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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

September 8, 2023

MEMORANDUM

FROM: Howard Quinn, Partner Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, FL 33131

TO: Audit Committee of the Board of Directors Verimark Hospitality Group Inc.

Diane Kowalski, Chair Reginald Faulkner, Member Sandra Yeung, Member

RE: Interim Status Report No. 1 — Internal Investigation of Verimark Coastal Resorts LLC

MATTER NO.: 1021-00008

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I. Introduction and Purpose

This memorandum constitutes the first interim status report submitted by Calderwood & Harkness LLP ("C&H" or the "Firm") to the Audit Committee (the "Committee") of the Board of Directors of Verimark Hospitality Group Inc. ("VHG," a Delaware corporation listed on Nasdaq under the ticker symbol VMRK, headquartered at 4100 Bayshore Boulevard, Suite 1200, Tampa, FL 33611) in connection with the Firm's internal investigation into certain expense-reporting irregularities and premature revenue-recognition practices at Verimark Coastal Resorts LLC ("VCR"), a wholly owned Florida limited liability company subsidiary of VHG.

The Firm's engagement in this matter was formalized pursuant to an engagement letter executed by Committee Chair Diane Kowalski on July 17, 2023. The investigation was formally opened on July 24, 2023, upon the issuance of the first document-preservation notices to relevant VHG and VCR personnel. This report covers the period from the formal opening of the investigation on July 24, 2023 through September 5, 2023.

The investigation encompasses two principal workstreams:

1. Premature Revenue Recognition of Timeshare-Interest Deposits. This workstream addresses the recording of timeshare-interest purchase deposits as completed-sale revenue at VCR properties before the expiration of applicable statutory rescission periods, potentially in violation of ASC 606 revenue-recognition standards and related internal accounting controls. This workstream focuses on timeshare-interest transactions at two VCR-managed properties: (a) the Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, FL 32541, specifically Phase III timeshare units; and (b) the Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, FL 34228, specifically Phase II timeshare units.

2. Expense-Reporting Irregularities Involving Potentially Fictitious Vendor Invoices. This workstream examines whether fictitious or inflated vendor invoices were submitted and approved within VCR's capital-improvement budgets at the above-referenced properties, potentially resulting in the misappropriation of company funds through fabricated purchase orders and vendor relationships.

The matters under investigation implicate VHG's obligations under the federal securities laws, including the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 ("SOX"), and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). In particular, the investigation has potential ramifications for VHG's certifications under SOX Section 302 (officer certifications regarding the accuracy of financial statements and effectiveness of disclosure controls) and SOX Section 404 (management assessment of internal controls over financial reporting). The investigation also implicates VHG's compliance with its obligations under the antifraud provisions of the federal securities laws to the extent that previously filed financial statements may have contained material misstatements.

This report is intended to provide the Committee with a comprehensive overview of investigation activities undertaken to date, preliminary observations arising from those activities, and a summary of anticipated next steps. It is not intended to convey final conclusions or recommendations, as the investigation remains in its early stages.

II. Investigation Team and Resources

A. Calderwood & Harkness LLP Staffing

The Firm has assembled a team within its White Collar Defense & Investigations Practice Group to conduct this investigation on behalf of the Committee. The team is currently staffed as follows:

The hourly rates set forth above are consistent with the rate schedule contained in the engagement letter executed by Committee Chair Kowalski on July 17, 2023. Mr. Quinn serves as the Responsible Partner with day-to-day oversight of the investigation and direct reporting responsibility to the Committee. Mr. Ashby serves as Billing Partner and provides additional senior-level supervision and strategic guidance. Mr. Donahue, as Lead Associate, manages the day-to-day execution of the investigation work plan, including interview preparation, document review oversight, and coordination with the forensic accounting advisor and e-discovery vendor. Mr. Hollander provides additional associate-level support for document review, research, and memorandum preparation. Paralegal support has been engaged for document collection coordination, privilege log maintenance, and administrative functions related to the investigation.

The Firm will adjust staffing levels as warranted by the scope and pace of the investigation and will advise the Committee in advance of any material changes to the team composition or billing arrangements.

B. Forensic Accounting Advisor

Calderwood & Harkness has retained Crestline Forensic Advisory LLC ("Crestline") to serve as the Firm's forensic accounting advisor in connection with this investigation. Crestline was retained under the Kovel doctrine, pursuant to the principles established in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), to ensure that Crestline's work product and communications are protected by the attorney-client privilege and the work-product doctrine as the work of an agent retained by counsel to assist in the provision of legal advice to the client.

Crestline's engagement was formalized pursuant to an engagement letter dated July 21, 2023, bearing Crestline engagement number CFA-VHG-2023-0089. The key personnel assigned to this matter are as follows:

Crestline maintains its principal office at 1330 Avenue of the Americas, 28th Floor, New York, NY 10019. The Crestline engagement is structured as a flat-fee arrangement in the amount of $1.15 million, with overage provisions applicable in the event that professional hours exceed 4,500 hours during the engagement. Hours exceeding the 4,500-hour threshold are billed at a blended rate of $375 per hour.

Crestline has commenced its forensic analysis of VCR revenue transactions and expense records. The initial focus of Crestline's work has been directed at two areas: (1) a detailed examination of timeshare-interest deposit booking practices at the Coral Dune Resort & Residences and the Palmetto Bluff Club, including a transaction-level analysis of the timing of revenue recognition relative to the expiration of statutory rescission periods; and (2) a systematic review of vendor payment patterns within VCR's capital-improvement budgets, including entity-formation research and payment-flow analysis for vendors identified in connection with the expense-reporting workstream. Crestline's work product is being generated at the direction of C&H and is protected under the Kovel doctrine as described above. All communications between Crestline and the investigation team are channeled through C&H to preserve privilege protections.

C. E-discovery Vendor

Calderwood & Harkness has engaged Triton discovery Solutions Inc. ("Triton") to provide e-discovery services in connection with this investigation. The engagement was formalized pursuant to a Master Services Agreement dated August 1, 2023. Triton maintains its office at 500 Seventh Avenue, 14th Floor, New York, NY 10018.

Triton's scope of services includes the following:

• Hosting and storage of collected data in a secure, access-controlled review environment;

• Processing of collected electronically stored information ("ESI"), including email, attachments, and structured data sets;

• De-duplication of collected documents to eliminate exact duplicates within and across custodial collections;

• De-NISTing of collected files to remove system files, application executables, and other non-substantive files using the National Institute of Standards and Technology's National Software Reference Library ("NSRL");

• Configuration and implementation of Technology Assisted Review ("TAR") 2.0 predictive-coding workflows to prioritize document review and improve review efficiency;

• Production of documents in formats suitable for review, analysis, and potential regulatory production.

The estimated fees for Triton's services are approximately $487,000, based on current projections of data volumes and processing requirements. The Firm will advise the Committee of any material deviation from this estimate.

III. Document Preservation and Collection

A. Preservation Notices

On July 24, 2023, Calderwood & Harkness issued two document-preservation notices, marking the formal opening of the investigation. The two notices are described below:

1. Company-Wide Preservation Notice. A company-wide preservation notice was distributed to all officers and directors of VHG and to relevant personnel across the VHG organization. This notice directed the preservation of all documents and ESI relating to VCR revenue recognition, timeshare-interest sales, expense reimbursements, and capital-improvement expenditures for the period from January 1, 2021 forward. The notice instructed recipients to refrain from destroying, discarding, deleting, modifying, or otherwise disposing of any documents or ESI falling within the scope of the preservation obligation, including emails, instant messages, text messages, voicemails, memoranda, handwritten notes, spreadsheets, financial records, contracts, purchase orders, vendor files, and any other documents in any medium that relate to the subjects identified therein.

2. Targeted Preservation Notice to VCR Custodians. A separate, more targeted preservation notice was issued to identified VCR custodians, including the following individuals:

• Garrett W. Daskine, Division President, VCR

• Nicole Prescott, Vice President of Finance, VCR

• Ryan Mateo Serrano, Controller, VCR

• Additional identified VCR finance and operations personnel

This targeted notice specified in detail the preservation obligations applicable to each custodian with respect to financial records, purchase orders, vendor contracts, email communications, messaging (including text messages and instant messages), and any other documents or ESI relating to timeshare sales and capital-improvement projects at the Coral Dune Resort & Residences and the Palmetto Bluff Club. The notice reiterated the applicable preservation period of January 1, 2021 forward and described the categories of documents subject to preservation with specificity.

