damages are equal to three times (3×) the trailing-twelve-month royalties for each terminated property. Based on the true trailing-twelve-month royalties (calculated using corrected GRR for the twelve months ending December 31, 2021), Verimark estimates that the aggregate liquidated damages across all twenty-two properties, upon termination for cause, would be approximately one hundred five million five hundred thousand dollars ($105,500,000). Verimark does not seek these liquidated damages at this time, but expressly reserves the right to pursue them in the event of termination.
VI. Declaration of Material Breach
Based on the foregoing, Verimark hereby declares that Coastal Palms is in material breach of each of the twenty-two Franchise License Agreements.
The conduct described above — specifically, the systematic diversion of guest-room revenue through Suncoast Room Management Inc., the operation of the unbranded gulfcoastrooms.com booking channel as a mechanism to circumvent the GRR reporting requirements of the FLAs, the improper netting of OTA commissions against Gross Room Revenue, and the failure to report the addition of approximately 214 guest rooms across four franchised properties — constitutes a material breach of the FLAs, including but not limited to Sections 4.1, 4.2, 4.3, 6.4, and 8.2 thereof. This conduct further constitutes a violation of the duty of good faith and fair dealing implicit in every contractual relationship under Florida law.
The material breaches identified herein are not isolated incidents of inadvertent error. They reflect a deliberate, coordinated, and sustained pattern of conduct spanning nearly nine years, involving the creation of a separate corporate entity to serve as a revenue-diversion vehicle, the operation of an unbranded booking website, and the systematic manipulation of accounting classifications to reduce reported GRR. This pattern of conduct falls squarely within the scope of Section 14.2(c) of the FLAs, which provides that "systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure."
Notwithstanding the foregoing, and without waiving any of its rights under Section 14.2(c) or any other provision of the FLAs or applicable law, Verimark hereby provides Coastal Palms with notice of the material breaches described herein and an opportunity to respond within the thirty (30)-day period contemplated by Section 14.1 of the FLAs. Verimark provides this opportunity as a matter of considered judgment, not as a concession that the identified breaches are curable. Verimark's provision of a cure period shall not be construed, and shall not operate, as a waiver of Verimark's right to invoke Section 14.2(c) at any time.
VII. Demand for Cure
Verimark demands that within thirty (30) calendar days of the date of this Notice — that is, by no later than March 6, 2022 — Coastal Palms take the following actions in full and without reservation:
1.  Immediate Cessation of Revenue Diversion. Coastal Palms shall immediately cease and permanently discontinue all practices of diverting guest-room revenue through Suncoast Room Management Inc., gulfcoastrooms.com, or any other entity, channel, or mechanism through which guest-room revenue is collected but not reported to Verimark as Gross Room Revenue. Coastal Palms shall take immediate steps to shut down the gulfcoastrooms.com website and to redirect all direct bookings through Verimark-approved reservation channels.
2.  Corrected GRR Reports. Coastal Palms shall provide Verimark with complete, accurate, and verified Gross Room Revenue reports for all twenty-two (22) franchised properties for the entire period from January 1, 2013 through the date of this Notice. These corrected reports shall include all revenue previously diverted through Suncoast Room Management Inc. or otherwise excluded from prior GRR reports, and shall reflect GRR calculated on a gross basis without deduction for OTA commissions, management fees, or other costs of collection, in accordance with FLA § 4.1.
3.  Payment of All Underpaid Amounts. Coastal Palms shall pay all underpaid royalties (at 5% of the corrected GRR), all underpaid marketing-fund contributions (at 2.5% of the corrected GRR), and all underpaid technology fees (including technology fees for the 214 unreported rooms), together with all accrued late-payment interest at the rate of 1.5% per month, compounded monthly, as provided under FLA § 4.6. Based on Verimark's preliminary calculations, the total amount presently owed, including accrued interest, is estimated at $44,495,000, subject to adjustment based on the corrected GRR reports.
4.  Complete Access to Books and Records. Coastal Palms shall provide Verimark and its authorized representatives (including Thornbury & Associates and this firm) with complete, unrestricted, and immediate access to all books, records, financial statements, bank statements, tax returns, merchant processing records, OTA remittance records, reservation system data, and all other financial data and documentation of Coastal Palms Franchise Holdings LLC, Suncoast Room Management Inc., Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and all other property-level and affiliated entities, as required by FLA § 8.2. This access shall extend to all records from January 1, 2007 to the present.
