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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

INTERIM STATUS REPORT NO. 3

TO THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS VERIMARK HOSPITALITY GROUP INC.

November 22, 2023

FROM:

Howard Quinn, Partner Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, FL 33131 Telephone: (305) 555-7200

Email: hquinn@calderwoodharkness.com

TO:

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

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

RE: Internal Investigation — Verimark Coastal Resorts LLC (Matter No. 1021-00008)

REPORTING PERIOD: October 21, 2023 through November 22, 2023 (period since Interim Status Report No. 2, dated October 20, 2023)

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I. Executive Summary

This is the third interim status report from Calderwood & Harkness LLP ("Calderwood & Harkness" or the "Firm") to the Audit Committee (the "Committee") of the Board of Directors of Verimark Hospitality Group Inc. ("VHG" or the "Company") concerning the internal investigation (the "Investigation") opened on July 24, 2023, into expense-reporting irregularities and premature revenue-recognition practices at Verimark Coastal Resorts LLC ("VCR"), a wholly owned Florida subsidiary of VHG. This report covers the period from approximately October 21, 2023 through November 22, 2023, the period since the delivery of our Interim Status Report No. 2 dated October 20, 2023. All prior interim status reports are incorporated herein by reference to the extent relevant.

Since the date of Interim Status Report No. 2, the Investigation has advanced materially across multiple workstreams. The following key developments have occurred:

• Second Interview of Nicole Prescott (November 8, 2023). Calderwood & Harkness conducted a second interview of Nicole Prescott, Vice President of Finance of VCR, at the Firm's Miami office. The session addressed newly developed evidence concerning Prescott's role as sole shareholder of Clearwater Design Collective Inc. ("CDC"), as well as the mechanics of the premature revenue-recognition practices identified at the property level. Prescott's counsel, Candace O'Brien Langford of Langford Pace LLP, was present throughout the session.

• Cooperation Agreement with Ryan Mateo Serrano (November 15, 2023). VHG and Ryan Mateo Serrano, Controller of VCR, executed a cooperation agreement on November 15, 2023. The agreement was negotiated by Calderwood & Harkness and executed by VHG's General Counsel, Patricia Navarro, on behalf of the Company, and by Marco A. Ruiz of Coletti & Ruiz PA on behalf of Serrano. The agreement secures Serrano's ongoing cooperation, including his agreement to provide truthful and complete testimony and documentary productions, in exchange for specified employment-termination accommodations.

• Shell-Entity Analysis. The investigation team, with forensic accounting support from Crestline Forensic Advisory LLC ("Crestline"), has continued to advance the comprehensive shell-entity analysis memorandum, which examines the three entities — Gulf Standard Contracting LLC ("GSC"), Clearwater Design Collective Inc. ("CDC"), and Suncoast Property Services LLC ("SPS") — used in the expense-reimbursement scheme. The aggregate improper payments across the three entities now total $1,830,000 over a scheme period of approximately twenty-four months. The analysis memorandum is expected to be finalized by late November 2023.

• SEC Coordination. Calderwood & Harkness has continued its coordination with the SEC Division of Enforcement regarding preliminary inquiry File No. HO-14237 and with Westlake Burris & Holt LLP (Irene Castellanos, lead partner) on SEC disclosure matters and the phased voluntary production strategy. No formal subpoena, Wells notice, or Department of Justice referral has been received as of this report date.

• Ongoing Coordination with Outside Securities Counsel and Auditors. The Firm continues to coordinate with Westlake Burris & Holt LLP on disclosure considerations and with Hargrove, Steen & Aldrich LLP ("HSA") regarding audit-related matters arising from the Investigation.

The Investigation remains on track for delivery of the Final Investigation Report to the Audit Committee in the first or second week of January 2024. The sections below provide additional detail on each area of Investigation activity during this reporting period.

II. Investigation Activity Since Interim Report No. 2

A. Witness Interview: Nicole Prescott — Session 2 (November 8, 2023)

On November 8, 2023, Calderwood & Harkness conducted a second interview of Nicole Prescott, Vice President of Finance of VCR. The interview was conducted at the Firm's Miami office at 200 South Biscayne Boulevard, Suite 4400, Miami, Florida 33131. The interview commenced at approximately 9:30 a.m. and concluded at approximately 3:45 p.m., with a break for lunch and two additional short breaks. The interview was attended by Howard Quinn and Liam Donahue on behalf of Calderwood & Harkness.

Prescott was accompanied by her personal counsel, Candace O'Brien Langford of Langford Pace LLP, 3200 Capital Circle Southwest, Suite 212, Tallahassee, FL 32308. Ms. Langford's representation of Prescott was previously confirmed by letter dated August 22, 2023, and her participation in the interview process was acknowledged and documented in accordance with the approved Investigation protocol.

At the outset of the session, Upjohn warnings were administered to Prescott consistent with the Investigation protocol approved by the Audit Committee on July 28, 2023. Specifically, Prescott was advised that: (i) Calderwood & Harkness represents VHG and the Audit Committee, not Prescott individually; (ii) the purpose of the interview was to gather facts relevant to the Investigation; (iii) the attorney-client privilege with respect to the interview belongs to VHG and the Audit Committee, not to Prescott; (iv) VHG and the Audit Committee may elect to waive the privilege and disclose the substance of the interview to third parties, including government regulators or law enforcement, without Prescott's consent; and (v) Prescott's cooperation was requested but her participation was voluntary. Prescott acknowledged her understanding of these warnings.

The purpose of the second interview session was to address additional evidence that had been developed since the first interview on October 11, 2023, as well as to clarify certain aspects of Prescott's prior testimony. Specifically, the second session focused on three principal topics:

(1) Prescott's Role as Sole Shareholder of Clearwater Design Collective Inc. ("CDC"). Following the first interview, the investigation team, in conjunction with Crestline's forensic analysis, confirmed through Florida Division of Corporations records, bank account documentation obtained from Ostrander Savings Bank, and internal VCR accounts-payable records that Prescott is the sole shareholder of CDC, a Florida corporation formed on June 4, 2021. CDC's registered agent is Ryan Mateo Serrano. Prescott was questioned at length regarding the formation of CDC, its purpose, its relationship (if any) to VCR business operations, the nature of the sixteen invoices submitted by CDC to VCR, and the disposition of the $587,600 in payments received by CDC from VCR.

(2) Mechanics of the Revenue-Recognition Overstatement. Prescott was questioned regarding the practice of booking timeshare-interest purchase deposits as completed-sale revenue at the property level upon the signing of purchase agreements, rather than deferring recognition until the expiration of the ten-day statutory rescission period mandated by Florida Statute § 721.10. The investigation team focused on the specific journal entries at two key properties — Coral Dune Resort & Residences (14200 Emerald Coast Parkway, Destin, FL 32541) and Palmetto Bluff Club (3950 Longboat Key Drive, Sarasota, FL 34228) — and sought to establish Prescott's awareness of, and involvement in, the booking of those entries.

(3) Prescott's Awareness of the GSC and SPS Shell Entities. Prescott was questioned regarding her knowledge of Gulf Standard Contracting LLC and Suncoast Property Services LLC, the other two entities identified as participants in the expense-reimbursement scheme, and regarding any communications she may have had with Garrett W. Daskine or Ryan Mateo Serrano concerning those entities or the invoices submitted by them.

The second interview yielded several noteworthy observations, which are summarized below:

• Prescott acknowledged that she was aware that the ten-day statutory rescission periods under Florida Statute § 721.10 had not expired for certain Q1 2023 timeshare-interest transactions. She stated that the affected transactions totaled approximately $9.8 million in recognized revenue. However, Prescott characterized the booking practice as consistent with prior division practice and stated that she understood the practice to have been in place at VCR since at least 2019, prior to her appointment as Vice President of Finance. Prescott did not identify any specific individual who had directed her to continue the practice, but indicated that the practice was known at the division-controller level and had not been flagged in prior internal-audit reviews.

• Prescott denied directing Serrano to create fictitious purchase orders or to submit fraudulent invoices through any of the three shell entities. However, Prescott acknowledged that she received funds through CDC. When pressed on the source and nature of those funds, Prescott, on the advice of her counsel, provided limited additional detail, stating only that CDC was formed to provide "consulting and design services" and that the payments received were for "legitimate work." Prescott did not identify any specific projects, deliverables, or work product associated with CDC's purported services.

• Prescott's responses regarding the timing and extent of her knowledge of GSC and SPS were, in Calderwood & Harkness's assessment, materially inconsistent with the documentary evidence reviewed to date. In particular, email correspondence recovered from VCR's email servers indicates that Prescott received and responded to at least four emails referencing GSC and SPS invoices during the period from January 2022 through March 2023. During the interview, Prescott stated that she had "no recollection" of those communications and denied any substantive involvement with or knowledge of GSC or SPS beyond their appearance in VCR's accounts-payable ledger. The investigation team views these inconsistencies as significant and plans to address them further in the Final Investigation Report.

A detailed memorandum of interview documenting Prescott's testimony, including the specific questions posed and her responses, has been prepared by Liam Donahue and has been reviewed by Howard Quinn. The memorandum is maintained in the privileged Investigation file. A copy of the request letter sent to Langford Pace LLP dated October 30, 2023, requesting the second interview, is also maintained in the privileged file.

B. Cooperation Agreement with Ryan Mateo Serrano (November 15, 2023)

On November 15, 2023, VHG and Ryan Mateo Serrano, Controller of VCR, executed a cooperation agreement (the "Cooperation Agreement") that governs the terms of Serrano's ongoing cooperation with the Investigation. The Cooperation Agreement was drafted by Calderwood & Harkness and was the product of negotiations conducted between the Firm and Serrano's personal counsel, Marco A. Ruiz of Coletti & Ruiz PA, 1601 West Swann Avenue, Suite 200, Tampa, FL 33606. The Cooperation Agreement was executed on behalf of VHG by Patricia Navarro, VHG's General Counsel, and on behalf of Serrano by Mr. Ruiz.