VHG General Counsel Patricia Navarro confirmed the distribution of both preservation notices and the acknowledgment of receipt by all relevant personnel. Ms. Navarro further confirmed that VHG's IT department has implemented a litigation hold on the email accounts and network storage associated with the identified custodians to prevent the automated deletion of ESI under VHG's ordinary-course document-retention policies.

B. Custodian Identification and Collection

The investigation team identified eleven (11) custodians based on a review of VCR and VHG organizational charts, reporting structures, and preliminary information provided by Hargrove, Steen & Aldrich LLP ("HSA") in connection with HSA's audit findings. The custodian-identification process included consultation with VHG General Counsel Navarro and VHG's internal audit function regarding relevant personnel who may possess documents or ESI pertinent to the investigation.

Following the initial identification of eleven custodians, the investigation team conducted a preliminary assessment of each custodian's likely possession of unique relevant materials. Based on this assessment, the team determined that three of the initially identified custodians did not hold unique relevant materials that were not duplicated in the collections of other custodians. Accordingly, the team proceeded to collect ESI and documents from eight (8) custodians.

The collected custodians include the three investigation subjects—Garrett W. Daskine, Nicole Prescott, and Ryan Mateo Serrano—as well as relevant VCR and VHG corporate finance personnel whose roles involve oversight of, or interaction with, VCR's financial reporting, timeshare sales operations, and capital-improvement expenditure processes.

C. Volume of Documents

The collection effort yielded approximately 1.2 million documents, including emails, email attachments, financial records, contracts, purchase orders, vendor files, and other categories of documents and ESI. These documents are currently being processed by Triton discovery Solutions. De-duplication and de-NISTing of the collected data set are in progress and are expected to be completed in mid-September 2023.

Triton has begun configuring the TAR 2.0 predictive-coding workflow that will be employed to prioritize the document review. Seed-set review has commenced, with members of the C&H investigation team reviewing an initial set of documents to train the predictive-coding algorithm and establish relevance and privilege classification parameters.

Based on current processing results, the estimated review universe after de-duplication and de-NISTing is approximately 347,000 documents. This figure may be refined as processing is completed and additional filtering is applied.

Privilege review protocols are in place as outlined in the Upjohn protocol memorandum prepared by C&H and dated July 26, 2023. These protocols establish procedures for the identification, logging, and handling of documents potentially subject to the attorney-client privilege or the work-product doctrine, and provide for the use of a privilege team and a clawback protocol consistent with Federal Rule of Evidence 502(d) to protect against inadvertent privilege waiver.

IV. Administrative Leave of Investigation Subjects

On August 7, 2023, in coordination with VHG General Counsel Patricia Navarro and VHG Chief Executive Officer Margaret Calder, the following three individuals were placed on administrative leave from their respective positions at VCR, pending the outcome of this investigation:

1. Garrett W. Daskine — Division President, Verimark Coastal Resorts LLC. Mr. Daskine is a seventeen-year veteran of VHG and has served as Division President of VCR since 2018. Mr. Daskine is suspected of directing the premature recognition of timeshare-interest purchase deposits as completed-sale revenue and of approving fictitious vendor invoices within VCR's capital-improvement budgets to conceal personal expenses. Mr. Daskine's position as Division President afforded him broad authority over VCR's financial reporting, operational management, and vendor-approval processes.

2. Nicole Prescott — Vice President of Finance, Verimark Coastal Resorts LLC. Ms. Prescott is a nine-year veteran of VHG and has served in her current role since 2020. Ms. Prescott is suspected of implementing the revenue-recognition scheme by directing the booking of timeshare-interest purchase deposits as completed-sale revenue upon contract execution, before the expiration of the statutory ten-day rescission period under Florida Statute § 721.10. Ms. Prescott reported directly to Mr. Daskine and was responsible for VCR's financial reporting processes and submission of divisional financial data to VHG corporate.

3. Ryan Mateo Serrano — Controller, Verimark Coastal Resorts LLC. Mr. Serrano is a five-year veteran of VHG and has served as Controller since 2021. Mr. Serrano is suspected of creating fictitious capital-improvement purchase orders and vendor invoices to funnel reimbursements for personal expenditures through VCR's capital-improvement budgets. Mr. Serrano reported to Ms. Prescott and was responsible for the preparation and approval of purchase orders and the maintenance of VCR's accounts payable records.

The decision to place these individuals on administrative leave was made to preserve the integrity of the investigation, to prevent the potential destruction or alteration of evidence, and to remove the investigation subjects from positions in which they could influence VCR's financial reporting or vendor-payment processes during the pendency of the investigation. Each individual was placed on paid administrative leave and was informed of the investigation in general terms. The terms of administrative leave include the requirement that each individual refrain from accessing VHG or VCR systems, premises, or records without prior authorization.

Each investigation subject has retained separate outside legal counsel, as set forth below:

C&H has communicated with each subject's counsel regarding the nature and scope of the investigation, the investigation procedures and protocols, and the scheduling of interviews of the respective subjects. As discussed in Section IX below, interviews of the three investigation subjects are anticipated for September–October 2023.

V. Interviews Conducted to Date

A. Overview

As of the date of this report, the investigation team has conducted three (3) interviews in connection with the investigation. A summary of each interview is provided below.

For interviews of current VHG employees, the investigation team administered an Upjohn warning script at the opening of each interview. The Upjohn warning script was prepared by C&H on August 14, 2023, and is consistent with the principles established in Upjohn Co. v. United States, 449 U.S. 383 (1981), and its progeny. The Upjohn warning advises each interviewee of the following:

(a) Calderwood & Harkness LLP represents the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. in connection with this investigation. C&H does not represent any individual employee or officer in his or her personal capacity.

(b) The attorney-client privilege with respect to the interview belongs to VHG, acting through the Audit Committee, and not to the individual interviewee. VHG may choose to waive the privilege at any time and may disclose the contents of the interview to third parties, including government authorities, at its sole discretion.

(c) The interviewee is requested to maintain the confidentiality of the interview and not to discuss the substance of the interview with other employees or third parties, except the interviewee's own personal attorney if the interviewee has retained one.

(d) The interviewee's cooperation with the investigation is expected and appreciated, and the interviewee is directed to provide truthful and complete answers to all questions.

As noted below, the interview of William Gentry of HSA was conducted on an informational basis and was not subject to the Upjohn warning procedure, as Mr. Gentry is an external auditor and not an employee of VHG.

B. Interview of William "Bill" Gentry, CPA — HSA Lead Engagement Partner

Date: August 15, 2023 Location: Calderwood & Harkness LLP, Miami office Interviewers: Howard Quinn, Liam Donahue Upjohn Warning: Not administered (external auditor; informational interview)

Mr. Gentry is the lead engagement partner at Hargrove, Steen & Aldrich LLP responsible for the HSA audit engagement with VHG. Mr. Gentry was interviewed on an informational basis to obtain HSA's account of the events and findings that gave rise to this investigation.

Mr. Gentry described HSA's identification, during its Q1 2023 interim review (for the 10-Q period ending March 31, 2023), of a potential material weakness relating to VCR's revenue-recognition controls. Specifically, Mr. Gentry explained that HSA's review procedures identified approximately $9.8 million in timeshare-interest purchase deposits that had been recorded in VCR's financial records as completed-sale revenue during Q1 2023. Upon examination, HSA determined that the applicable statutory rescission periods—ten (10) calendar days under Florida Statute § 721.10 (the Florida Vacation Plan and Timesharing Act)—had not expired before the close of the quarter for a significant portion of these transactions. Under applicable accounting standards, including ASC 606, revenue from timeshare-interest sales should not be recognized until the rescission period has expired and the purchaser's right to cancel the contract has lapsed, as the expiration of the rescission period is a condition for the transfer of control to the purchaser.