5.  Written Explanation of Revenue-Reporting Methodology. Coastal Palms shall provide Verimark with a detailed written explanation, certified as accurate by Randall Brecker in his capacity as Managing Member, of the revenue-reporting methodology employed by Coastal Palms and its affiliated entities since January 1, 2013. This explanation shall include: (a) a complete identification of all entities and booking channels through which guest-room revenue has been collected at any of the twenty-two franchised properties; (b) a complete description of the role of Suncoast Room Management Inc. in the collection and distribution of guest-room revenue; (c) a complete accounting of all management fees, commissions, or other amounts retained by Suncoast or any other affiliated entity; (d) the identity of all persons involved in the design, implementation, and oversight of the revenue-reporting practices described in this Notice; and (e) a complete description of any other practices that may have resulted in the underreporting of Gross Room Revenue.
Verimark emphasizes that partial compliance with the foregoing demands will not constitute a cure of the material breaches identified herein. Coastal Palms must satisfy each and every demand set forth above, in full, within the thirty-day cure period.
VIII. Reservation of Rights
Verimark expressly reserves all rights and remedies available to it under the FLAs, applicable law, and equity, including but not limited to the following:
•  The right to terminate each of the twenty-two (22) FLAs for cause under Section 14.2(c), upon written notice, and to seek liquidated damages in the aggregate estimated amount of $105,500,000 under Section 15.3 of the FLAs, as set forth above;
•  The right to pursue claims for breach of contract against Coastal Palms arising from Coastal Palms' systematic violations of Sections 4.1, 4.2, 4.3, 6.4, 8.2, and other provisions of the FLAs;
•  The right to pursue claims for fraudulent concealment, based on Coastal Palms' deliberate concealment of the Suncoast revenue-diversion scheme, the gulfcoastrooms.com booking channel, and the true amount of Gross Room Revenue generated at the franchised properties;
•  The right to pursue claims for negligent misrepresentation, based on Coastal Palms' submission of GRR reports that Coastal Palms knew or should have known to be materially inaccurate;
•  The right to pursue claims for unjust enrichment, to the extent Coastal Palms or its affiliates have been unjustly enriched by the retention of amounts properly owed to Verimark;
•  The right to pursue an equitable accounting of all revenues collected by Coastal Palms, Suncoast Room Management Inc., Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and all other affiliated and property-level entities;
•  The right to pursue claims for civil conspiracy against Randall Brecker individually, Suncoast Room Management Inc., and any other persons or entities that participated in, directed, or facilitated the revenue-diversion scheme;
•  The right to pursue claims directly against Randall Brecker in his individual capacity, including but not limited to claims based on Mr. Brecker's personal guaranty obligations under the FLAs, his role as President and sole director of Suncoast Room Management Inc., and his direct participation in and direction of the revenue-diversion scheme;
•  The right to seek temporary and permanent injunctive relief, including an order enjoining Coastal Palms and its affiliates from continuing to operate the gulfcoastrooms.com website, from diverting guest-room revenue through Suncoast or any other entity, and from destroying, altering, or concealing any books, records, or financial data;
•  The right to seek any other equitable remedies available under Florida law, including constructive trust, disgorgement, and specific performance;
•  The right to recover all audit costs incurred by Verimark in connection with the Thornbury & Associates compliance audit, as required under FLA § 8.2, given that the audit has revealed an underpayment vastly exceeding two percent (2%) of reported Gross Room Revenue; and
•  The right to recover all attorneys' fees and costs incurred by Verimark in connection with the enforcement of the FLAs and the prosecution of claims against Coastal Palms and its affiliates, to the extent permitted by the FLAs or applicable law.
Nothing in this Notice, and nothing in Verimark's provision of a thirty-day cure period, shall be construed as a waiver, modification, limitation, or relinquishment of any right or remedy available to Verimark under the FLAs, applicable law, or equity. Verimark's issuance of this Notice and its provision of a cure period shall not be deemed an acknowledgment, admission, or concession that the material breaches identified herein are capable of cure. To the contrary, Verimark expressly maintains its position that the systematic underreporting of Gross Room Revenue described herein constitutes a material breach that is incapable of cure under FLA § 14.2(c), and Verimark reserves its right to invoke that provision at any time, including during or after the expiration of the thirty-day cure period.