For the Committee's reference, Serrano was originally placed on administrative leave by VHG on August 7, 2023, concurrent with the placement on administrative leave of Garrett W. Daskine, Division President of VCR, and Nicole Prescott, Vice President of Finance of VCR. Serrano's first interview was conducted on September 27, 2023, with his counsel Mr. Ruiz present, as reported in Interim Status Report No. 2. During that interview, Serrano provided initial testimony concerning his role in the formation of the shell entities and his knowledge of the fictitious purchase orders.

The key terms of the Cooperation Agreement are as follows:

(a) Truthful and Complete Cooperation. Serrano agreed to provide truthful and complete testimony in all interviews conducted by Calderwood & Harkness in connection with the Investigation, and to produce all responsive documents in his possession, custody, or control, including but not limited to electronic communications, financial records, corporate formation documents, and bank statements. Serrano further agreed to identify all documents and communications of which he is aware that are relevant to the Investigation, including documents held by third parties to the extent within his knowledge.

(b) Availability for Further Interviews and Testimony. Serrano agreed to make himself available for further interviews at mutually convenient times and locations, on reasonable notice from Calderwood & Harkness, and, if necessary, to provide testimony before regulatory bodies (including the SEC Division of Enforcement) or judicial bodies as requested by VHG or the Audit Committee.

(c) Employment Termination on Non-Cause Basis. VHG agreed that Serrano's employment termination would be effected on a non-cause basis, rather than for cause, with attendant implications for severance eligibility and benefits continuation under Serrano's employment agreement dated March 14, 2019, and VHG's Severance Policy (revised January 1, 2022). The non-cause designation entitles Serrano to twelve months of base-salary continuation and six months of COBRA-subsidized health-insurance coverage, in accordance with the terms of the applicable employment agreement and severance policy. This concession was a material element of the negotiation and was made in consideration of Serrano's agreement to provide full and truthful cooperation.

(d) Mutual Release Provisions. The Cooperation Agreement contains mutual release provisions under which VHG releases Serrano from certain employment-related claims, and Serrano releases VHG from certain claims, subject in all cases to the condition of Serrano's continued full cooperation and truthful testimony. The releases are expressly conditioned upon Serrano's ongoing compliance with his cooperation obligations; any material breach of those obligations by Serrano voids the releases in their entirety.

(e) Preservation of Recovery Rights. Notwithstanding the mutual release provisions, the Cooperation Agreement expressly preserves VHG's right to pursue claims for recovery of any improper payments that are determined through the Investigation or subsequent proceedings to have been traceable to Serrano's personal benefit, including but not limited to funds received by Serrano directly or indirectly through any of the three shell entities. This carve-out was included at Calderwood & Harkness's recommendation to ensure that VHG's potential recovery rights are not compromised by the Cooperation Agreement.

A second interview of Serrano is currently being scheduled for early December 2023, pursuant to the terms of the Cooperation Agreement. The purpose of the second interview will be to obtain from Serrano a detailed account of the creation of the forty-seven (47) fictitious purchase orders, the approval and payment processes by which those purchase orders were converted into payments from VCR to the shell entities, and the fund-flow mechanics by which funds were disbursed from the shell entities to the personal benefit of the scheme participants. This testimony is expected to be a critical element of the Final Investigation Report.

The executed Cooperation Agreement has been reviewed by the Audit Committee Chair, Diane Kowalski, as communicated to Calderwood & Harkness by Ms. Kowalski on November 17, 2023. The original executed copy of the Cooperation Agreement is maintained in the privileged Investigation file.

C. Daskine — Status of Follow-Up

As reported in Interim Status Report No. 2, Garrett W. Daskine, Division President of VCR, was interviewed by Calderwood & Harkness on October 4, 2023, at the Firm's Miami office. Daskine was accompanied at that interview by his personal counsel, James Corwin Merritt of Merritt & Dunleavy LLP, 201 South Biscayne Boulevard, Suite 2700, Miami, FL 33131. The October 4, 2023 interview addressed Daskine's role in the management and operations of VCR, his knowledge of the vendor relationships with GSC and SPS, and his involvement in the revenue-recognition practices at issue.

Following the first interview, Calderwood & Harkness sent a letter to Merritt & Dunleavy LLP on October 25, 2023, requesting that Daskine produce additional documents identified during the investigation team's review, including personal financial records, bank statements for GSC and SPS, and communications with Serrano and Prescott during the scheme period. The letter also requested that Daskine make himself available for a follow-up interview to address matters that could not be fully covered during the first session, as well as additional evidence developed subsequent to the October 4 interview.

As of this report date, Daskine, through his counsel Mr. Merritt, has declined a follow-up interview. Merritt & Dunleavy LLP's letter of November 10, 2023, stated that Daskine "does not believe a second interview is warranted at this time" and that "Mr. Daskine has cooperated fully with the investigation and has nothing further to add to his prior testimony." Calderwood & Harkness views this refusal as significant and has documented it in the Investigation file. The refusal, together with Daskine's role and the documentary evidence developed to date, will be addressed in the Final Investigation Report and in the personnel-action recommendations anticipated in mid-December 2023.

With respect to document production, Merritt & Dunleavy LLP has provided limited additional documentation in response to the October 25, 2023 request. The production consisted of thirty-seven (37) documents, primarily consisting of email communications between Daskine and VCR operational staff that do not directly relate to the shell entities. Notably absent from the production were personal bank records, GSC and SPS bank statements, and communications between Daskine and Serrano during the scheme period. Calderwood & Harkness has sent a follow-up letter dated November 20, 2023, reiterating its request for these categories of documents and noting the deficiencies in the October production.

Daskine's connection to Gulf Standard Contracting LLC ("GSC"), formed March 12, 2021, and Suncoast Property Services LLC ("SPS"), formed November 18, 2021, has been further substantiated through the shell-entity analysis described in Section III below. In particular, forensic tracing performed by Crestline has confirmed that Daskine is the beneficial owner of GSC through a nominee arrangement and is the sole member of SPS. Additionally, fund-flow analysis has traced payments from VCR to GSC and SPS to expenditures that appear to have been for Daskine's personal benefit, including residential renovation work at Daskine's personal residence.

Daskine has remained on paid administrative leave since August 7, 2023, in accordance with the terms of his employment agreement and the administrative-leave protocol approved by the Audit Committee on August 4, 2023.

III. Shell-Entity Analysis — Progress Report

Calderwood & Harkness, with forensic accounting support from Crestline Forensic Advisory LLC (engagement partner Douglas Reinhardt, CPA, CFF; senior manager Priya Venkatesh, CPA; engagement number CFA-VHG-2023-0089), is preparing a comprehensive memorandum (the "Shell-Entity Analysis Memorandum") analyzing the three shell entities used in the expense-reimbursement scheme that is at the center of one of the two principal tracks of the Investigation. The Shell-Entity Analysis Memorandum is expected to be finalized by late November 2023 and will be included as an appendix to the Final Investigation Report.

The following is a summary of the findings to date for each of the three shell entities, as well as the aggregate findings across the scheme.

Gulf Standard Contracting LLC ("GSC")

GSC is a Florida limited liability company formed on March 12, 2021, with the Florida Division of Corporations. Its registered agent is Ryan Mateo Serrano. Based on the investigation team's analysis of corporate formation records, bank-account signature cards and beneficial-ownership certifications obtained from Seaside Community Bank (Destin, FL), and testimony provided by Serrano during his September 27, 2023 interview, the sole beneficial owner of GSC is Garrett W. Daskine, who holds his membership interest through a nominee arrangement. Serrano served as the nominal registered agent and signatory on the GSC bank account and was responsible for the day-to-day administration of the entity, including the preparation and submission of invoices to VCR.

A total of nineteen (19) invoices were submitted by GSC to VCR during the scheme period, totaling $812,400. The invoices purported to be for capital-improvement work at VCR properties, including renovations, materials procurement, and construction-related services. The largest single invoice was Invoice No. GSC-2023-007, dated February 14, 2023, in the amount of $94,500, described on its face as "lobby renovation materials — Coral Dune Phase III." Crestline's forensic review has found no evidence that GSC performed any legitimate contracting services for VCR or any other entity. GSC has no employees, no contractor licenses, no insurance policies, and no operational history beyond the submission of invoices to VCR and the receipt of corresponding payments.

Clearwater Design Collective Inc. ("CDC")

CDC is a Florida corporation formed on June 4, 2021, with the Florida Division of Corporations. Its registered agent is Ryan Mateo Serrano. Based on corporate formation records, Florida Division of Corporations annual report filings, and bank records obtained from Fenmore National Bank, the sole shareholder of CDC is Nicole Prescott. As with GSC, Serrano served as the registered agent and was involved in the administration of the entity.

A total of sixteen (16) invoices were submitted by CDC to VCR during the scheme period, totaling $587,600. The invoices purported to be for design and interior-improvement services at VCR properties. Crestline's forensic review has found no evidence that CDC rendered any legitimate design or interior-improvement services for VCR or any other entity. CDC has no employees (other than Prescott as nominal sole shareholder), no design-industry registrations or certifications, no portfolio of work product, and no operational history beyond the submission of invoices to VCR and the receipt of corresponding payments.

Suncoast Property Services LLC ("SPS")

SPS is a Florida limited liability company formed on November 18, 2021, with the Florida Division of Corporations. Unlike GSC and CDC, for which Serrano served as registered agent, the registered agent for SPS is Panhandle Agent Services Inc., a commercial registered-agent service located in Tallahassee, Florida. This distinction is noted as it may have been intended to create distance between SPS and the other two entities. The sole member of SPS is Garrett W. Daskine, as confirmed through formation records and bank-account documentation obtained from Halcyon Capital Markets (Destin, FL).

A total of twelve (12) invoices were submitted by SPS to VCR during the scheme period, totaling $430,000. The invoices purported to be for property-maintenance services at VCR properties. Crestline's forensic review has found no evidence that SPS rendered any legitimate property-maintenance or related services for VCR or any other entity. SPS has no employees, no maintenance contracts with any properties, and no operational history beyond the submission of invoices to VCR and the receipt of corresponding payments.