Mr. Gentry stated that HSA communicated these findings to VHG Chief Financial Officer Thomas Griffith and Audit Committee Chair Diane Kowalski on June 19, 2023. This communication identified the potential material weakness and recommended that VHG investigate the scope and extent of the revenue-recognition issue.

Mr. Gentry further described HSA's prior-year audit procedures and indicated that HSA's review of prior periods had not surfaced analogous issues at the magnitude identified in Q1 2023. However, Mr. Gentry noted that HSA had observed during the investigation period that VCR's timeshare-interest rescission rate was approximately 14.3%, which was higher than the industry average of approximately 11%. This elevated rescission rate, while noted in HSA's working papers, had not previously triggered a material-weakness finding.

A full memorandum of the interview with Mr. Gentry was prepared by the investigation team and is on file, dated August 15, 2023.

C. Interview of Thomas Rhett Griffith — VHG Chief Financial Officer

Date: August 22, 2023 Location: Calderwood & Harkness LLP, Miami office Interviewers: Howard Quinn, Liam Donahue, Steven Hollander Upjohn Warning: Administered

Mr. Griffith is the Chief Financial Officer of VHG and has served in that capacity since 2019. Mr. Griffith was interviewed regarding his oversight of VCR's financial reporting and his interactions with VCR division management.

Mr. Griffith described his role in overseeing VCR's financial data as it was incorporated into VHG's consolidated financial statements. He stated that he relied on divisional reporting from VP of Finance Nicole Prescott and Controller Ryan Mateo Serrano for VCR-specific financial data, which was submitted to VHG corporate finance on a monthly and quarterly basis as part of VHG's consolidation process. Mr. Griffith stated that VCR's divisional financial submissions were reviewed by VHG corporate finance staff, but acknowledged that his team did not independently verify the timing of timeshare-interest deposit booking relative to the expiration of applicable rescission periods.

Mr. Griffith discussed HSA's June 19, 2023 communication regarding the potential material weakness identified in VCR's revenue-recognition controls. He described receiving the communication from Mr. Gentry and subsequently advising Committee Chair Kowalski and VHG CEO Calder of the findings. Mr. Griffith stated that he was troubled by the findings and supported the Committee's decision to engage outside counsel to conduct an independent investigation.

Mr. Griffith also discussed the CFO certification process under SOX Section 302, including his quarterly certifications regarding the accuracy and completeness of VHG's financial statements and the effectiveness of VHG's disclosure controls and procedures. Mr. Griffith stated that his certifications were made in reliance on the accuracy of the divisional financial information provided by VCR and the other VHG business units, as well as the results of HSA's audit procedures.

A full memorandum of the interview with Mr. Griffith was prepared by the investigation team and is on file, dated August 22, 2023.

D. Interview of Margaret "Meg" Calder — VHG Chief Executive Officer

Date: August 29, 2023 Location: Calderwood & Harkness LLP, Miami office Interviewers: Howard Quinn, Liam Donahue Upjohn Warning: Administered

Ms. Calder is the Chief Executive Officer of VHG and has served in that capacity since 2017. Ms. Calder was interviewed regarding her oversight of VCR and her interactions with VCR Division President Garrett Daskine.

Ms. Calder described VCR's role within the broader VHG organization, noting that VCR represented approximately 23.5% of VHG's consolidated fiscal year 2022 revenue, or approximately $438.7 million of VHG's total consolidated revenue of $1.87 billion. Ms. Calder described VCR as a significant contributor to VHG's overall financial performance and a strategic priority for the company's growth plans in the Florida resort and timeshare market.

Ms. Calder discussed her awareness of capital-improvement expenditures at VCR properties, including the ongoing Phase III development at Coral Dune and Phase II development at Palmetto Bluff. She described Mr. Daskine's role in managing VCR's capital-improvement budgets and stated that she reviewed periodic capital-expenditure reports but did not typically review individual purchase orders or vendor invoices within those budgets. Ms. Calder stated that she relied on VCR's division management and the established internal controls to ensure the accuracy and propriety of VCR's expenditures.

Ms. Calder stated that she was not aware of any irregularities in VCR's vendor-approval processes or purchase-order practices prior to HSA's June 19, 2023 communication regarding the potential material weakness. She stated that Mr. Daskine had not raised any concerns with her regarding VCR's financial reporting or vendor relationships, and she had no reason to question the accuracy of VCR's financial submissions to VHG corporate prior to learning of HSA's findings.

A full memorandum of the interview with Ms. Calder was prepared by the investigation team and is on file, dated August 29, 2023.

VI. Coordination with Independent Auditor (Hargrove, Steen & Aldrich LLP)

On August 9, 2023, C&H transmitted a letter to William Gentry at Hargrove, Steen & Aldrich LLP establishing protocols for coordination between the internal investigation conducted by C&H on behalf of the Committee and HSA's ongoing audit activities with respect to VHG. The letter addressed the following matters:

• Information-Sharing Arrangements. The letter established procedures for the sharing of factual information and documents between the investigation team and HSA, to the extent necessary to facilitate both the investigation and HSA's audit responsibilities. The information-sharing protocols are designed to enable efficient coordination while preserving the distinct roles and independence of the investigation and audit functions.

• Privilege Protections. The letter addressed the preservation of the attorney-client privilege and work-product protections applicable to the investigation. Specifically, the letter clarified that the sharing of investigation-related information with HSA for purposes of facilitating HSA's audit procedures does not constitute a waiver of any privilege or protection, and that HSA agreed to maintain the confidentiality of any privileged or protected information received from the investigation team.

• Boundaries Between Audit and Investigation Workstreams. The letter delineated the respective boundaries between HSA's audit activities and C&H's investigation activities, to ensure that each function operates within its defined scope and that the independence and integrity of both workstreams are maintained.

HSA has continued to cooperate fully with the investigation team and with Crestline Forensic Advisory. HSA has made available relevant audit working papers, correspondence, and analytical work product, and has facilitated the investigation team's access to financial data and transaction records maintained in HSA's systems.

HSA's identification of the $9.8 million Q1 2023 revenue-recognition issue during its interim review procedures remains the catalyzing event for this investigation. The investigation team continues to coordinate with HSA as the investigation progresses and as HSA evaluates the implications of the investigation findings for its own audit conclusions.

VII. SEC Disclosure Coordination — Form 8-K Filing

A. Coordination with Outside Securities Counsel

On August 11, 2023, C&H transmitted a letter to Irene Castellanos of Westlake Burris & Holt LLP ("Westlake Burris"), located at 600 Brickell Avenue, Suite 3100, Miami, FL 33131, regarding the coordination of SEC disclosure obligations arising from the investigation. Westlake Burris serves as VHG's regular outside securities counsel for disclosure and securities-regulatory matters.

The letter addressed the need for timely and accurate disclosure of the investigation and its potential implications for VHG's previously issued financial statements. The letter outlined the respective roles of C&H (as counsel to the Committee in connection with the internal investigation) and Westlake Burris (as VHG's outside securities counsel responsible for advising management on disclosure obligations under the Securities Exchange Act of 1934 and applicable SEC rules). The letter also addressed coordination procedures regarding the content and timing of any SEC filings required in connection with the investigation.

B. Form 8-K Filing

On August 14, 2023, VHG filed a Current Report on Form 8-K with the SEC under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review). The filing disclosed the following:

The Audit Committee of the Board of Directors of VHG, in consultation with management and the Company's independent registered public accounting firm, Hargrove, Steen & Aldrich LLP, concluded on August 14, 2023 that the Company's previously issued financial statements for the fiscal quarters ended September 30, 2022 (Q3 FY 2022), December 31, 2022 (Q4 FY 2022), and March 31, 2023 (Q1 FY 2023) should no longer be relied upon due to the identification of potential errors in revenue recognition relating to the Company's Verimark Coastal Resorts LLC subsidiary. The Company's Audit Committee has engaged outside counsel to conduct an internal investigation into these matters.

The Form 8-K filing was coordinated among C&H, Westlake Burris, VHG management (including CEO Margaret Calder, CFO Thomas Griffith, and General Counsel Patricia Navarro), and HSA. The filing was made in accordance with the requirements of Item 4.02 of Form 8-K and Rule 12b-25 under the Securities Exchange Act of 1934.

