1021-00008 · Client 1021 · Correspondence

letter-to-hsa-coordination.docx DOCUMENT Litigation

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP Attorneys at Law 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131 Telephone: (305) 714-8800 Facsimile: (305) 714-8801 www.calderwoodharkness.com

Howard Quinn Partner Direct: (305) 714-8812 hquinn@calderwoodharkness.com

August 9, 2023

VIA HAND DELIVERY AND ELECTRONIC MAIL (wgentry@hsa-cpa.com)

William "Bill" Gentry, CPA Lead Engagement Partner Hargrove, Steen & Aldrich LLP 101 East Kennedy Boulevard, Suite 3200 Tampa, Florida 33602

Re: Coordination of Audit and Investigation Activities — Verimark Hospitality Group Inc. (Internal Investigation)

Matter Reference: 1021-00008

Dear Bill:

I. Introduction and Purpose

I write in my capacity as the Responsible Partner at Calderwood & Harkness LLP ("C&H" or the "Firm") in connection with the matter referenced above. As you are aware, C&H represents the Audit Committee (the "Audit Committee") of the Board of Directors of Verimark Hospitality Group Inc. ("VHG"), a Delaware corporation whose common stock is publicly traded on the Nasdaq Stock Market under the ticker symbol VMRK. VHG maintains its principal executive offices at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. The Audit Committee is currently composed of three independent directors: Diane Kowalski (Chair), Reginald Faulkner, and Sandra Yeung.

Calderwood & Harkness was formally engaged by the Audit Committee on July 17, 2023, pursuant to a written engagement letter of the same date, to conduct an independent internal investigation into certain expense-reporting irregularities and revenue-recognition practices at VHG's wholly owned subsidiary, Verimark Coastal Resorts LLC ("VCR"), a Florida limited liability company with its principal office at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541. The investigation was formally opened on July 24, 2023, with the issuance of company-wide and targeted document-preservation notices to relevant custodians.

The purpose of this letter is threefold. First, it is intended to establish clear and workable protocols for the coordination of C&H's investigation on behalf of the Audit Committee with Hargrove, Steen & Aldrich LLP's ("HSA") ongoing audit and interim review activities for VHG. Second, it sets forth the terms governing information-sharing arrangements between our respective teams. Third, it addresses the protections that must be maintained with respect to privileged materials generated in the course of the investigation. We believe that a well-defined coordination framework will serve the interests of all parties, facilitate the efficient discharge of our respective responsibilities, and ensure that the Audit Committee receives the benefit of both the independent investigation and the external audit process in a manner that preserves all applicable privileges.

II. Background and Reference to HSA's June 19, 2023 Communication

We acknowledge and appreciate HSA's longstanding role as VHG's independent registered public accounting firm. HSA has served in that capacity since VHG's fiscal year ending December 31, 2019, and we recognize the depth of institutional knowledge that HSA has accumulated regarding VHG's operations, internal controls, and financial reporting practices.

This letter follows upon, and is informed in significant part by, the written communication dated June 19, 2023, from you to VHG's Chief Financial Officer, Thomas Rhett Griffith, and to Audit Committee Chair Diane Kowalski. In that communication, HSA identified a potential material weakness relating to VCR's internal controls over financial reporting, which was discovered during HSA's interim review procedures performed in connection with VHG's Quarterly Report on Form 10-Q for the quarter ending March 31, 2023 (the "Q1 2023 Interim Review").

Specifically, HSA noted that approximately $9.8 million in timeshare-interest deposits at VCR properties had been recorded as completed-sale revenue in Q1 2023, notwithstanding that the applicable rescission periods — ten (10) calendar days under Florida Statute § 721.10 — had not expired before the close of the quarter. This finding raised serious questions about VCR's application of the revenue-recognition criteria set forth in Accounting Standards Codification Topic 606 (Revenue from Contracts with Customers) ("ASC 606") and related guidance applicable to timeshare and vacation-ownership transactions.

HSA's June 19, 2023 communication was a significant factor in the Audit Committee's decision, reached during an executive session of the Board held on July 10, 2023, to retain independent outside counsel to conduct a thorough investigation. We understand that this matter has also given rise to HSA's own professional concerns, and that HSA may need to perform additional audit and review procedures in connection with VHG's fiscal year 2022 annual audit, the Q1 2023 interim review, and the upcoming interim review for the quarter ending June 30, 2023 (the "Q2 2023 Interim Review"). We are committed to ensuring that our investigation does not impede or unduly complicate HSA's ability to discharge its independent obligations.