Aggregate Findings

Across the three shell entities, a total of forty-seven (47) fictitious purchase orders were created and processed through VCR's accounts-payable system during the scheme period of approximately July 2021 through June 2023 (approximately twenty-four months). The aggregate improper payments made by VCR to the three entities are as follows:

Crestline's forensic tracing of funds flowing from VCR to the shell entities has identified that the funds were used for range personal expenditures by the scheme participants, including but not limited to the following:

• Residential renovation work at Daskine's personal residence at 312 Harbor View Lane, Destin, FL 32541, including payments to a general contractor, materials suppliers, and subcontractors, totaling approximately $385,000 in traced expenditures;

• Boat-slip fees at HarborWalk Marina (Destin, FL) in Daskine's name;

• Luxury-goods purchases at various retailers, including charges consistent with jewelry, designer apparel, and electronics; and

• Personal credit-card payments made from GSC, CDC, and SPS bank accounts to credit-card accounts in the names of Daskine, Prescott, and, to a lesser extent, Serrano.

The detailed fund-flow analysis, including source-and-use schedules for each entity and each identified recipient, is being finalized by Crestline and will be incorporated into the Shell-Entity Analysis Memorandum. Calderwood & Harkness anticipates that the final fund-flow tracing will account for substantially all of the $1,830,000 in improper payments and will establish the proportionate personal benefit received by each of the three individuals involved.

IV. Revenue-Recognition Analysis — Update

As reported in Interim Status Report No. 2, the Investigation has identified premature revenue recognition of timeshare-interest deposits at VCR totaling $26.4 million across four fiscal quarters. The overstatements by quarter are as follows:

The scheme involved the booking of timeshare-interest purchase deposits as completed-sale revenue upon the signing of purchase agreements by timeshare purchasers, rather than deferring revenue recognition until the expiration of the statutory ten-day rescission period mandated by Florida Statute § 721.10. Under this statute, a purchaser of a timeshare interest in Florida is entitled to cancel the purchase agreement within ten days of the later of the date of execution of the agreement or the date the purchaser receives a copy of the public offering statement. Revenue recognition upon signing, without regard to the unexpired rescission period, is inconsistent with the applicable accounting standards, as a completed transaction cannot be recognized when a substantive contractual right of cancellation exists and has not yet lapsed.

In many cases during the investigated period, purchasers exercised their rescission rights within the statutory period. However, the revenue associated with those rescinded transactions was not reversed until the following quarter, creating a persistent overstatement that rolled forward from quarter to quarter. This practice had the effect of inflating VCR's reported revenue in each affected quarter and, because VCR's financial results are consolidated into VHG's financial statements, the overstatement impacted VHG's consolidated financial reporting.

VCR's timeshare rescission rate during the investigated period (Q3 FY 2022 through Q2 FY 2023) was approximately 14.3%, which is notably higher than the industry average of approximately 11% as reported by the American Resort Development Association. The elevated rescission rate exacerbated the magnitude of the revenue overstatement because a greater proportion of prematurely recognized revenue was subsequently reversed.

The key properties involved in the premature revenue-recognition practice were Coral Dune Resort & Residences, specifically Phase III timeshare units located at 14200 Emerald Coast Parkway, Destin, FL 32541, and Palmetto Bluff Club, specifically Phase II timeshare units located at 3950 Longboat Key Drive, Sarasota, FL 34228. Both properties are high-volume timeshare-sales locations within the VCR portfolio and together account for the substantial majority of the identified overstatement.

Crestline is preparing a comprehensive ASC 606 analysis memorandum (the "Revenue-Recognition Analysis Memorandum"), which is expected to be completed in late December 2023. The Revenue-Recognition Analysis Memorandum will quantify the impact of the premature revenue recognition on VHG's consolidated financial statements and will provide the accounting analysis necessary to support the restatement of the affected periods. Preliminary quantification of the impact is as follows:

• FY 2022 Revenue Overstatement: $10.8 million, representing the combined overstatement for Q3 FY 2022 ($4.7 million) and Q4 FY 2022 ($6.1 million).

• VCR FY 2022 Reported Revenue: $438.7 million. VCR represented approximately 23.46% of VHG's consolidated revenue of $1.87 billion for FY 2022.

• After-Tax Income Overstatement for FY 2022: Approximately $8.17 million, calculated as $10.8 million multiplied by (1 minus 0.243), applying VHG's effective tax rate of 24.3% for FY 2022. This after-tax overstatement represents approximately 5.74% of VHG's reported FY 2022 net income of $142.3 million.

The implications of the revenue-recognition irregularities for VHG's certifications under Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 continue to be assessed by the investigation team in coordination with Westlake Burris & Holt LLP and HSA. As previously reported, HSA has identified a material weakness in VHG's internal controls over financial reporting related to VCR's timeshare revenue-recognition processes. The scope and remediation of this material weakness will be addressed in the Remediation Recommendations Memorandum expected in early January 2024.

V. Document Review — Status Update

As previously reported, the Investigation's document-review workstream has involved the collection, processing, and review of documents from identified custodians at VCR and VHG. The following is a summary of the current status of the document review:

Collection. Approximately 1.2 million documents have been collected from eight (8) of the eleven (11) identified custodians. The remaining three custodians are non-priority custodians whose collections are expected to be completed in December 2023, though the investigation team does not anticipate that those collections will yield material new evidence beyond what has already been identified.

Processing and Filtering. Following collection, the documents were processed by Triton discovery Solutions Inc. ("Triton") (500 Seventh Avenue, 14th Floor, New York, NY 10018). De-duplication, de-NISTing (removal of system files and non-user-generated content), and application of search-term filters and date-range restrictions reduced the corpus to the documents requiring substantive review. The TAR 2.0 (Technology-Assisted Review) predictive-coding workflow, managed by Triton, was then applied to further prioritize the document population. Approximately 347,000 documents were identified for substantive review following the application of these protocols.

Review Status. The substantive document review is substantially complete as of this reporting period. The review has been conducted by the Calderwood & Harkness investigation team, including Liam Donahue, Steven Hollander, and contract attorneys working under the supervision of the Firm's associates and partners.

Privilege Log. A total of 4,218 documents have been logged on the privilege log as withheld or redacted on grounds of attorney-client privilege and/or work-product protection. The privilege log is being finalized by Liam Donahue and Steven Hollander and is expected to be completed in late December 2023. The log will be available for production to the SEC, if required, in connection with the phased voluntary production described in Section VI below, and care is being taken to ensure that privilege designations are defensible and consistent with applicable case law.

VI. Coordination with SEC Division of Enforcement

As reported in Interim Status Report No. 2, the SEC Division of Enforcement opened a preliminary inquiry (File No. HO-14237) in September 2023, following VHG's filing of the Form 8-K under Item 4.02 on August 14, 2023. The preliminary inquiry is being handled by the SEC's Miami Regional Office.

Calderwood & Harkness has continued to coordinate with Westlake Burris & Holt LLP (Irene Castellanos, lead partner, 600 Brickell Avenue, Suite 3100, Miami, FL 33131), VHG's outside securities counsel, on the strategy for voluntary production of non-privileged Investigation materials to the SEC. This coordination is being conducted in accordance with the memorandum on SEC voluntary-production strategy and privilege considerations prepared by Calderwood & Harkness on September 15, 2023, which was reviewed and approved by the Audit Committee.

The team is proceeding with a phased production approach, as outlined in the September 15, 2023 memorandum:

(a) Phase 1 — Non-Privileged Financial Records and Transactional Data. Non-privileged financial records and transactional data relating to VCR's timeshare-interest revenue, including general-ledger entries, journal entries, source documents for the affected transactions, and the relevant accounts-payable and accounts-receivable records, have been organized for production. This first phase of production is expected to be delivered to the SEC in coordination with Westlake Burris & Holt LLP following the completion of the document review and the finalization of the privilege log.

(b) Privilege Protections. Privilege protections for Calderwood & Harkness's work product, including interview memoranda, legal analyses, and internal strategy communications, are being carefully maintained. Additionally, Crestline's forensic work product is protected under the Kovel doctrine (United States v. Kovel, 296 F.2d 918 (2d Cir. 1961)) as work performed at the direction of and for the benefit of counsel in connection with the rendering of legal services. All Crestline deliverables have been marked as privileged and confidential, and the engagement structure has been documented to support the application of the Kovel doctrine.

(c) Selective-Waiver Considerations. No selective-waiver issues have arisen to date. The investigation team is mindful of the limitations on the selective-waiver doctrine in the Eleventh Circuit and is structuring the voluntary production to avoid any inadvertent waiver of privilege over protected materials.

As of this report date, no formal subpoena has been issued by the SEC in connection with the preliminary inquiry. Additionally, no Wells notice has been received by VHG or any individual subject of the Investigation, and no referral to the United States Department of Justice has been made, to our knowledge. Calderwood & Harkness will advise the Audit Committee immediately of any material developments in the SEC's inquiry, including the issuance of any subpoena, Wells notice, or DOJ referral.

VII. Coordination with HSA and Disclosure Matters

Calderwood & Harkness continues to coordinate with Hargrove, Steen & Aldrich LLP ("HSA") (William "Bill" Gentry, lead engagement partner, 101 East Kennedy Boulevard, Suite 3200, Tampa, FL 33602), VHG's independent registered public accounting firm, regarding the intersection of the Investigation with HSA's audit and review activities. This coordination is focused on ensuring that HSA has sufficient information to assess the impact of the Investigation's findings on VHG's financial statements and internal controls, while maintaining the privilege protections applicable to the Investigation.

As previously reported, VHG's Form 8-K under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review) was filed with the SEC on August 14, 2023. The Form 8-K covered the following financial statements: (i) FY 2022 audited financial statements (Q3 and Q4 FY 2022); and (ii) Q1 FY 2023 unaudited interim financial statements. The filing disclosed that, based on the preliminary findings of the Investigation and the recommendation of the Audit Committee, VHG's previously issued financial statements for the affected periods should no longer be relied upon due to the premature recognition of timeshare-interest revenue.

The restatement of VHG's affected filings — specifically, the amended Annual Report on Form 10-K for FY 2022 and the amended Quarterly Reports on Form 10-Q for Q1 FY 2023 and Q2 FY 2023 — is being coordinated by Westlake Burris & Holt LLP in consultation with HSA and with input from Crestline's Revenue-Recognition Analysis Memorandum (expected late December 2023). The amended filings are expected to be prepared and filed following the completion of the Investigation, which is currently targeted for the first or second week of January 2024. Calderwood & Harkness anticipates that the Revenue-Recognition Analysis Memorandum will provide HSA with the quantitative and qualitative analysis necessary to support its re-audit and re-review of the affected financial statements.