Ongoing disclosure considerations remain under active discussion between C&H and Westlake Burris. These considerations include the potential need for additional or amended filings as the investigation progresses and as additional facts are developed, as well as the disclosure implications of any restatement of previously issued financial statements that may be required as a result of the investigation findings.

VIII. Preliminary Observations

The investigation remains in its early stages, and the observations set forth below are preliminary in nature. The Committee should not draw final conclusions from these preliminary observations. The investigation team expects that additional document review, forensic analysis, and witness interviews will substantially refine and may materially alter these observations. With that significant caveat, the investigation team offers the following preliminary observations:

Revenue-Recognition Workstream. Initial document review and Crestline's preliminary forensic analysis suggest a pattern at VCR of recording timeshare-interest purchase deposits as completed-sale revenue upon the execution of the purchase contract, rather than upon the expiration of the ten-day statutory rescission period under Florida Statute § 721.10. This practice, if confirmed, would represent a departure from the requirements of ASC 606, which provides that revenue should not be recognized until performance obligations have been satisfied and control of the good or service has been transferred to the customer. In the context of Florida timeshare sales, the purchaser's statutory right to rescind the purchase contract within ten days of execution creates a contingency that must lapse before revenue recognition is appropriate.

The potential scope of the revenue-recognition issue appears to extend beyond Q1 2023—the period initially identified by HSA—into earlier quarters, specifically Q3 and Q4 of fiscal year 2022. Crestline is conducting a detailed, transaction-level quantification analysis to determine the magnitude of prematurely recognized revenue across all affected periods. This quantification work is ongoing and is expected to be a principal focus of Crestline's activities in the coming weeks.

Expense-Reimbursement Workstream. Preliminary review of VCR's capital-improvement purchase orders has identified a number of potentially irregular vendor invoices that require further investigation. Certain of these invoices bear characteristics that may indicate fabrication, including invoices from vendors whose entity-formation records cannot be readily confirmed, invoices for services or goods that lack supporting documentation such as delivery receipts or inspection reports, and invoices reflecting pricing that appears inconsistent with market rates for the purported goods or services. Crestline is conducting a systematic analysis of vendor payment patterns within VCR's capital-improvement budgets and is researching entity-formation records for several purported VCR vendors. This workstream is at an earlier stage of development than the revenue-recognition workstream and will require substantial additional document review and forensic analysis before preliminary quantification is possible.

Interview Program. The interview program will expand significantly in September and October 2023 to include interviews of the three investigation subjects: Garrett W. Daskine, Nicole Prescott, and Ryan Mateo Serrano. The investigation team is coordinating with each subject's respective counsel to schedule these interviews. The subject interviews are expected to be a critical component of the investigation and will be informed by the document review and forensic analysis being conducted in the interim.

IX. Upcoming Activities and Next Steps

The investigation team anticipates the following principal activities and milestones during the next reporting period:

1. Document Review. Triton discovery Solutions is expected to complete the processing, de-duplication, and de-NISTing of the collected data set in mid-September 2023. Upon completion of processing, the investigation team will commence full-scale TAR-assisted document review of the estimated 347,000-document review universe. Document review is expected to continue through October and November 2023.

2. Subject Interviews. The investigation team will schedule and conduct interviews of the three investigation subjects—Garrett W. Daskine, Nicole Prescott, and Ryan Mateo Serrano—during the September–October 2023 timeframe, in coordination with their respective counsel. Additional witness interviews may be scheduled as warranted by the findings of the document review and forensic analysis.

3. Crestline Forensic Findings. Crestline Forensic Advisory is expected to deliver preliminary forensic findings on two matters: (a) the quantification of prematurely recognized timeshare-interest revenue across the affected periods, and (b) the analysis of vendor-payment patterns and entity-formation records relevant to the expense-reporting workstream. These preliminary findings are expected during the next reporting period and will inform the direction and scope of subsequent investigation activities.

4. SEC Disclosure Coordination. The investigation team will continue to coordinate with Westlake Burris & Holt LLP regarding VHG's ongoing SEC disclosure obligations, including any additional filings that may be required as the investigation develops and as the scope of any potential restatement becomes clearer.

5. Regulatory Monitoring. As of the date of this report, no inquiry or investigation has been initiated by the SEC or any other regulatory body in connection with the matters under investigation. The investigation team will continue to monitor for any regulatory inquiries and will promptly advise the Committee of any such development.

6. Next Interim Status Report. The second interim status report (Interim Status Report No. 2) is anticipated for delivery to the Committee in late October 2023, and will provide an update on the investigation activities and findings during the intervening period.

X. Budget and Fee Status

The following is a summary of the current budget and fee status for the investigation:

C&H fees incurred through August 31, 2023 will be detailed in the Firm's monthly invoices, which are submitted separately to the Committee in accordance with the billing arrangements set forth in the engagement letter. Crestline's work is proceeding within the parameters of the $1.15 million flat-fee arrangement. Triton's processing and hosting costs are accruing within the scope of the estimated $487,000 project budget.

The total estimated investigation cost of approximately $5.057 million remains the Firm's current best estimate and is subject to adjustment based on investigation developments, including the scope and complexity of the document review, the number and duration of witness interviews, and any expansion of the investigation scope that may be warranted by the findings to date. The Firm will advise the Committee promptly of any material changes to this estimate.

XI. Privilege and Confidentiality Reminder

This report constitutes a privileged and confidential attorney-client communication and attorney work product. It has been prepared by Calderwood & Harkness LLP at the direction of the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. for the sole purpose of providing legal advice to the Committee in connection with the internal investigation of Verimark Coastal Resorts LLC.

This report is protected from disclosure by the attorney-client privilege and the work-product doctrine. Distribution of this report should be strictly limited to the members of the Audit Committee: Diane Kowalski, Chair; Reginald Faulkner, Member; and Sandra Yeung, Member. This report should not be forwarded, copied, or disclosed to any other person, whether inside or outside VHG, without the prior written approval of C&H.

Any questions regarding the privilege protections applicable to this report, or regarding the permissible scope of dissemination, should be directed to Howard Quinn at the contact information set forth below.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Howard Quinn, Partner 200 South Biscayne Boulevard, Suite 4400 Miami, FL 33131 Telephone: (305) 555-7800

Email: hquinn@calderwoodharkness.com

Date: September 8, 2023

cc: Conrad Ashby, Calderwood & Harkness LLP (via hand delivery — privileged and confidential)

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

Role	Name	Practice Group	Hourly Rate
Responsible Partner	Howard Quinn	White Collar & Investigations	$1,350/hr
Billing Partner	Conrad Ashby	White Collar & Investigations	$1,275/hr
Lead Associate	Liam Donahue	White Collar & Investigations	$895/hr
Working Associate	Steven Hollander	White Collar & Investigations	$725/hr
Paralegals	Various	Litigation Support	$395/hr
Role	Name	Credentials
Engagement Partner	Douglas Reinhardt	CPA, CFF
Senior Manager	Priya Venkatesh	CPA
Subject	Counsel	Firm	Location
Garrett W. Daskine	James Corwin Merritt	Merritt & Dunleavy LLP	Miami, FL
Nicole Prescott	Candace O'Brien Langford	Langford Pace LLP	Tallahassee, FL
Ryan Mateo Serrano	Marco A. Ruiz	Coletti & Ruiz PA	Tampa, FL
Vendor / Firm	Estimated Total Cost	Fee Arrangement	Status
Calderwood & Harkness LLP	$3,420,000	Hourly	Fees incurred through August 31, 2023 to be detailed in monthly invoices
Crestline Forensic Advisory LLC	$1,150,000	Flat fee (with overage provisions above 4,500 hours at $375/hr blended)	Work commenced; within budget projections
Triton discovery Solutions Inc.	$487,000	Project-based estimate	Processing and hosting costs accruing within estimated scope
Total Estimated Investigation Cost	$5,057,000	Subject to adjustment