III. Scope of the Investigation

For HSA's reference, and to provide context for the coordination protocols set forth below, we describe briefly the two principal workstreams of the investigation.

(a) Revenue-Recognition Irregularities. The first workstream involves a detailed examination of the premature recognition of timeshare-interest deposits at VCR-managed properties, with a particular focus on two properties: (i) the Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, Florida 32541, and (ii) the Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228. The period under examination for this workstream spans from Q3 2022 (the quarter ending September 30, 2022) through Q2 2023 (the quarter ending June 30, 2023), encompassing four fiscal quarters. The investigation team is reviewing, among other things, the timing and manner of revenue recognition for timeshare-interest sales, the treatment of buyer rescission rights under applicable Florida law, the accuracy of management's representations to HSA during the relevant interim and annual review and audit periods, and any internal communications that bear on the intent and knowledge of the individuals involved.

(b) Expense-Reporting Irregularities. The second workstream involves an examination of potentially fictitious vendor invoices and purchase orders that appear to have been submitted through VCR's capital-improvement budgets during the period from approximately July 2021 through June 2023. This workstream encompasses a review of vendor-approval processes, purchase-order authorization workflows, payment disbursement records, and the existence and legitimacy of vendors reflected in VCR's accounts payable system. Preliminary analysis by our forensic accounting advisors has identified certain patterns of concern that warrant further investigation.

The investigation team is composed of the following personnel:

Calderwood & Harkness LLP: Howard Quinn (Responsible Partner), Conrad Ashby (Partner), Liam Donahue (Lead Associate), and Steven Hollander (Associate).

Crestline Forensic Advisory LLC ("Crestline"): Douglas Reinhardt, CPA, CFF (Engagement Partner), and Priya Venkatesh, CPA (Senior Manager). Crestline's engagement is identified under engagement number CFA-VHG-2023-0089. Crestline has been retained as a forensic accounting advisor under the Kovel doctrine at the direction of the Audit Committee. See United States v. Kovel, 296 F.2d 918 (2d Cir. 1961). Accordingly, Crestline's work is performed under the supervision of, and at the direction of, C&H counsel, and the communications between Crestline and C&H are protected by the attorney-client privilege and the work-product doctrine.

Triton discovery Solutions Inc. ("Triton"): Triton has been engaged to provide electronic discovery and data-collection support for the investigation, including the forensic imaging of custodial devices, collection of electronic mail and other electronically stored information ("ESI"), and hosting of a document-review platform.

The investigation currently involves three subjects: Garrett W. Daskine (VCR Division President), Nicole Prescott (VCR Vice President of Finance), and Ryan Mateo Serrano (VCR Controller). All three individuals were placed on paid administrative leave effective August 7, 2023, pending the outcome of the investigation. Each has been instructed to preserve all documents and communications in his or her possession, custody, or control that may be relevant to the matters under investigation, and each has been advised not to communicate with other employees regarding the substance of the investigation.

IV. Information-Sharing Protocol

The orderly exchange of relevant information between the investigation team and HSA is essential to ensure that both the investigation and the external audit can proceed effectively. The following protocol is proposed to govern such exchanges.

A. Sharing of Information from HSA to the Investigation Team

We respectfully request that HSA make available to C&H and Crestline, upon reasonable request and at mutually convenient times, the following categories of materials to the extent they relate to VCR's revenue recognition, internal controls over financial reporting, expense-reimbursement processes, capital-improvement expenditure approvals, and vendor payment processes:

(1) Audit workpapers and supporting schedules from HSA's annual audit of VHG's financial statements for the fiscal year ending December 31, 2022, to the extent they pertain to VCR operations, timeshare-interest revenue recognition, and internal controls testing;

(2) Interim review documentation prepared in connection with HSA's Q1 2023 Interim Review, including, in particular, the workpapers that support HSA's identification of the $9.8 million in prematurely recognized timeshare-interest deposits;

(3) Any documentation prepared by HSA reflecting VCR's revenue-recognition policies, including management's documented application of ASC 606 to timeshare-interest sales, and any memoranda or working papers prepared by HSA evaluating the appropriateness of such policies;

(4) All prior written and electronic communications between HSA engagement team members and VCR finance personnel — including but not limited to Garrett W. Daskine, Nicole Prescott, and Ryan Mateo Serrano — regarding the application of ASC 606 to timeshare-interest sales, the treatment of buyer rescission periods, and the timing of revenue recognition;

(5) Any management representation letters received by HSA from VHG or VCR management for the fiscal year 2022 audit or the Q1 2023 Interim Review;

(6) Any documentation relating to HSA's assessment of VCR's capital-improvement expenditures, vendor-approval processes, purchase-order workflows, or accounts payable procedures; and

(7) Any additional findings, concerns, or observations that may arise in the course of HSA's ongoing audit or review work relating to VCR, as they come to HSA's attention.