VIII. Upcoming Activities and Timeline

The Investigation is proceeding in accordance with the timeline previously communicated to the Audit Committee, with the Final Investigation Report targeted for delivery in the first or second week of January 2024. The following activities are planned for the period from this report date through the anticipated conclusion of the Investigation:

Second Interview of Ryan Mateo Serrano. A second interview of Serrano is anticipated in early December 2023, pursuant to the terms of the Cooperation Agreement executed on November 15, 2023. The purpose of this interview will be to obtain a detailed account from Serrano regarding the creation of the forty-seven (47) fictitious purchase orders, the internal approval and payment-processing mechanisms by which those purchase orders were converted into payments from VCR to the three shell entities, and the fund-flow mechanics by which funds were disbursed from the shell entities to the personal benefit of the scheme participants. The scheduling of this interview is being coordinated with Serrano's counsel, Marco A. Ruiz.

Shell-Entity Analysis Memorandum. The comprehensive Shell-Entity Analysis Memorandum, incorporating Crestline's forensic tracing and fund-flow analysis, is expected to be finalized in late November 2023.

Personnel Action Recommendations. Calderwood & Harkness anticipates providing formal recommendations to the Audit Committee in mid-December 2023 regarding personnel actions with respect to the three individuals who have been on administrative leave since August 7, 2023: Garrett W. Daskine, Nicole Prescott, and Ryan Mateo Serrano. These recommendations will include:

• Analysis of the applicable employment-agreement provisions for each individual, including termination-for-cause definitions, notice requirements, and cure periods;

• Clawback considerations under VHG's Executive Compensation Clawback Policy (adopted effective October 2, 2023, in compliance with SEC Rule 10D-1 and NYSE Listed Company Manual Section 303A.14), as well as contractual clawback provisions in the individuals' respective employment agreements;

• Analysis of potential indemnification obligations under VHG's Amended and Restated Certificate of Incorporation, Bylaws, and applicable Florida law; and

• D&O insurance implications under the primary directors-and-officers liability insurance policy issued by North Atlantic Indemnity Corp. (Policy No. NAI-DOL-2023-004891, with limits of $25 million per claim and $50 million in the aggregate) and the Side A difference-in-conditions ("DIC") coverage issued by Ironbridge Specialty Insurance Ltd. (limits of $15 million).

Revenue-Recognition Analysis Memorandum (ASC 606). Crestline's comprehensive analysis of the premature revenue-recognition practices under ASC 606 is expected to be completed in late December 2023.

Expense-Reimbursement Irregularity Analysis Memorandum. A comprehensive memorandum analyzing the expense-reimbursement irregularities — i.e., the fictitious-vendor scheme involving the three shell entities — is expected to be completed in late December 2023 and will incorporate the findings of the Shell-Entity Analysis Memorandum, Serrano's second-interview testimony, and the full documentary record.

Remediation Recommendations Memorandum. Calderwood & Harkness will prepare a memorandum setting forth recommendations for remedial measures to address the control deficiencies and other weaknesses identified through the Investigation. This memorandum is expected in early January 2024 and will address, among other things, enhancements to VCR's vendor-onboarding and accounts-payable processes, improvements to the revenue-recognition controls for timeshare-interest sales, and organizational and reporting-structure changes at the division level.

Final Investigation Report. The Final Investigation Report is targeted for delivery to the Audit Committee in the first or second week of January 2024. The Final Report will consolidate the findings from all workstreams of the Investigation, including the shell-entity analysis, the revenue-recognition analysis, the witness-interview testimony, and the document-review results, and will include formal findings, conclusions, and recommendations.

IX. Investigation Costs — Interim Summary

The following is a summary of the Investigation costs incurred through this reporting period and the estimated costs through the close of the Investigation:

Calderwood & Harkness LLP

Fees incurred through this reporting period total approximately $2,500,000 of an estimated total of $3,420,000 through Investigation close. The hourly rates applicable to the Calderwood & Harkness team members working on this matter are as follows:

Crestline Forensic Advisory LLC

Fees incurred to date total approximately $850,000 of the $1,150,000 flat-fee engagement. The engagement contemplates approximately 3,067 total hours at a blended rate of $375 per hour. The engagement letter contains overage provisions that allow for additional billing at the $375 blended rate for hours in excess of 4,500, though the investigation team does not currently anticipate exceeding that threshold.

Triton discovery Solutions Inc.

Fees incurred to date total approximately $420,000 of an estimated total of $487,000. Triton's fees cover hosting, processing, TAR licensing, and production services in connection with the document-review workstream.

Total Estimated Investigation Cost

The estimated total cost of the Investigation through close is approximately $5,057,000, broken down as follows:

These estimates are subject to adjustment based on the scope of remaining activities, including the possibility of additional witness interviews, the outcome of the pending document-production request to Merritt & Dunleavy LLP on behalf of Daskine, and any developments in the SEC preliminary inquiry that may require additional work by the investigation team.

X. Recommendations and Items Requiring Audit Committee Action

Calderwood & Harkness respectfully directs the Audit Committee's attention to the following items:

Serrano Cooperation Agreement. The executed Cooperation Agreement between VHG and Ryan Mateo Serrano, dated November 15, 2023, has been provided to the Audit Committee Chair, Diane Kowalski, for review. No further Audit Committee action is required at this time with respect to the Cooperation Agreement. However, the Committee should be prepared to consider and approve the non-cause termination of Serrano as recommended in the agreement terms, at the appropriate time and in coordination with VHG General Counsel Patricia Navarro. The timing of Serrano's formal termination will be addressed in the personnel-action recommendations anticipated in mid-December 2023.

Personnel Actions. The Audit Committee should anticipate receiving from Calderwood & Harkness formal recommendations regarding personnel actions in mid-December 2023. Based on the current state of the evidence, the Firm anticipates recommending termination of Garrett W. Daskine for cause, termination of Nicole Prescott for cause, and non-cause termination of Ryan Mateo Serrano (in accordance with the Cooperation Agreement). These recommendations will be accompanied by supporting analysis of employment-agreement provisions, clawback considerations, and indemnification and insurance implications.

SEC Coordination. Calderwood & Harkness will continue to coordinate with Westlake Burris & Holt LLP on all matters relating to the SEC preliminary inquiry (File No. HO-14237) and will advise the Audit Committee immediately of any material developments, including the issuance of any subpoena, Wells notice, or referral to the Department of Justice. The Firm does not recommend any change to the current voluntary-cooperation posture at this time.

XI. Privilege and Confidentiality Reminder

This Interim Status Report No. 3, and all prior interim status reports, constitute attorney-client privileged communications and attorney work product prepared at the direction of the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. in connection with Calderwood & Harkness LLP's engagement as special investigation counsel. The protections of the attorney-client privilege and the work-product doctrine attach to this report and its contents.

Distribution of this report should be strictly limited to the members of the Audit Committee — Diane Kowalski (Chair), Reginald Faulkner, and Sandra Yeung. Any further dissemination of this report or its contents, whether to other members of the Board of Directors, VHG management, outside advisors, or any third party, requires the prior written approval of the Audit Committee Chair in consultation with Calderwood & Harkness. Unauthorized dissemination may result in the waiver of applicable privileges.

The Audit Committee is reminded that the work product of Crestline Forensic Advisory LLC, including all reports, memoranda, analyses, and communications prepared by Crestline in connection with the Investigation, is protected under the Kovel doctrine as work performed by a non-attorney agent at the direction of and for the benefit of counsel in connection with the rendering of legal services. The Kovel protections are maintained through the structure of the engagement, under which Crestline was retained by Calderwood & Harkness (rather than directly by VHG) and reports to the Firm in its capacity as agent of counsel. The integrity of this engagement structure should be preserved, and all communications with Crestline should continue to be routed through Calderwood & Harkness.

We remain available to discuss this report and any questions the Audit Committee may have at the Committee's convenience. We anticipate providing Interim Status Report No. 4 in approximately three to four weeks, covering the period through mid-to-late December 2023.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Howard Quinn, Partner 200 South Biscayne Boulevard, Suite 4400 Miami, FL 33131 Telephone: (305) 555-7200

Email: hquinn@calderwoodharkness.com

Date: November 22, 2023

cc: Conrad Ashby, Partner, Calderwood & Harkness LLP Liam Donahue, Senior Associate, Calderwood & Harkness LLP

Enclosures: None. All referenced memoranda, interview memoranda, and supporting documentation are maintained in the privileged Investigation file at Calderwood & Harkness LLP and are available for the Audit Committee's review upon request.

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT This document and its contents are protected by the attorney-client privilege and the work-product doctrine. Any unauthorized review, use, disclosure, or distribution is prohibited.