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
September 8, 2023
MEMORANDUM
FROM: Howard Quinn, Partner Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, FL 33131
TO: Audit Committee of the Board of Directors Verimark Hospitality Group Inc.
Diane Kowalski, Chair Reginald Faulkner, Member Sandra Yeung, Member
RE: Interim Status Report No. 1 — Internal Investigation of Verimark Coastal Resorts LLC
MATTER NO.: 1021-00008
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I. Introduction and Purpose
This memorandum constitutes the first interim status report submitted by Calderwood & Harkness LLP ("C&H" or the "Firm") to the Audit Committee (the "Committee") of the Board of Directors of Verimark Hospitality Group Inc. ("VHG," a Delaware corporation listed on Nasdaq under the ticker symbol VMRK, headquartered at 4100 Bayshore Boulevard, Suite 1200, Tampa, FL 33611) in connection with the Firm's internal investigation into certain expense-reporting irregularities and premature revenue-recognition practices at Verimark Coastal Resorts LLC ("VCR"), a wholly owned Florida limited liability company subsidiary of VHG.
The Firm's engagement in this matter was formalized pursuant to an engagement letter executed by Committee Chair Diane Kowalski on July 17, 2023. The investigation was formally opened on July 24, 2023, upon the issuance of the first document-preservation notices to relevant VHG and VCR personnel. This report covers the period from the formal opening of the investigation on July 24, 2023 through September 5, 2023.
The investigation encompasses two principal workstreams:
1.  Premature Revenue Recognition of Timeshare-Interest Deposits. This workstream addresses the recording of timeshare-interest purchase deposits as completed-sale revenue at VCR properties before the expiration of applicable statutory rescission periods, potentially in violation of ASC 606 revenue-recognition standards and related internal accounting controls. This workstream focuses on timeshare-interest transactions at two VCR-managed properties: (a) the Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, FL 32541, specifically Phase III timeshare units; and (b) the Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, FL 34228, specifically Phase II timeshare units.
2.  Expense-Reporting Irregularities Involving Potentially Fictitious Vendor Invoices. This workstream examines whether fictitious or inflated vendor invoices were submitted and approved within VCR's capital-improvement budgets at the above-referenced properties, potentially resulting in the misappropriation of company funds through fabricated purchase orders and vendor relationships.
The matters under investigation implicate VHG's obligations under the federal securities laws, including the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 ("SOX"), and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). In particular, the investigation has potential ramifications for VHG's certifications under SOX Section 302 (officer certifications regarding the accuracy of financial statements and effectiveness of disclosure controls) and SOX Section 404 (management assessment of internal controls over financial reporting). The investigation also implicates VHG's compliance with its obligations under the antifraud provisions of the federal securities laws to the extent that previously filed financial statements may have contained material misstatements.
This report is intended to provide the Committee with a comprehensive overview of investigation activities undertaken to date, preliminary observations arising from those activities, and a summary of anticipated next steps. It is not intended to convey final conclusions or recommendations, as the investigation remains in its early stages.
II. Investigation Team and Resources
A. Calderwood & Harkness LLP Staffing
The Firm has assembled a team within its White Collar Defense & Investigations Practice Group to conduct this investigation on behalf of the Committee. The team is currently staffed as follows:
The hourly rates set forth above are consistent with the rate schedule contained in the engagement letter executed by Committee Chair Kowalski on July 17, 2023. Mr. Quinn serves as the Responsible Partner with day-to-day oversight of the investigation and direct reporting responsibility to the Committee. Mr. Ashby serves as Billing Partner and provides additional senior-level supervision and strategic guidance. Mr. Donahue, as Lead Associate, manages the day-to-day execution of the investigation work plan, including interview preparation, document review oversight, and coordination with the forensic accounting advisor and e-discovery vendor. Mr. Hollander provides additional associate-level support for document review, research, and memorandum preparation. Paralegal support has been engaged for document collection coordination, privilege log maintenance, and administrative functions related to the investigation.
The Firm will adjust staffing levels as warranted by the scope and pace of the investigation and will advise the Committee in advance of any material changes to the team composition or billing arrangements.
B. Forensic Accounting Advisor
Calderwood & Harkness has retained Crestline Forensic Advisory LLC ("Crestline") to serve as the Firm's forensic accounting advisor in connection with this investigation. Crestline was retained under the Kovel doctrine, pursuant to the principles established in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), to ensure that Crestline's work product and communications are protected by the attorney-client privilege and the work-product doctrine as the work of an agent retained by counsel to assist in the provision of legal advice to the client.
Crestline's engagement was formalized pursuant to an engagement letter dated July 21, 2023, bearing Crestline engagement number CFA-VHG-2023-0089. The key personnel assigned to this matter are as follows:
Crestline maintains its principal office at 1330 Avenue of the Americas, 28th Floor, New York, NY 10019. The Crestline engagement is structured as a flat-fee arrangement in the amount of $1.15 million, with overage provisions applicable in the event that professional hours exceed 4,500 hours during the engagement. Hours exceeding the 4,500-hour threshold are billed at a blended rate of $375 per hour.
Crestline has commenced its forensic analysis of VCR revenue transactions and expense records. The initial focus of Crestline's work has been directed at two areas: (1) a detailed examination of timeshare-interest deposit booking practices at the Coral Dune Resort & Residences and the Palmetto Bluff Club, including a transaction-level analysis of the timing of revenue recognition relative to the expiration of statutory rescission periods; and (2) a systematic review of vendor payment patterns within VCR's capital-improvement budgets, including entity-formation research and payment-flow analysis for vendors identified in connection with the expense-reporting workstream. Crestline's work product is being generated at the direction of C&H and is protected under the Kovel doctrine as described above. All communications between Crestline and the investigation team are channeled through C&H to preserve privilege protections.
C. E-discovery Vendor
Calderwood & Harkness has engaged Triton discovery Solutions Inc. ("Triton") to provide e-discovery services in connection with this investigation. The engagement was formalized pursuant to a Master Services Agreement dated August 1, 2023. Triton maintains its office at 500 Seventh Avenue, 14th Floor, New York, NY 10018.
Triton's scope of services includes the following:
•  Hosting and storage of collected data in a secure, access-controlled review environment;
•  Processing of collected electronically stored information ("ESI"), including email, attachments, and structured data sets;
•  De-duplication of collected documents to eliminate exact duplicates within and across custodial collections;
•  De-NISTing of collected files to remove system files, application executables, and other non-substantive files using the National Institute of Standards and Technology's National Software Reference Library ("NSRL");
•  Configuration and implementation of Technology Assisted Review ("TAR") 2.0 predictive-coding workflows to prioritize document review and improve review efficiency;
•  Production of documents in formats suitable for review, analysis, and potential regulatory production.
The estimated fees for Triton's services are approximately $487,000, based on current projections of data volumes and processing requirements. The Firm will advise the Committee of any material deviation from this estimate.
III. Document Preservation and Collection
A. Preservation Notices
On July 24, 2023, Calderwood & Harkness issued two document-preservation notices, marking the formal opening of the investigation. The two notices are described below:
1. Company-Wide Preservation Notice. A company-wide preservation notice was distributed to all officers and directors of VHG and to relevant personnel across the VHG organization. This notice directed the preservation of all documents and ESI relating to VCR revenue recognition, timeshare-interest sales, expense reimbursements, and capital-improvement expenditures for the period from January 1, 2021 forward. The notice instructed recipients to refrain from destroying, discarding, deleting, modifying, or otherwise disposing of any documents or ESI falling within the scope of the preservation obligation, including emails, instant messages, text messages, voicemails, memoranda, handwritten notes, spreadsheets, financial records, contracts, purchase orders, vendor files, and any other documents in any medium that relate to the subjects identified therein.
2. Targeted Preservation Notice to VCR Custodians. A separate, more targeted preservation notice was issued to identified VCR custodians, including the following individuals:
•  Garrett W. Daskine, Division President, VCR
•  Nicole Prescott, Vice President of Finance, VCR