We recognize that certain of these materials may be subject to HSA's own professional obligations regarding workpaper confidentiality. We are prepared to execute a reasonable access agreement, consistent with applicable PCAOB and AICPA standards, to facilitate the exchange. We ask that all such sharing be coordinated through the designated points of contact identified in Section IV.C below, to ensure an orderly process and to minimize disruption to HSA's ongoing engagement activities.

B. Sharing of Information from the Investigation Team to HSA

C&H recognizes that HSA, in its capacity as VHG's independent auditor, has a legitimate and important need for information developed during the investigation, insofar as such information is relevant to HSA's assessment of VHG's financial statements, internal controls, and compliance with applicable accounting standards. Accordingly, C&H will, at appropriate junctures and with the express authorization of the Audit Committee, share non-privileged factual findings with HSA to the extent necessary for HSA to fulfill its audit and review obligations under PCAOB auditing standards.

Such sharing will, however, be subject to the following limitations and conditions:

(1) Disclosures to HSA will be limited to factual information. Attorney mental impressions, legal analyses, strategy memoranda, and materials constituting attorney work product will not be disclosed to HSA, and HSA should not request or expect to receive such materials.

(2) Any disclosures of factual information to HSA will be documented in writing, including a description of the information disclosed and the date of disclosure. Each such disclosure will be approved in advance by the Audit Committee or its Chair, Diane Kowalski, prior to being made. C&H will maintain a log of all such disclosures.

(3) The timing and content of disclosures will be determined at C&H's discretion, in consultation with the Audit Committee, taking into account the stage of the investigation, the sensitivity of the information, and the potential impact of premature disclosure on the integrity of the investigation.

We believe this approach appropriately balances HSA's need for information against the imperative of preserving the integrity and privilege protections of the investigation.

C. Designated Points of Contact

To maintain orderly coordination and to avoid miscommunication, all substantive communications between C&H, Crestline, and HSA regarding the investigation and related audit matters shall be directed through the following designated points of contact:

For Calderwood & Harkness LLP:

• Primary: Howard Quinn, Partner — (305) 714-8812 / hquinn@calderwoodharkness.com

• Secondary: Liam Donahue, Associate — (305) 714-8847 / ldonahue@calderwoodharkness.com

For Hargrove, Steen & Aldrich LLP:

• Primary: William Gentry, Lead Engagement Partner — (813) 227-6500 / wgentry@hsa-cpa.com

All substantive communications between C&H or Crestline, on the one hand, and HSA, on the other hand, should flow through these individuals. To the extent HSA identifies an additional or alternative point of contact (such as an HSA in-house counsel or a quality-review partner), we request that HSA advise us promptly so that we may update our records accordingly.

V. Privilege Protections

A. Preservation of Attorney-Client Privilege and Work-Product Protections

We wish to emphasize certain critical points regarding the privileged nature of the investigation and the materials generated in connection therewith.

The investigation is being conducted under the direction and at the privilege of the Audit Committee of VHG's Board of Directors. Communications between C&H and the Audit Committee, and communications between C&H and Crestline made in furtherance of the rendering of legal advice, are protected by the attorney-client privilege. Work product generated by C&H attorneys and by Crestline personnel working at the direction of C&H is protected by the work-product doctrine. See Fed. R. Civ. P. 26(b)(3); Hickman v. Taylor, 329 U.S. 495 (1947); In re Grand Jury Subpoena Dated March 24, 2003, 265 F. Supp. 2d 321 (S.D.N.Y. 2003).

As noted above, Crestline Forensic Advisory LLC has been retained under the Kovel doctrine as an agent of counsel. Crestline's analyses, findings, work product, and communications with C&H are encompassed within the attorney-client privilege and the work-product doctrine. See United States v. Kovel, 296 F.2d 918 (2d Cir. 1961). The sharing of non-privileged factual information with HSA as described in Section IV.B above does not constitute, and should not be construed as, a waiver of privilege over attorney work product, legal conclusions, attorney mental impressions, or any other privileged materials.

We respectfully request that HSA treat all information received from the investigation team as confidential and refrain from disclosing such information to any third party, except to the extent required by applicable professional standards (including PCAOB auditing standards), regulatory requirements, or compulsory legal process. In the event HSA receives a request, subpoena, or other compulsory process directed at information received from the investigation team, we request that HSA promptly notify C&H and the Audit Committee before making any disclosure, to the extent permitted by law.