Entity	No. of Invoices	Total Payments	Beneficial Owner
Gulf Standard Contracting LLC	19	$812,400	Garrett W. Daskine (via nominee)
Clearwater Design Collective Inc.	16	$587,600	Nicole Prescott
Suncoast Property Services LLC	12	$430,000	Garrett W. Daskine
Total	47	$1,830,000
Quarter	Period Ending	Overstatement Amount
Q3 FY 2022	September 30, 2022	$4.7 million
Q4 FY 2022	December 31, 2022	$6.1 million
Q1 FY 2023	March 31, 2023	$9.8 million
Q2 FY 2023	June 30, 2023	$5.8 million
Total	$26.4 million
Timekeeper	Role	Hourly Rate
Howard Quinn	Partner (Lead)	$1,350
Conrad Ashby	Partner	$1,275
Liam Donahue	Senior Associate	$895
Steven Hollander	Associate	$725
Paralegal Staff	Various	$395
Vendor	Estimated Total
Calderwood & Harkness LLP	$3,420,000
Crestline Forensic Advisory LLC	$1,150,000
Triton discovery Solutions Inc.	$487,000
Total	$5,057,000

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
INTERIM STATUS REPORT NO. 3
TO THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS VERIMARK HOSPITALITY GROUP INC.
November 22, 2023
FROM:
Howard Quinn, Partner Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, FL 33131 Telephone: (305) 555-7200
Email: hquinn@calderwoodharkness.com
TO:
Audit Committee of the Board of Directors Verimark Hospitality Group Inc.
Diane Kowalski, Chair Reginald Faulkner, Member Sandra Yeung, Member
RE: Internal Investigation — Verimark Coastal Resorts LLC (Matter No. 1021-00008)
REPORTING PERIOD: October 21, 2023 through November 22, 2023 (period since Interim Status Report No. 2, dated October 20, 2023)
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I. Executive Summary
This is the third interim status report from Calderwood & Harkness LLP ("Calderwood & Harkness" or the "Firm") to the Audit Committee (the "Committee") of the Board of Directors of Verimark Hospitality Group Inc. ("VHG" or the "Company") concerning the internal investigation (the "Investigation") opened on July 24, 2023, into expense-reporting irregularities and premature revenue-recognition practices at Verimark Coastal Resorts LLC ("VCR"), a wholly owned Florida subsidiary of VHG. This report covers the period from approximately October 21, 2023 through November 22, 2023, the period since the delivery of our Interim Status Report No. 2 dated October 20, 2023. All prior interim status reports are incorporated herein by reference to the extent relevant.
Since the date of Interim Status Report No. 2, the Investigation has advanced materially across multiple workstreams. The following key developments have occurred:
•  Second Interview of Nicole Prescott (November 8, 2023). Calderwood & Harkness conducted a second interview of Nicole Prescott, Vice President of Finance of VCR, at the Firm's Miami office. The session addressed newly developed evidence concerning Prescott's role as sole shareholder of Clearwater Design Collective Inc. ("CDC"), as well as the mechanics of the premature revenue-recognition practices identified at the property level. Prescott's counsel, Candace O'Brien Langford of Langford Pace LLP, was present throughout the session.
•  Cooperation Agreement with Ryan Mateo Serrano (November 15, 2023). VHG and Ryan Mateo Serrano, Controller of VCR, executed a cooperation agreement on November 15, 2023. The agreement was negotiated by Calderwood & Harkness and executed by VHG's General Counsel, Patricia Navarro, on behalf of the Company, and by Marco A. Ruiz of Coletti & Ruiz PA on behalf of Serrano. The agreement secures Serrano's ongoing cooperation, including his agreement to provide truthful and complete testimony and documentary productions, in exchange for specified employment-termination accommodations.
•  Shell-Entity Analysis. The investigation team, with forensic accounting support from Crestline Forensic Advisory LLC ("Crestline"), has continued to advance the comprehensive shell-entity analysis memorandum, which examines the three entities — Gulf Standard Contracting LLC ("GSC"), Clearwater Design Collective Inc. ("CDC"), and Suncoast Property Services LLC ("SPS") — used in the expense-reimbursement scheme. The aggregate improper payments across the three entities now total $1,830,000 over a scheme period of approximately twenty-four months. The analysis memorandum is expected to be finalized by late November 2023.
•  SEC Coordination. Calderwood & Harkness has continued its coordination with the SEC Division of Enforcement regarding preliminary inquiry File No. HO-14237 and with Westlake Burris & Holt LLP (Irene Castellanos, lead partner) on SEC disclosure matters and the phased voluntary production strategy. No formal subpoena, Wells notice, or Department of Justice referral has been received as of this report date.
•  Ongoing Coordination with Outside Securities Counsel and Auditors. The Firm continues to coordinate with Westlake Burris & Holt LLP on disclosure considerations and with Hargrove, Steen & Aldrich LLP ("HSA") regarding audit-related matters arising from the Investigation.
The Investigation remains on track for delivery of the Final Investigation Report to the Audit Committee in the first or second week of January 2024. The sections below provide additional detail on each area of Investigation activity during this reporting period.
II. Investigation Activity Since Interim Report No. 2
A. Witness Interview: Nicole Prescott — Session 2 (November 8, 2023)
On November 8, 2023, Calderwood & Harkness conducted a second interview of Nicole Prescott, Vice President of Finance of VCR. The interview was conducted at the Firm's Miami office at 200 South Biscayne Boulevard, Suite 4400, Miami, Florida 33131. The interview commenced at approximately 9:30 a.m. and concluded at approximately 3:45 p.m., with a break for lunch and two additional short breaks. The interview was attended by Howard Quinn and Liam Donahue on behalf of Calderwood & Harkness.
Prescott was accompanied by her personal counsel, Candace O'Brien Langford of Langford Pace LLP, 3200 Capital Circle Southwest, Suite 212, Tallahassee, FL 32308. Ms. Langford's representation of Prescott was previously confirmed by letter dated August 22, 2023, and her participation in the interview process was acknowledged and documented in accordance with the approved Investigation protocol.
At the outset of the session, Upjohn warnings were administered to Prescott consistent with the Investigation protocol approved by the Audit Committee on July 28, 2023. Specifically, Prescott was advised that: (i) Calderwood & Harkness represents VHG and the Audit Committee, not Prescott individually; (ii) the purpose of the interview was to gather facts relevant to the Investigation; (iii) the attorney-client privilege with respect to the interview belongs to VHG and the Audit Committee, not to Prescott; (iv) VHG and the Audit Committee may elect to waive the privilege and disclose the substance of the interview to third parties, including government regulators or law enforcement, without Prescott's consent; and (v) Prescott's cooperation was requested but her participation was voluntary. Prescott acknowledged her understanding of these warnings.
The purpose of the second interview session was to address additional evidence that had been developed since the first interview on October 11, 2023, as well as to clarify certain aspects of Prescott's prior testimony. Specifically, the second session focused on three principal topics:
(1) Prescott's Role as Sole Shareholder of Clearwater Design Collective Inc. ("CDC"). Following the first interview, the investigation team, in conjunction with Crestline's forensic analysis, confirmed through Florida Division of Corporations records, bank account documentation obtained from Ostrander Savings Bank, and internal VCR accounts-payable records that Prescott is the sole shareholder of CDC, a Florida corporation formed on June 4, 2021. CDC's registered agent is Ryan Mateo Serrano. Prescott was questioned at length regarding the formation of CDC, its purpose, its relationship (if any) to VCR business operations, the nature of the sixteen invoices submitted by CDC to VCR, and the disposition of the $587,600 in payments received by CDC from VCR.
(2) Mechanics of the Revenue-Recognition Overstatement. Prescott was questioned regarding the practice of booking timeshare-interest purchase deposits as completed-sale revenue at the property level upon the signing of purchase agreements, rather than deferring recognition until the expiration of the ten-day statutory rescission period mandated by Florida Statute § 721.10. The investigation team focused on the specific journal entries at two key properties — Coral Dune Resort & Residences (14200 Emerald Coast Parkway, Destin, FL 32541) and Palmetto Bluff Club (3950 Longboat Key Drive, Sarasota, FL 34228) — and sought to establish Prescott's awareness of, and involvement in, the booking of those entries.
(3) Prescott's Awareness of the GSC and SPS Shell Entities. Prescott was questioned regarding her knowledge of Gulf Standard Contracting LLC and Suncoast Property Services LLC, the other two entities identified as participants in the expense-reimbursement scheme, and regarding any communications she may have had with Garrett W. Daskine or Ryan Mateo Serrano concerning those entities or the invoices submitted by them.
The second interview yielded several noteworthy observations, which are summarized below:
•  Prescott acknowledged that she was aware that the ten-day statutory rescission periods under Florida Statute § 721.10 had not expired for certain Q1 2023 timeshare-interest transactions. She stated that the affected transactions totaled approximately $9.8 million in recognized revenue. However, Prescott characterized the booking practice as consistent with prior division practice and stated that she understood the practice to have been in place at VCR since at least 2019, prior to her appointment as Vice President of Finance. Prescott did not identify any specific individual who had directed her to continue the practice, but indicated that the practice was known at the division-controller level and had not been flagged in prior internal-audit reviews.
•  Prescott denied directing Serrano to create fictitious purchase orders or to submit fraudulent invoices through any of the three shell entities. However, Prescott acknowledged that she received funds through CDC. When pressed on the source and nature of those funds, Prescott, on the advice of her counsel, provided limited additional detail, stating only that CDC was formed to provide "consulting and design services" and that the payments received were for "legitimate work." Prescott did not identify any specific projects, deliverables, or work product associated with CDC's purported services.
•  Prescott's responses regarding the timing and extent of her knowledge of GSC and SPS were, in Calderwood & Harkness's assessment, materially inconsistent with the documentary evidence reviewed to date. In particular, email correspondence recovered from VCR's email servers indicates that Prescott received and responded to at least four emails referencing GSC and SPS invoices during the period from January 2022 through March 2023. During the interview, Prescott stated that she had "no recollection" of those communications and denied any substantive involvement with or knowledge of GSC or SPS beyond their appearance in VCR's accounts-payable ledger. The investigation team views these inconsistencies as significant and plans to address them further in the Final Investigation Report.
A detailed memorandum of interview documenting Prescott's testimony, including the specific questions posed and her responses, has been prepared by Liam Donahue and has been reviewed by Howard Quinn. The memorandum is maintained in the privileged Investigation file. A copy of the request letter sent to Langford Pace LLP dated October 30, 2023, requesting the second interview, is also maintained in the privileged file.
B. Cooperation Agreement with Ryan Mateo Serrano (November 15, 2023)
On November 15, 2023, VHG and Ryan Mateo Serrano, Controller of VCR, executed a cooperation agreement (the "Cooperation Agreement") that governs the terms of Serrano's ongoing cooperation with the Investigation. The Cooperation Agreement was drafted by Calderwood & Harkness and was the product of negotiations conducted between the Firm and Serrano's personal counsel, Marco A. Ruiz of Coletti & Ruiz PA, 1601 West Swann Avenue, Suite 200, Tampa, FL 33606. The Cooperation Agreement was executed on behalf of VHG by Patricia Navarro, VHG's General Counsel, and on behalf of Serrano by Mr. Ruiz.