•  Ryan Mateo Serrano, Controller, VCR
•  Additional identified VCR finance and operations personnel
This targeted notice specified in detail the preservation obligations applicable to each custodian with respect to financial records, purchase orders, vendor contracts, email communications, messaging (including text messages and instant messages), and any other documents or ESI relating to timeshare sales and capital-improvement projects at the Coral Dune Resort & Residences and the Palmetto Bluff Club. The notice reiterated the applicable preservation period of January 1, 2021 forward and described the categories of documents subject to preservation with specificity.
VHG General Counsel Patricia Navarro confirmed the distribution of both preservation notices and the acknowledgment of receipt by all relevant personnel. Ms. Navarro further confirmed that VHG's IT department has implemented a litigation hold on the email accounts and network storage associated with the identified custodians to prevent the automated deletion of ESI under VHG's ordinary-course document-retention policies.
B. Custodian Identification and Collection
The investigation team identified eleven (11) custodians based on a review of VCR and VHG organizational charts, reporting structures, and preliminary information provided by Hargrove, Steen & Aldrich LLP ("HSA") in connection with HSA's audit findings. The custodian-identification process included consultation with VHG General Counsel Navarro and VHG's internal audit function regarding relevant personnel who may possess documents or ESI pertinent to the investigation.
Following the initial identification of eleven custodians, the investigation team conducted a preliminary assessment of each custodian's likely possession of unique relevant materials. Based on this assessment, the team determined that three of the initially identified custodians did not hold unique relevant materials that were not duplicated in the collections of other custodians. Accordingly, the team proceeded to collect ESI and documents from eight (8) custodians.
The collected custodians include the three investigation subjects—Garrett W. Daskine, Nicole Prescott, and Ryan Mateo Serrano—as well as relevant VCR and VHG corporate finance personnel whose roles involve oversight of, or interaction with, VCR's financial reporting, timeshare sales operations, and capital-improvement expenditure processes.
C. Volume of Documents
The collection effort yielded approximately 1.2 million documents, including emails, email attachments, financial records, contracts, purchase orders, vendor files, and other categories of documents and ESI. These documents are currently being processed by Triton discovery Solutions. De-duplication and de-NISTing of the collected data set are in progress and are expected to be completed in mid-September 2023.
Triton has begun configuring the TAR 2.0 predictive-coding workflow that will be employed to prioritize the document review. Seed-set review has commenced, with members of the C&H investigation team reviewing an initial set of documents to train the predictive-coding algorithm and establish relevance and privilege classification parameters.
Based on current processing results, the estimated review universe after de-duplication and de-NISTing is approximately 347,000 documents. This figure may be refined as processing is completed and additional filtering is applied.
Privilege review protocols are in place as outlined in the Upjohn protocol memorandum prepared by C&H and dated July 26, 2023. These protocols establish procedures for the identification, logging, and handling of documents potentially subject to the attorney-client privilege or the work-product doctrine, and provide for the use of a privilege team and a clawback protocol consistent with Federal Rule of Evidence 502(d) to protect against inadvertent privilege waiver.
IV. Administrative Leave of Investigation Subjects
On August 7, 2023, in coordination with VHG General Counsel Patricia Navarro and VHG Chief Executive Officer Margaret Calder, the following three individuals were placed on administrative leave from their respective positions at VCR, pending the outcome of this investigation:
1. Garrett W. Daskine — Division President, Verimark Coastal Resorts LLC. Mr. Daskine is a seventeen-year veteran of VHG and has served as Division President of VCR since 2018. Mr. Daskine is suspected of directing the premature recognition of timeshare-interest purchase deposits as completed-sale revenue and of approving fictitious vendor invoices within VCR's capital-improvement budgets to conceal personal expenses. Mr. Daskine's position as Division President afforded him broad authority over VCR's financial reporting, operational management, and vendor-approval processes.
2. Nicole Prescott — Vice President of Finance, Verimark Coastal Resorts LLC. Ms. Prescott is a nine-year veteran of VHG and has served in her current role since 2020. Ms. Prescott is suspected of implementing the revenue-recognition scheme by directing the booking of timeshare-interest purchase deposits as completed-sale revenue upon contract execution, before the expiration of the statutory ten-day rescission period under Florida Statute § 721.10. Ms. Prescott reported directly to Mr. Daskine and was responsible for VCR's financial reporting processes and submission of divisional financial data to VHG corporate.
3. Ryan Mateo Serrano — Controller, Verimark Coastal Resorts LLC. Mr. Serrano is a five-year veteran of VHG and has served as Controller since 2021. Mr. Serrano is suspected of creating fictitious capital-improvement purchase orders and vendor invoices to funnel reimbursements for personal expenditures through VCR's capital-improvement budgets. Mr. Serrano reported to Ms. Prescott and was responsible for the preparation and approval of purchase orders and the maintenance of VCR's accounts payable records.
The decision to place these individuals on administrative leave was made to preserve the integrity of the investigation, to prevent the potential destruction or alteration of evidence, and to remove the investigation subjects from positions in which they could influence VCR's financial reporting or vendor-payment processes during the pendency of the investigation. Each individual was placed on paid administrative leave and was informed of the investigation in general terms. The terms of administrative leave include the requirement that each individual refrain from accessing VHG or VCR systems, premises, or records without prior authorization.
Each investigation subject has retained separate outside legal counsel, as set forth below:
C&H has communicated with each subject's counsel regarding the nature and scope of the investigation, the investigation procedures and protocols, and the scheduling of interviews of the respective subjects. As discussed in Section IX below, interviews of the three investigation subjects are anticipated for September–October 2023.
V. Interviews Conducted to Date
A. Overview
As of the date of this report, the investigation team has conducted three (3) interviews in connection with the investigation. A summary of each interview is provided below.
For interviews of current VHG employees, the investigation team administered an Upjohn warning script at the opening of each interview. The Upjohn warning script was prepared by C&H on August 14, 2023, and is consistent with the principles established in Upjohn Co. v. United States, 449 U.S. 383 (1981), and its progeny. The Upjohn warning advises each interviewee of the following:
(a) Calderwood & Harkness LLP represents the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. in connection with this investigation. C&H does not represent any individual employee or officer in his or her personal capacity.
(b) The attorney-client privilege with respect to the interview belongs to VHG, acting through the Audit Committee, and not to the individual interviewee. VHG may choose to waive the privilege at any time and may disclose the contents of the interview to third parties, including government authorities, at its sole discretion.
(c) The interviewee is requested to maintain the confidentiality of the interview and not to discuss the substance of the interview with other employees or third parties, except the interviewee's own personal attorney if the interviewee has retained one.
(d) The interviewee's cooperation with the investigation is expected and appreciated, and the interviewee is directed to provide truthful and complete answers to all questions.
As noted below, the interview of William Gentry of HSA was conducted on an informational basis and was not subject to the Upjohn warning procedure, as Mr. Gentry is an external auditor and not an employee of VHG.
B. Interview of William "Bill" Gentry, CPA — HSA Lead Engagement Partner
Date: August 15, 2023 Location: Calderwood & Harkness LLP, Miami office Interviewers: Howard Quinn, Liam Donahue Upjohn Warning: Not administered (external auditor; informational interview)
Mr. Gentry is the lead engagement partner at Hargrove, Steen & Aldrich LLP responsible for the HSA audit engagement with VHG. Mr. Gentry was interviewed on an informational basis to obtain HSA's account of the events and findings that gave rise to this investigation.
Mr. Gentry described HSA's identification, during its Q1 2023 interim review (for the 10-Q period ending March 31, 2023), of a potential material weakness relating to VCR's revenue-recognition controls. Specifically, Mr. Gentry explained that HSA's review procedures identified approximately $9.8 million in timeshare-interest purchase deposits that had been recorded in VCR's financial records as completed-sale revenue during Q1 2023. Upon examination, HSA determined that the applicable statutory rescission periods—ten (10) calendar days under Florida Statute § 721.10 (the Florida Vacation Plan and Timesharing Act)—had not expired before the close of the quarter for a significant portion of these transactions. Under applicable accounting standards, including ASC 606, revenue from timeshare-interest sales should not be recognized until the rescission period has expired and the purchaser's right to cancel the contract has lapsed, as the expiration of the rescission period is a condition for the transfer of control to the purchaser.