Verimark's investigation into Coastal Palms' revenue-reporting practices is ongoing. Verimark reserves the right to identify additional breaches of the FLAs and to assert additional claims as the investigation progresses. Nothing in this Notice shall be construed as a comprehensive or exclusive statement of all breaches or claims that Verimark may assert.
IX. Consequences of Failure to Cure
If Coastal Palms fails to fully cure the material breaches identified herein within the thirty (30)-day cure period — that is, by March 6, 2022 — Verimark will pursue all available remedies with the full force and resources at its disposal, including without limitation:
•  Immediate termination of each of the twenty-two (22) Franchise License Agreements for cause, with all consequences attendant thereto, including the imposition of liquidated damages, the immediate cessation of Coastal Palms' right to use the Verimark trademarks and brand identifiers, and the de-flagging of all twenty-two properties;
•  The commencement of litigation against Coastal Palms Franchise Holdings LLC, Randall Brecker individually, Suncoast Room Management Inc., and all other responsible parties, seeking compensatory damages in excess of one hundred fifty million dollars ($150,000,000), including underpaid fees, late-payment interest, liquidated damages, audit costs, attorneys' fees, and such other relief as the court may deem just and appropriate; and
•  Such other and further remedies as may be appropriate under the circumstances, including the pursuit of emergency injunctive relief and the reporting of relevant findings to appropriate regulatory and law enforcement authorities, as Verimark may deem warranted.
Verimark takes no pleasure in the prospect of terminating a franchise relationship of fifteen years' standing. However, the integrity of the Verimark franchise system — and the fair treatment of the hundreds of franchisees who accurately report their Gross Room Revenue and faithfully pay their contractual obligations — demands that Verimark take decisive action to address the conduct described in this Notice. Verimark's brand, its system-wide standards, and the trust of its franchise partners require nothing less.
X. Direction for Response
Any and all responses to this Notice, and all further communications regarding this matter, should be directed exclusively to the undersigned at the following address:
Priya Anand, Partner Calderwood & Harkness LLP 110 SE 6th Street, Suite 2800 Fort Lauderdale, Florida 33301 Telephone: (954) 761-8217
Email: panand@calderwoodharkness.com
Coastal Palms and its counsel should direct all communications regarding this matter to counsel. Neither Coastal Palms nor its representatives should contact Verimark's officers, directors, or employees directly regarding the subject matter of this Notice.
Verimark expects a substantive response from Coastal Palms, through its counsel, within the thirty-day cure period. Silence or a failure to respond will be treated as a failure to cure.
This Notice is issued in good faith and in the exercise of Verimark's contractual rights under the Franchise License Agreements. Verimark remains prepared to engage in a constructive dialogue regarding the resolution of the matters described herein, provided that Coastal Palms demonstrates a genuine willingness to acknowledge and remediate the identified breaches in their entirety and without further delay.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Priya Anand, Partner Florida Bar No. 0087451
On behalf of Verimark Hospitality Group Inc.
cc: (via electronic mail)
Renata Solis-Vega, Senior Vice President & General Counsel, Verimark Hospitality Group Inc., 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, FL 33301
Martin Holcomb, Executive Vice President & Chief Financial Officer, Verimark Hospitality Group Inc., 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, FL 33301
Deidre Langston, Senior Vice President, Franchise Operations, Verimark Hospitality Group Inc., 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, FL 33301
Nathan Whitfield III, Esq., Whitfield, Barrow & Crane LLP, 1221 Brickell Avenue, Suite 3000, Miami, FL 33131 (Counsel for Coastal Palms Franchise Holdings LLC)
Enclosures:
Enclosure A: List of 22 Franchise License Agreements (identified by property name, FLA execution date, and FLA identification number)
Enclosure B: Summary of Thornbury & Associates CPAs LLP Preliminary Audit Findings (dated January 18, 2022)
Category | Estimated Amount
Cumulative Underreported GRR (2013–2021) | $197,800,000
Underpaid Royalties (5% of Underreported GRR) | $9,890,000
Underpaid Marketing-Fund Contributions (2.5% of Underreported GRR) | $4,945,000
Underpaid Technology Fees (214 rooms × $12.50/room/month × avg. 47 months) | $1,260,000
Subtotal — Direct Underpayments | $16,095,000
Accrued Late-Payment Interest (1.5%/month, compounded, per FLA § 4.6) | $28,400,000
Total Estimated Underpayments (including interest) | $44,495,000

CALDERWOOD & HARKNESS LLP Attorneys at Law

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