For the Committee's reference, Serrano was originally placed on administrative leave by VHG on August 7, 2023, concurrent with the placement on administrative leave of Garrett W. Daskine, Division President of VCR, and Nicole Prescott, Vice President of Finance of VCR. Serrano's first interview was conducted on September 27, 2023, with his counsel Mr. Ruiz present, as reported in Interim Status Report No. 2. During that interview, Serrano provided initial testimony concerning his role in the formation of the shell entities and his knowledge of the fictitious purchase orders.
The key terms of the Cooperation Agreement are as follows:
(a) Truthful and Complete Cooperation. Serrano agreed to provide truthful and complete testimony in all interviews conducted by Calderwood & Harkness in connection with the Investigation, and to produce all responsive documents in his possession, custody, or control, including but not limited to electronic communications, financial records, corporate formation documents, and bank statements. Serrano further agreed to identify all documents and communications of which he is aware that are relevant to the Investigation, including documents held by third parties to the extent within his knowledge.
(b) Availability for Further Interviews and Testimony. Serrano agreed to make himself available for further interviews at mutually convenient times and locations, on reasonable notice from Calderwood & Harkness, and, if necessary, to provide testimony before regulatory bodies (including the SEC Division of Enforcement) or judicial bodies as requested by VHG or the Audit Committee.
(c) Employment Termination on Non-Cause Basis. VHG agreed that Serrano's employment termination would be effected on a non-cause basis, rather than for cause, with attendant implications for severance eligibility and benefits continuation under Serrano's employment agreement dated March 14, 2019, and VHG's Severance Policy (revised January 1, 2022). The non-cause designation entitles Serrano to twelve months of base-salary continuation and six months of COBRA-subsidized health-insurance coverage, in accordance with the terms of the applicable employment agreement and severance policy. This concession was a material element of the negotiation and was made in consideration of Serrano's agreement to provide full and truthful cooperation.
(d) Mutual Release Provisions. The Cooperation Agreement contains mutual release provisions under which VHG releases Serrano from certain employment-related claims, and Serrano releases VHG from certain claims, subject in all cases to the condition of Serrano's continued full cooperation and truthful testimony. The releases are expressly conditioned upon Serrano's ongoing compliance with his cooperation obligations; any material breach of those obligations by Serrano voids the releases in their entirety.
(e) Preservation of Recovery Rights. Notwithstanding the mutual release provisions, the Cooperation Agreement expressly preserves VHG's right to pursue claims for recovery of any improper payments that are determined through the Investigation or subsequent proceedings to have been traceable to Serrano's personal benefit, including but not limited to funds received by Serrano directly or indirectly through any of the three shell entities. This carve-out was included at Calderwood & Harkness's recommendation to ensure that VHG's potential recovery rights are not compromised by the Cooperation Agreement.
A second interview of Serrano is currently being scheduled for early December 2023, pursuant to the terms of the Cooperation Agreement. The purpose of the second interview will be to obtain from Serrano a detailed account of the creation of the forty-seven (47) fictitious purchase orders, the approval and payment processes by which those purchase orders were converted into payments from VCR to the shell entities, and the fund-flow mechanics by which funds were disbursed from the shell entities to the personal benefit of the scheme participants. This testimony is expected to be a critical element of the Final Investigation Report.
The executed Cooperation Agreement has been reviewed by the Audit Committee Chair, Diane Kowalski, as communicated to Calderwood & Harkness by Ms. Kowalski on November 17, 2023. The original executed copy of the Cooperation Agreement is maintained in the privileged Investigation file.
C. Daskine — Status of Follow-Up
As reported in Interim Status Report No. 2, Garrett W. Daskine, Division President of VCR, was interviewed by Calderwood & Harkness on October 4, 2023, at the Firm's Miami office. Daskine was accompanied at that interview by his personal counsel, James Corwin Merritt of Merritt & Dunleavy LLP, 201 South Biscayne Boulevard, Suite 2700, Miami, FL 33131. The October 4, 2023 interview addressed Daskine's role in the management and operations of VCR, his knowledge of the vendor relationships with GSC and SPS, and his involvement in the revenue-recognition practices at issue.
Following the first interview, Calderwood & Harkness sent a letter to Merritt & Dunleavy LLP on October 25, 2023, requesting that Daskine produce additional documents identified during the investigation team's review, including personal financial records, bank statements for GSC and SPS, and communications with Serrano and Prescott during the scheme period. The letter also requested that Daskine make himself available for a follow-up interview to address matters that could not be fully covered during the first session, as well as additional evidence developed subsequent to the October 4 interview.
As of this report date, Daskine, through his counsel Mr. Merritt, has declined a follow-up interview. Merritt & Dunleavy LLP's letter of November 10, 2023, stated that Daskine "does not believe a second interview is warranted at this time" and that "Mr. Daskine has cooperated fully with the investigation and has nothing further to add to his prior testimony." Calderwood & Harkness views this refusal as significant and has documented it in the Investigation file. The refusal, together with Daskine's role and the documentary evidence developed to date, will be addressed in the Final Investigation Report and in the personnel-action recommendations anticipated in mid-December 2023.
With respect to document production, Merritt & Dunleavy LLP has provided limited additional documentation in response to the October 25, 2023 request. The production consisted of thirty-seven (37) documents, primarily consisting of email communications between Daskine and VCR operational staff that do not directly relate to the shell entities. Notably absent from the production were personal bank records, GSC and SPS bank statements, and communications between Daskine and Serrano during the scheme period. Calderwood & Harkness has sent a follow-up letter dated November 20, 2023, reiterating its request for these categories of documents and noting the deficiencies in the October production.
Daskine's connection to Gulf Standard Contracting LLC ("GSC"), formed March 12, 2021, and Suncoast Property Services LLC ("SPS"), formed November 18, 2021, has been further substantiated through the shell-entity analysis described in Section III below. In particular, forensic tracing performed by Crestline has confirmed that Daskine is the beneficial owner of GSC through a nominee arrangement and is the sole member of SPS. Additionally, fund-flow analysis has traced payments from VCR to GSC and SPS to expenditures that appear to have been for Daskine's personal benefit, including residential renovation work at Daskine's personal residence.
Daskine has remained on paid administrative leave since August 7, 2023, in accordance with the terms of his employment agreement and the administrative-leave protocol approved by the Audit Committee on August 4, 2023.
III. Shell-Entity Analysis — Progress Report
Calderwood & Harkness, with forensic accounting support from Crestline Forensic Advisory LLC (engagement partner Douglas Reinhardt, CPA, CFF; senior manager Priya Venkatesh, CPA; engagement number CFA-VHG-2023-0089), is preparing a comprehensive memorandum (the "Shell-Entity Analysis Memorandum") analyzing the three shell entities used in the expense-reimbursement scheme that is at the center of one of the two principal tracks of the Investigation. The Shell-Entity Analysis Memorandum is expected to be finalized by late November 2023 and will be included as an appendix to the Final Investigation Report.
The following is a summary of the findings to date for each of the three shell entities, as well as the aggregate findings across the scheme.
Gulf Standard Contracting LLC ("GSC")
GSC is a Florida limited liability company formed on March 12, 2021, with the Florida Division of Corporations. Its registered agent is Ryan Mateo Serrano. Based on the investigation team's analysis of corporate formation records, bank-account signature cards and beneficial-ownership certifications obtained from Seaside Community Bank (Destin, FL), and testimony provided by Serrano during his September 27, 2023 interview, the sole beneficial owner of GSC is Garrett W. Daskine, who holds his membership interest through a nominee arrangement. Serrano served as the nominal registered agent and signatory on the GSC bank account and was responsible for the day-to-day administration of the entity, including the preparation and submission of invoices to VCR.
A total of nineteen (19) invoices were submitted by GSC to VCR during the scheme period, totaling $812,400. The invoices purported to be for capital-improvement work at VCR properties, including renovations, materials procurement, and construction-related services. The largest single invoice was Invoice No. GSC-2023-007, dated February 14, 2023, in the amount of $94,500, described on its face as "lobby renovation materials — Coral Dune Phase III." Crestline's forensic review has found no evidence that GSC performed any legitimate contracting services for VCR or any other entity. GSC has no employees, no contractor licenses, no insurance policies, and no operational history beyond the submission of invoices to VCR and the receipt of corresponding payments.
Clearwater Design Collective Inc. ("CDC")
CDC is a Florida corporation formed on June 4, 2021, with the Florida Division of Corporations. Its registered agent is Ryan Mateo Serrano. Based on corporate formation records, Florida Division of Corporations annual report filings, and bank records obtained from Fenmore National Bank, the sole shareholder of CDC is Nicole Prescott. As with GSC, Serrano served as the registered agent and was involved in the administration of the entity.
A total of sixteen (16) invoices were submitted by CDC to VCR during the scheme period, totaling $587,600. The invoices purported to be for design and interior-improvement services at VCR properties. Crestline's forensic review has found no evidence that CDC rendered any legitimate design or interior-improvement services for VCR or any other entity. CDC has no employees (other than Prescott as nominal sole shareholder), no design-industry registrations or certifications, no portfolio of work product, and no operational history beyond the submission of invoices to VCR and the receipt of corresponding payments.
Suncoast Property Services LLC ("SPS")
SPS is a Florida limited liability company formed on November 18, 2021, with the Florida Division of Corporations. Unlike GSC and CDC, for which Serrano served as registered agent, the registered agent for SPS is Panhandle Agent Services Inc., a commercial registered-agent service located in Tallahassee, Florida. This distinction is noted as it may have been intended to create distance between SPS and the other two entities. The sole member of SPS is Garrett W. Daskine, as confirmed through formation records and bank-account documentation obtained from Halcyon Capital Markets (Destin, FL).
A total of twelve (12) invoices were submitted by SPS to VCR during the scheme period, totaling $430,000. The invoices purported to be for property-maintenance services at VCR properties. Crestline's forensic review has found no evidence that SPS rendered any legitimate property-maintenance or related services for VCR or any other entity. SPS has no employees, no maintenance contracts with any properties, and no operational history beyond the submission of invoices to VCR and the receipt of corresponding payments.