Mr. Gentry stated that HSA communicated these findings to VHG Chief Financial Officer Thomas Griffith and Audit Committee Chair Diane Kowalski on June 19, 2023. This communication identified the potential material weakness and recommended that VHG investigate the scope and extent of the revenue-recognition issue.
Mr. Gentry further described HSA's prior-year audit procedures and indicated that HSA's review of prior periods had not surfaced analogous issues at the magnitude identified in Q1 2023. However, Mr. Gentry noted that HSA had observed during the investigation period that VCR's timeshare-interest rescission rate was approximately 14.3%, which was higher than the industry average of approximately 11%. This elevated rescission rate, while noted in HSA's working papers, had not previously triggered a material-weakness finding.
A full memorandum of the interview with Mr. Gentry was prepared by the investigation team and is on file, dated August 15, 2023.
C. Interview of Thomas Rhett Griffith — VHG Chief Financial Officer
Date: August 22, 2023 Location: Calderwood & Harkness LLP, Miami office Interviewers: Howard Quinn, Liam Donahue, Steven Hollander Upjohn Warning: Administered
Mr. Griffith is the Chief Financial Officer of VHG and has served in that capacity since 2019. Mr. Griffith was interviewed regarding his oversight of VCR's financial reporting and his interactions with VCR division management.
Mr. Griffith described his role in overseeing VCR's financial data as it was incorporated into VHG's consolidated financial statements. He stated that he relied on divisional reporting from VP of Finance Nicole Prescott and Controller Ryan Mateo Serrano for VCR-specific financial data, which was submitted to VHG corporate finance on a monthly and quarterly basis as part of VHG's consolidation process. Mr. Griffith stated that VCR's divisional financial submissions were reviewed by VHG corporate finance staff, but acknowledged that his team did not independently verify the timing of timeshare-interest deposit booking relative to the expiration of applicable rescission periods.
Mr. Griffith discussed HSA's June 19, 2023 communication regarding the potential material weakness identified in VCR's revenue-recognition controls. He described receiving the communication from Mr. Gentry and subsequently advising Committee Chair Kowalski and VHG CEO Calder of the findings. Mr. Griffith stated that he was troubled by the findings and supported the Committee's decision to engage outside counsel to conduct an independent investigation.
Mr. Griffith also discussed the CFO certification process under SOX Section 302, including his quarterly certifications regarding the accuracy and completeness of VHG's financial statements and the effectiveness of VHG's disclosure controls and procedures. Mr. Griffith stated that his certifications were made in reliance on the accuracy of the divisional financial information provided by VCR and the other VHG business units, as well as the results of HSA's audit procedures.
A full memorandum of the interview with Mr. Griffith was prepared by the investigation team and is on file, dated August 22, 2023.
D. Interview of Margaret "Meg" Calder — VHG Chief Executive Officer
Date: August 29, 2023 Location: Calderwood & Harkness LLP, Miami office Interviewers: Howard Quinn, Liam Donahue Upjohn Warning: Administered
Ms. Calder is the Chief Executive Officer of VHG and has served in that capacity since 2017. Ms. Calder was interviewed regarding her oversight of VCR and her interactions with VCR Division President Garrett Daskine.
Ms. Calder described VCR's role within the broader VHG organization, noting that VCR represented approximately 23.5% of VHG's consolidated fiscal year 2022 revenue, or approximately $438.7 million of VHG's total consolidated revenue of $1.87 billion. Ms. Calder described VCR as a significant contributor to VHG's overall financial performance and a strategic priority for the company's growth plans in the Florida resort and timeshare market.
Ms. Calder discussed her awareness of capital-improvement expenditures at VCR properties, including the ongoing Phase III development at Coral Dune and Phase II development at Palmetto Bluff. She described Mr. Daskine's role in managing VCR's capital-improvement budgets and stated that she reviewed periodic capital-expenditure reports but did not typically review individual purchase orders or vendor invoices within those budgets. Ms. Calder stated that she relied on VCR's division management and the established internal controls to ensure the accuracy and propriety of VCR's expenditures.
Ms. Calder stated that she was not aware of any irregularities in VCR's vendor-approval processes or purchase-order practices prior to HSA's June 19, 2023 communication regarding the potential material weakness. She stated that Mr. Daskine had not raised any concerns with her regarding VCR's financial reporting or vendor relationships, and she had no reason to question the accuracy of VCR's financial submissions to VHG corporate prior to learning of HSA's findings.
A full memorandum of the interview with Ms. Calder was prepared by the investigation team and is on file, dated August 29, 2023.
VI. Coordination with Independent Auditor (Hargrove, Steen & Aldrich LLP)
On August 9, 2023, C&H transmitted a letter to William Gentry at Hargrove, Steen & Aldrich LLP establishing protocols for coordination between the internal investigation conducted by C&H on behalf of the Committee and HSA's ongoing audit activities with respect to VHG. The letter addressed the following matters:
•  Information-Sharing Arrangements. The letter established procedures for the sharing of factual information and documents between the investigation team and HSA, to the extent necessary to facilitate both the investigation and HSA's audit responsibilities. The information-sharing protocols are designed to enable efficient coordination while preserving the distinct roles and independence of the investigation and audit functions.
•  Privilege Protections. The letter addressed the preservation of the attorney-client privilege and work-product protections applicable to the investigation. Specifically, the letter clarified that the sharing of investigation-related information with HSA for purposes of facilitating HSA's audit procedures does not constitute a waiver of any privilege or protection, and that HSA agreed to maintain the confidentiality of any privileged or protected information received from the investigation team.
•  Boundaries Between Audit and Investigation Workstreams. The letter delineated the respective boundaries between HSA's audit activities and C&H's investigation activities, to ensure that each function operates within its defined scope and that the independence and integrity of both workstreams are maintained.
HSA has continued to cooperate fully with the investigation team and with Crestline Forensic Advisory. HSA has made available relevant audit working papers, correspondence, and analytical work product, and has facilitated the investigation team's access to financial data and transaction records maintained in HSA's systems.
HSA's identification of the $9.8 million Q1 2023 revenue-recognition issue during its interim review procedures remains the catalyzing event for this investigation. The investigation team continues to coordinate with HSA as the investigation progresses and as HSA evaluates the implications of the investigation findings for its own audit conclusions.
VII. SEC Disclosure Coordination — Form 8-K Filing
A. Coordination with Outside Securities Counsel
On August 11, 2023, C&H transmitted a letter to Irene Castellanos of Westlake Burris & Holt LLP ("Westlake Burris"), located at 600 Brickell Avenue, Suite 3100, Miami, FL 33131, regarding the coordination of SEC disclosure obligations arising from the investigation. Westlake Burris serves as VHG's regular outside securities counsel for disclosure and securities-regulatory matters.
The letter addressed the need for timely and accurate disclosure of the investigation and its potential implications for VHG's previously issued financial statements. The letter outlined the respective roles of C&H (as counsel to the Committee in connection with the internal investigation) and Westlake Burris (as VHG's outside securities counsel responsible for advising management on disclosure obligations under the Securities Exchange Act of 1934 and applicable SEC rules). The letter also addressed coordination procedures regarding the content and timing of any SEC filings required in connection with the investigation.
B. Form 8-K Filing
On August 14, 2023, VHG filed a Current Report on Form 8-K with the SEC under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review). The filing disclosed the following:
The Audit Committee of the Board of Directors of VHG, in consultation with management and the Company's independent registered public accounting firm, Hargrove, Steen & Aldrich LLP, concluded on August 14, 2023 that the Company's previously issued financial statements for the fiscal quarters ended September 30, 2022 (Q3 FY 2022), December 31, 2022 (Q4 FY 2022), and March 31, 2023 (Q1 FY 2023) should no longer be relied upon due to the identification of potential errors in revenue recognition relating to the Company's Verimark Coastal Resorts LLC subsidiary. The Company's Audit Committee has engaged outside counsel to conduct an internal investigation into these matters.
The Form 8-K filing was coordinated among C&H, Westlake Burris, VHG management (including CEO Margaret Calder, CFO Thomas Griffith, and General Counsel Patricia Navarro), and HSA. The filing was made in accordance with the requirements of Item 4.02 of Form 8-K and Rule 12b-25 under the Securities Exchange Act of 1934.
Ongoing disclosure considerations remain under active discussion between C&H and Westlake Burris. These considerations include the potential need for additional or amended filings as the investigation progresses and as additional facts are developed, as well as the disclosure implications of any restatement of previously issued financial statements that may be required as a result of the investigation findings.
VIII. Preliminary Observations
The investigation remains in its early stages, and the observations set forth below are preliminary in nature. The Committee should not draw final conclusions from these preliminary observations. The investigation team expects that additional document review, forensic analysis, and witness interviews will substantially refine and may materially alter these observations. With that significant caveat, the investigation team offers the following preliminary observations:
Revenue-Recognition Workstream. Initial document review and Crestline's preliminary forensic analysis suggest a pattern at VCR of recording timeshare-interest purchase deposits as completed-sale revenue upon the execution of the purchase contract, rather than upon the expiration of the ten-day statutory rescission period under Florida Statute § 721.10. This practice, if confirmed, would represent a departure from the requirements of ASC 606, which provides that revenue should not be recognized until performance obligations have been satisfied and control of the good or service has been transferred to the customer. In the context of Florida timeshare sales, the purchaser's statutory right to rescind the purchase contract within ten days of execution creates a contingency that must lapse before revenue recognition is appropriate.
The potential scope of the revenue-recognition issue appears to extend beyond Q1 2023—the period initially identified by HSA—into earlier quarters, specifically Q3 and Q4 of fiscal year 2022. Crestline is conducting a detailed, transaction-level quantification analysis to determine the magnitude of prematurely recognized revenue across all affected periods. This quantification work is ongoing and is expected to be a principal focus of Crestline's activities in the coming weeks.
Expense-Reimbursement Workstream. Preliminary review of VCR's capital-improvement purchase orders has identified a number of potentially irregular vendor invoices that require further investigation. Certain of these invoices bear characteristics that may indicate fabrication, including invoices from vendors whose entity-formation records cannot be readily confirmed, invoices for services or goods that lack supporting documentation such as delivery receipts or inspection reports, and invoices reflecting pricing that appears inconsistent with market rates for the purported goods or services. Crestline is conducting a systematic analysis of vendor payment patterns within VCR's capital-improvement budgets and is researching entity-formation records for several purported VCR vendors. This workstream is at an earlier stage of development than the revenue-recognition workstream and will require substantial additional document review and forensic analysis before preliminary quantification is possible.
Interview Program. The interview program will expand significantly in September and October 2023 to include interviews of the three investigation subjects: Garrett W. Daskine, Nicole Prescott, and Ryan Mateo Serrano. The investigation team is coordinating with each subject's respective counsel to schedule these interviews. The subject interviews are expected to be a critical component of the investigation and will be informed by the document review and forensic analysis being conducted in the interim.
IX. Upcoming Activities and Next Steps
The investigation team anticipates the following principal activities and milestones during the next reporting period:
1.  Document Review. Triton discovery Solutions is expected to complete the processing, de-duplication, and de-NISTing of the collected data set in mid-September 2023. Upon completion of processing, the investigation team will commence full-scale TAR-assisted document review of the estimated 347,000-document review universe. Document review is expected to continue through October and November 2023.
2.  Subject Interviews. The investigation team will schedule and conduct interviews of the three investigation subjects—Garrett W. Daskine, Nicole Prescott, and Ryan Mateo Serrano—during the September–October 2023 timeframe, in coordination with their respective counsel. Additional witness interviews may be scheduled as warranted by the findings of the document review and forensic analysis.
3.  Crestline Forensic Findings. Crestline Forensic Advisory is expected to deliver preliminary forensic findings on two matters: (a) the quantification of prematurely recognized timeshare-interest revenue across the affected periods, and (b) the analysis of vendor-payment patterns and entity-formation records relevant to the expense-reporting workstream. These preliminary findings are expected during the next reporting period and will inform the direction and scope of subsequent investigation activities.
4.  SEC Disclosure Coordination. The investigation team will continue to coordinate with Westlake Burris & Holt LLP regarding VHG's ongoing SEC disclosure obligations, including any additional filings that may be required as the investigation develops and as the scope of any potential restatement becomes clearer.
5.  Regulatory Monitoring. As of the date of this report, no inquiry or investigation has been initiated by the SEC or any other regulatory body in connection with the matters under investigation. The investigation team will continue to monitor for any regulatory inquiries and will promptly advise the Committee of any such development.
6.  Next Interim Status Report. The second interim status report (Interim Status Report No. 2) is anticipated for delivery to the Committee in late October 2023, and will provide an update on the investigation activities and findings during the intervening period.
X. Budget and Fee Status
The following is a summary of the current budget and fee status for the investigation:
C&H fees incurred through August 31, 2023 will be detailed in the Firm's monthly invoices, which are submitted separately to the Committee in accordance with the billing arrangements set forth in the engagement letter. Crestline's work is proceeding within the parameters of the $1.15 million flat-fee arrangement. Triton's processing and hosting costs are accruing within the scope of the estimated $487,000 project budget.
The total estimated investigation cost of approximately $5.057 million remains the Firm's current best estimate and is subject to adjustment based on investigation developments, including the scope and complexity of the document review, the number and duration of witness interviews, and any expansion of the investigation scope that may be warranted by the findings to date. The Firm will advise the Committee promptly of any material changes to this estimate.
XI. Privilege and Confidentiality Reminder
This report constitutes a privileged and confidential attorney-client communication and attorney work product. It has been prepared by Calderwood & Harkness LLP at the direction of the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. for the sole purpose of providing legal advice to the Committee in connection with the internal investigation of Verimark Coastal Resorts LLC.
This report is protected from disclosure by the attorney-client privilege and the work-product doctrine. Distribution of this report should be strictly limited to the members of the Audit Committee: Diane Kowalski, Chair; Reginald Faulkner, Member; and Sandra Yeung, Member. This report should not be forwarded, copied, or disclosed to any other person, whether inside or outside VHG, without the prior written approval of C&H.
Any questions regarding the privilege protections applicable to this report, or regarding the permissible scope of dissemination, should be directed to Howard Quinn at the contact information set forth below.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Howard Quinn, Partner 200 South Biscayne Boulevard, Suite 4400 Miami, FL 33131 Telephone: (305) 555-7800
Email: hquinn@calderwoodharkness.com
Date: September 8, 2023
cc: Conrad Ashby, Calderwood & Harkness LLP (via hand delivery — privileged and confidential)
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
Role | Name | Practice Group | Hourly Rate
Responsible Partner | Howard Quinn | White Collar & Investigations | $1,350/hr
Billing Partner | Conrad Ashby | White Collar & Investigations | $1,275/hr
Lead Associate | Liam Donahue | White Collar & Investigations | $895/hr
Working Associate | Steven Hollander | White Collar & Investigations | $725/hr
Paralegals | Various | Litigation Support | $395/hr
Role | Name | Credentials
Engagement Partner | Douglas Reinhardt | CPA, CFF
Senior Manager | Priya Venkatesh | CPA
Subject | Counsel | Firm | Location
Garrett W. Daskine | James Corwin Merritt | Merritt & Dunleavy LLP | Miami, FL
Nicole Prescott | Candace O'Brien Langford | Langford Pace LLP | Tallahassee, FL
Ryan Mateo Serrano | Marco A. Ruiz | Coletti & Ruiz PA | Tampa, FL
Vendor / Firm | Estimated Total Cost | Fee Arrangement | Status
Calderwood & Harkness LLP | $3,420,000 | Hourly | Fees incurred through August 31, 2023 to be detailed in monthly invoices
Crestline Forensic Advisory LLC | $1,150,000 | Flat fee (with overage provisions above 4,500 hours at $375/hr blended) | Work commenced; within budget projections
Triton discovery Solutions Inc. | $487,000 | Project-based estimate | Processing and hosting costs accruing within estimated scope
Total Estimated Investigation Cost | $5,057,000 | Subject to adjustment

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

MEMORANDUM

MATTER NO.: 1021-00008

CALDERWOOD & HARKNESS LLP

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