Aggregate Findings
Across the three shell entities, a total of forty-seven (47) fictitious purchase orders were created and processed through VCR's accounts-payable system during the scheme period of approximately July 2021 through June 2023 (approximately twenty-four months). The aggregate improper payments made by VCR to the three entities are as follows:
Crestline's forensic tracing of funds flowing from VCR to the shell entities has identified that the funds were used for range personal expenditures by the scheme participants, including but not limited to the following:
•  Residential renovation work at Daskine's personal residence at 312 Harbor View Lane, Destin, FL 32541, including payments to a general contractor, materials suppliers, and subcontractors, totaling approximately $385,000 in traced expenditures;
•  Boat-slip fees at HarborWalk Marina (Destin, FL) in Daskine's name;
•  Luxury-goods purchases at various retailers, including charges consistent with jewelry, designer apparel, and electronics; and
•  Personal credit-card payments made from GSC, CDC, and SPS bank accounts to credit-card accounts in the names of Daskine, Prescott, and, to a lesser extent, Serrano.
The detailed fund-flow analysis, including source-and-use schedules for each entity and each identified recipient, is being finalized by Crestline and will be incorporated into the Shell-Entity Analysis Memorandum. Calderwood & Harkness anticipates that the final fund-flow tracing will account for substantially all of the $1,830,000 in improper payments and will establish the proportionate personal benefit received by each of the three individuals involved.
IV. Revenue-Recognition Analysis — Update
As reported in Interim Status Report No. 2, the Investigation has identified premature revenue recognition of timeshare-interest deposits at VCR totaling $26.4 million across four fiscal quarters. The overstatements by quarter are as follows:
The scheme involved the booking of timeshare-interest purchase deposits as completed-sale revenue upon the signing of purchase agreements by timeshare purchasers, rather than deferring revenue recognition until the expiration of the statutory ten-day rescission period mandated by Florida Statute § 721.10. Under this statute, a purchaser of a timeshare interest in Florida is entitled to cancel the purchase agreement within ten days of the later of the date of execution of the agreement or the date the purchaser receives a copy of the public offering statement. Revenue recognition upon signing, without regard to the unexpired rescission period, is inconsistent with the applicable accounting standards, as a completed transaction cannot be recognized when a substantive contractual right of cancellation exists and has not yet lapsed.
In many cases during the investigated period, purchasers exercised their rescission rights within the statutory period. However, the revenue associated with those rescinded transactions was not reversed until the following quarter, creating a persistent overstatement that rolled forward from quarter to quarter. This practice had the effect of inflating VCR's reported revenue in each affected quarter and, because VCR's financial results are consolidated into VHG's financial statements, the overstatement impacted VHG's consolidated financial reporting.
VCR's timeshare rescission rate during the investigated period (Q3 FY 2022 through Q2 FY 2023) was approximately 14.3%, which is notably higher than the industry average of approximately 11% as reported by the American Resort Development Association. The elevated rescission rate exacerbated the magnitude of the revenue overstatement because a greater proportion of prematurely recognized revenue was subsequently reversed.
The key properties involved in the premature revenue-recognition practice were Coral Dune Resort & Residences, specifically Phase III timeshare units located at 14200 Emerald Coast Parkway, Destin, FL 32541, and Palmetto Bluff Club, specifically Phase II timeshare units located at 3950 Longboat Key Drive, Sarasota, FL 34228. Both properties are high-volume timeshare-sales locations within the VCR portfolio and together account for the substantial majority of the identified overstatement.
Crestline is preparing a comprehensive ASC 606 analysis memorandum (the "Revenue-Recognition Analysis Memorandum"), which is expected to be completed in late December 2023. The Revenue-Recognition Analysis Memorandum will quantify the impact of the premature revenue recognition on VHG's consolidated financial statements and will provide the accounting analysis necessary to support the restatement of the affected periods. Preliminary quantification of the impact is as follows:
•  FY 2022 Revenue Overstatement: $10.8 million, representing the combined overstatement for Q3 FY 2022 ($4.7 million) and Q4 FY 2022 ($6.1 million).
•  VCR FY 2022 Reported Revenue: $438.7 million. VCR represented approximately 23.46% of VHG's consolidated revenue of $1.87 billion for FY 2022.
•  After-Tax Income Overstatement for FY 2022: Approximately $8.17 million, calculated as $10.8 million multiplied by (1 minus 0.243), applying VHG's effective tax rate of 24.3% for FY 2022. This after-tax overstatement represents approximately 5.74% of VHG's reported FY 2022 net income of $142.3 million.
The implications of the revenue-recognition irregularities for VHG's certifications under Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 continue to be assessed by the investigation team in coordination with Westlake Burris & Holt LLP and HSA. As previously reported, HSA has identified a material weakness in VHG's internal controls over financial reporting related to VCR's timeshare revenue-recognition processes. The scope and remediation of this material weakness will be addressed in the Remediation Recommendations Memorandum expected in early January 2024.
V. Document Review — Status Update
As previously reported, the Investigation's document-review workstream has involved the collection, processing, and review of documents from identified custodians at VCR and VHG. The following is a summary of the current status of the document review:
Collection. Approximately 1.2 million documents have been collected from eight (8) of the eleven (11) identified custodians. The remaining three custodians are non-priority custodians whose collections are expected to be completed in December 2023, though the investigation team does not anticipate that those collections will yield material new evidence beyond what has already been identified.
Processing and Filtering. Following collection, the documents were processed by Triton discovery Solutions Inc. ("Triton") (500 Seventh Avenue, 14th Floor, New York, NY 10018). De-duplication, de-NISTing (removal of system files and non-user-generated content), and application of search-term filters and date-range restrictions reduced the corpus to the documents requiring substantive review. The TAR 2.0 (Technology-Assisted Review) predictive-coding workflow, managed by Triton, was then applied to further prioritize the document population. Approximately 347,000 documents were identified for substantive review following the application of these protocols.
Review Status. The substantive document review is substantially complete as of this reporting period. The review has been conducted by the Calderwood & Harkness investigation team, including Liam Donahue, Steven Hollander, and contract attorneys working under the supervision of the Firm's associates and partners.
Privilege Log. A total of 4,218 documents have been logged on the privilege log as withheld or redacted on grounds of attorney-client privilege and/or work-product protection. The privilege log is being finalized by Liam Donahue and Steven Hollander and is expected to be completed in late December 2023. The log will be available for production to the SEC, if required, in connection with the phased voluntary production described in Section VI below, and care is being taken to ensure that privilege designations are defensible and consistent with applicable case law.
VI. Coordination with SEC Division of Enforcement
As reported in Interim Status Report No. 2, the SEC Division of Enforcement opened a preliminary inquiry (File No. HO-14237) in September 2023, following VHG's filing of the Form 8-K under Item 4.02 on August 14, 2023. The preliminary inquiry is being handled by the SEC's Miami Regional Office.
Calderwood & Harkness has continued to coordinate with Westlake Burris & Holt LLP (Irene Castellanos, lead partner, 600 Brickell Avenue, Suite 3100, Miami, FL 33131), VHG's outside securities counsel, on the strategy for voluntary production of non-privileged Investigation materials to the SEC. This coordination is being conducted in accordance with the memorandum on SEC voluntary-production strategy and privilege considerations prepared by Calderwood & Harkness on September 15, 2023, which was reviewed and approved by the Audit Committee.
The team is proceeding with a phased production approach, as outlined in the September 15, 2023 memorandum:
(a) Phase 1 — Non-Privileged Financial Records and Transactional Data. Non-privileged financial records and transactional data relating to VCR's timeshare-interest revenue, including general-ledger entries, journal entries, source documents for the affected transactions, and the relevant accounts-payable and accounts-receivable records, have been organized for production. This first phase of production is expected to be delivered to the SEC in coordination with Westlake Burris & Holt LLP following the completion of the document review and the finalization of the privilege log.
(b) Privilege Protections. Privilege protections for Calderwood & Harkness's work product, including interview memoranda, legal analyses, and internal strategy communications, are being carefully maintained. Additionally, Crestline's forensic work product is protected under the Kovel doctrine (United States v. Kovel, 296 F.2d 918 (2d Cir. 1961)) as work performed at the direction of and for the benefit of counsel in connection with the rendering of legal services. All Crestline deliverables have been marked as privileged and confidential, and the engagement structure has been documented to support the application of the Kovel doctrine.
(c) Selective-Waiver Considerations. No selective-waiver issues have arisen to date. The investigation team is mindful of the limitations on the selective-waiver doctrine in the Eleventh Circuit and is structuring the voluntary production to avoid any inadvertent waiver of privilege over protected materials.
As of this report date, no formal subpoena has been issued by the SEC in connection with the preliminary inquiry. Additionally, no Wells notice has been received by VHG or any individual subject of the Investigation, and no referral to the United States Department of Justice has been made, to our knowledge. Calderwood & Harkness will advise the Audit Committee immediately of any material developments in the SEC's inquiry, including the issuance of any subpoena, Wells notice, or DOJ referral.
VII. Coordination with HSA and Disclosure Matters
Calderwood & Harkness continues to coordinate with Hargrove, Steen & Aldrich LLP ("HSA") (William "Bill" Gentry, lead engagement partner, 101 East Kennedy Boulevard, Suite 3200, Tampa, FL 33602), VHG's independent registered public accounting firm, regarding the intersection of the Investigation with HSA's audit and review activities. This coordination is focused on ensuring that HSA has sufficient information to assess the impact of the Investigation's findings on VHG's financial statements and internal controls, while maintaining the privilege protections applicable to the Investigation.
As previously reported, VHG's Form 8-K under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review) was filed with the SEC on August 14, 2023. The Form 8-K covered the following financial statements: (i) FY 2022 audited financial statements (Q3 and Q4 FY 2022); and (ii) Q1 FY 2023 unaudited interim financial statements. The filing disclosed that, based on the preliminary findings of the Investigation and the recommendation of the Audit Committee, VHG's previously issued financial statements for the affected periods should no longer be relied upon due to the premature recognition of timeshare-interest revenue.
The restatement of VHG's affected filings — specifically, the amended Annual Report on Form 10-K for FY 2022 and the amended Quarterly Reports on Form 10-Q for Q1 FY 2023 and Q2 FY 2023 — is being coordinated by Westlake Burris & Holt LLP in consultation with HSA and with input from Crestline's Revenue-Recognition Analysis Memorandum (expected late December 2023). The amended filings are expected to be prepared and filed following the completion of the Investigation, which is currently targeted for the first or second week of January 2024. Calderwood & Harkness anticipates that the Revenue-Recognition Analysis Memorandum will provide HSA with the quantitative and qualitative analysis necessary to support its re-audit and re-review of the affected financial statements.
VIII. Upcoming Activities and Timeline
The Investigation is proceeding in accordance with the timeline previously communicated to the Audit Committee, with the Final Investigation Report targeted for delivery in the first or second week of January 2024. The following activities are planned for the period from this report date through the anticipated conclusion of the Investigation:
Second Interview of Ryan Mateo Serrano. A second interview of Serrano is anticipated in early December 2023, pursuant to the terms of the Cooperation Agreement executed on November 15, 2023. The purpose of this interview will be to obtain a detailed account from Serrano regarding the creation of the forty-seven (47) fictitious purchase orders, the internal approval and payment-processing mechanisms by which those purchase orders were converted into payments from VCR to the three shell entities, and the fund-flow mechanics by which funds were disbursed from the shell entities to the personal benefit of the scheme participants. The scheduling of this interview is being coordinated with Serrano's counsel, Marco A. Ruiz.
Shell-Entity Analysis Memorandum. The comprehensive Shell-Entity Analysis Memorandum, incorporating Crestline's forensic tracing and fund-flow analysis, is expected to be finalized in late November 2023.
Personnel Action Recommendations. Calderwood & Harkness anticipates providing formal recommendations to the Audit Committee in mid-December 2023 regarding personnel actions with respect to the three individuals who have been on administrative leave since August 7, 2023: Garrett W. Daskine, Nicole Prescott, and Ryan Mateo Serrano. These recommendations will include:
•  Analysis of the applicable employment-agreement provisions for each individual, including termination-for-cause definitions, notice requirements, and cure periods;
•  Clawback considerations under VHG's Executive Compensation Clawback Policy (adopted effective October 2, 2023, in compliance with SEC Rule 10D-1 and NYSE Listed Company Manual Section 303A.14), as well as contractual clawback provisions in the individuals' respective employment agreements;
•  Analysis of potential indemnification obligations under VHG's Amended and Restated Certificate of Incorporation, Bylaws, and applicable Florida law; and
•  D&O insurance implications under the primary directors-and-officers liability insurance policy issued by North Atlantic Indemnity Corp. (Policy No. NAI-DOL-2023-004891, with limits of $25 million per claim and $50 million in the aggregate) and the Side A difference-in-conditions ("DIC") coverage issued by Ironbridge Specialty Insurance Ltd. (limits of $15 million).
Revenue-Recognition Analysis Memorandum (ASC 606). Crestline's comprehensive analysis of the premature revenue-recognition practices under ASC 606 is expected to be completed in late December 2023.
Expense-Reimbursement Irregularity Analysis Memorandum. A comprehensive memorandum analyzing the expense-reimbursement irregularities — i.e., the fictitious-vendor scheme involving the three shell entities — is expected to be completed in late December 2023 and will incorporate the findings of the Shell-Entity Analysis Memorandum, Serrano's second-interview testimony, and the full documentary record.
Remediation Recommendations Memorandum. Calderwood & Harkness will prepare a memorandum setting forth recommendations for remedial measures to address the control deficiencies and other weaknesses identified through the Investigation. This memorandum is expected in early January 2024 and will address, among other things, enhancements to VCR's vendor-onboarding and accounts-payable processes, improvements to the revenue-recognition controls for timeshare-interest sales, and organizational and reporting-structure changes at the division level.
Final Investigation Report. The Final Investigation Report is targeted for delivery to the Audit Committee in the first or second week of January 2024. The Final Report will consolidate the findings from all workstreams of the Investigation, including the shell-entity analysis, the revenue-recognition analysis, the witness-interview testimony, and the document-review results, and will include formal findings, conclusions, and recommendations.
IX. Investigation Costs — Interim Summary
The following is a summary of the Investigation costs incurred through this reporting period and the estimated costs through the close of the Investigation:
Calderwood & Harkness LLP
Fees incurred through this reporting period total approximately $2,500,000 of an estimated total of $3,420,000 through Investigation close. The hourly rates applicable to the Calderwood & Harkness team members working on this matter are as follows:
Crestline Forensic Advisory LLC
Fees incurred to date total approximately $850,000 of the $1,150,000 flat-fee engagement. The engagement contemplates approximately 3,067 total hours at a blended rate of $375 per hour. The engagement letter contains overage provisions that allow for additional billing at the $375 blended rate for hours in excess of 4,500, though the investigation team does not currently anticipate exceeding that threshold.
Triton discovery Solutions Inc.
Fees incurred to date total approximately $420,000 of an estimated total of $487,000. Triton's fees cover hosting, processing, TAR licensing, and production services in connection with the document-review workstream.
Total Estimated Investigation Cost
The estimated total cost of the Investigation through close is approximately $5,057,000, broken down as follows:
These estimates are subject to adjustment based on the scope of remaining activities, including the possibility of additional witness interviews, the outcome of the pending document-production request to Merritt & Dunleavy LLP on behalf of Daskine, and any developments in the SEC preliminary inquiry that may require additional work by the investigation team.
X. Recommendations and Items Requiring Audit Committee Action
Calderwood & Harkness respectfully directs the Audit Committee's attention to the following items:
Serrano Cooperation Agreement. The executed Cooperation Agreement between VHG and Ryan Mateo Serrano, dated November 15, 2023, has been provided to the Audit Committee Chair, Diane Kowalski, for review. No further Audit Committee action is required at this time with respect to the Cooperation Agreement. However, the Committee should be prepared to consider and approve the non-cause termination of Serrano as recommended in the agreement terms, at the appropriate time and in coordination with VHG General Counsel Patricia Navarro. The timing of Serrano's formal termination will be addressed in the personnel-action recommendations anticipated in mid-December 2023.
Personnel Actions. The Audit Committee should anticipate receiving from Calderwood & Harkness formal recommendations regarding personnel actions in mid-December 2023. Based on the current state of the evidence, the Firm anticipates recommending termination of Garrett W. Daskine for cause, termination of Nicole Prescott for cause, and non-cause termination of Ryan Mateo Serrano (in accordance with the Cooperation Agreement). These recommendations will be accompanied by supporting analysis of employment-agreement provisions, clawback considerations, and indemnification and insurance implications.
SEC Coordination. Calderwood & Harkness will continue to coordinate with Westlake Burris & Holt LLP on all matters relating to the SEC preliminary inquiry (File No. HO-14237) and will advise the Audit Committee immediately of any material developments, including the issuance of any subpoena, Wells notice, or referral to the Department of Justice. The Firm does not recommend any change to the current voluntary-cooperation posture at this time.
XI. Privilege and Confidentiality Reminder
This Interim Status Report No. 3, and all prior interim status reports, constitute attorney-client privileged communications and attorney work product prepared at the direction of the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. in connection with Calderwood & Harkness LLP's engagement as special investigation counsel. The protections of the attorney-client privilege and the work-product doctrine attach to this report and its contents.
Distribution of this report should be strictly limited to the members of the Audit Committee — Diane Kowalski (Chair), Reginald Faulkner, and Sandra Yeung. Any further dissemination of this report or its contents, whether to other members of the Board of Directors, VHG management, outside advisors, or any third party, requires the prior written approval of the Audit Committee Chair in consultation with Calderwood & Harkness. Unauthorized dissemination may result in the waiver of applicable privileges.
The Audit Committee is reminded that the work product of Crestline Forensic Advisory LLC, including all reports, memoranda, analyses, and communications prepared by Crestline in connection with the Investigation, is protected under the Kovel doctrine as work performed by a non-attorney agent at the direction of and for the benefit of counsel in connection with the rendering of legal services. The Kovel protections are maintained through the structure of the engagement, under which Crestline was retained by Calderwood & Harkness (rather than directly by VHG) and reports to the Firm in its capacity as agent of counsel. The integrity of this engagement structure should be preserved, and all communications with Crestline should continue to be routed through Calderwood & Harkness.
We remain available to discuss this report and any questions the Audit Committee may have at the Committee's convenience. We anticipate providing Interim Status Report No. 4 in approximately three to four weeks, covering the period through mid-to-late December 2023.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Howard Quinn, Partner 200 South Biscayne Boulevard, Suite 4400 Miami, FL 33131 Telephone: (305) 555-7200
Email: hquinn@calderwoodharkness.com
Date: November 22, 2023
cc: Conrad Ashby, Partner, Calderwood & Harkness LLP Liam Donahue, Senior Associate, Calderwood & Harkness LLP
Enclosures: None. All referenced memoranda, interview memoranda, and supporting documentation are maintained in the privileged Investigation file at Calderwood & Harkness LLP and are available for the Audit Committee's review upon request.
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT This document and its contents are protected by the attorney-client privilege and the work-product doctrine. Any unauthorized review, use, disclosure, or distribution is prohibited.
Entity | No. of Invoices | Total Payments | Beneficial Owner
Gulf Standard Contracting LLC | 19 | $812,400 | Garrett W. Daskine (via nominee)
Clearwater Design Collective Inc. | 16 | $587,600 | Nicole Prescott
Suncoast Property Services LLC | 12 | $430,000 | Garrett W. Daskine
Total | 47 | $1,830,000
Quarter | Period Ending | Overstatement Amount
Q3 FY 2022 | September 30, 2022 | $4.7 million
Q4 FY 2022 | December 31, 2022 | $6.1 million
Q1 FY 2023 | March 31, 2023 | $9.8 million
Q2 FY 2023 | June 30, 2023 | $5.8 million
Total | $26.4 million
Timekeeper | Role | Hourly Rate
Howard Quinn | Partner (Lead) | $1,350
Conrad Ashby | Partner | $1,275
Liam Donahue | Senior Associate | $895
Steven Hollander | Associate | $725
Paralegal Staff | Various | $395
Vendor | Estimated Total
Calderwood & Harkness LLP | $3,420,000
Crestline Forensic Advisory LLC | $1,150,000
Triton discovery Solutions Inc. | $487,000
Total | $5,057,000

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

INTERIM STATUS REPORT NO. 3

TO THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS VERIMARK HOSPITALITY GROUP INC.

CALDERWOOD & HARKNESS LLP

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