B. HSA's Independent Obligations

We acknowledge and respect that HSA has independent professional obligations that are not, and cannot be, circumscribed by this coordination protocol. HSA is bound by the auditing standards promulgated by the Public Company Accounting Oversight Board ("PCAOB"), including but not limited to AS 2401 (Consideration of Fraud in a Financial Statement Audit) and AS 2201 (An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements). HSA is also subject to the rules of professional conduct governing certified public accountants in the State of Florida, the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"), and the requirements of the Sarbanes-Oxley Act of 2002.

Nothing in this letter or in the coordination protocol set forth herein is intended to interfere with, limit, or qualify HSA's exercise of independent professional judgment. HSA remains free to conduct such additional audit procedures, tests, and inquiries as it deems necessary in its professional judgment, subject only to the coordination requests set forth in Section VII below with respect to investigation subjects.

If, in the course of its audit or review activities, HSA determines that it must communicate findings, observations, or conclusions to the SEC, the PCAOB, or any other regulatory body pursuant to its independent obligations — including, without limitation, reporting obligations under Section 10A of the Securities Exchange Act of 1934 — HSA will endeavor to provide reasonable advance notice to C&H and the Audit Committee before making any such communication, except where advance notice is prohibited by law, regulation, or applicable professional standards.

VI. Coordination with Other Parties

We wish to make HSA aware of certain other parties involved in this matter to facilitate orderly coordination.

VHG's outside securities counsel, Westlake Burris & Holt LLP ("WBH"), is advising VHG on its SEC disclosure obligations in connection with the matters under investigation. The WBH engagement is led by Irene Castellanos, Lead Partner, at WBH's office located at 600 Brickell Avenue, Suite 3100, Miami, Florida 33131. Among the matters on which WBH is advising are VHG's potential filing obligations under Form 8-K, including, in particular, whether a filing is required under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review), as well as potential restatement considerations.

We anticipate that HSA may need to coordinate directly with WBH on disclosure-related matters, including with respect to the content and timing of any Item 4.02 disclosure and the letter that HSA may be required to furnish to the SEC in connection with such a disclosure. We have no objection to direct communication between HSA and WBH on disclosure matters; however, we request that any such coordination be communicated to C&H to ensure that the investigation team maintains full awareness of developments that may affect the scope, timing, or conclusions of the investigation.

VHG's General Counsel, Patricia Navarro, has been informed of this coordination protocol and supports its implementation. Ms. Navarro has been cooperating fully with the investigation and has facilitated access to VHG's books, records, and systems as requested by C&H and Crestline.

Finally, we note that we are aware of the possibility that the SEC Division of Enforcement may open a preliminary inquiry or formal investigation into the matters at issue. In the event that occurs, prompt and coordinated communication regarding any regulatory requests, investigative subpoenas, or voluntary requests for production directed to HSA will be essential. We request that HSA promptly notify C&H if HSA receives any communication from the SEC, the PCAOB, or any other regulatory or law enforcement authority relating to VHG, VCR, or the matters under investigation.

VII. Avoidance of Interference with the Investigation

To preserve the integrity of the investigation and to avoid potential conflicts with the investigation team's interview schedule and the Upjohn protocols that have been implemented, we respectfully request that HSA refrain from conducting independent interviews, depositions, or other direct contacts with the three investigation subjects — Garrett W. Daskine, Nicole Prescott, and Ryan Mateo Serrano — without first coordinating with C&H through the designated points of contact identified in Section IV.C above. This request is not intended to prevent HSA from fulfilling its audit obligations; rather, it is intended to ensure that HSA's inquiries do not inadvertently compromise the investigation's interview sequencing, create confusion regarding applicable privilege protections, or interfere with the subjects' rights.

We note for your awareness that each of the three investigation subjects has retained individual legal counsel:

• Garrett W. Daskine is represented by Merritt & Dunleavy LLP (James Corwin Merritt, Partner);

• Nicole Prescott is represented by Langford Pace LLP (Candace O'Brien Langford, Partner); and

• Ryan Mateo Serrano is represented by Coletti & Ruiz PA (Marco A. Ruiz, Shareholder).

Any communications by HSA with these individuals should take into account the fact that each is represented by counsel. To the extent HSA determines that it must communicate directly with any investigation subject in order to fulfill its audit obligations, we ask that HSA first advise C&H so that we can coordinate appropriately and, if necessary, arrange for individual counsel to be present.

In addition, we request that any audit inquiries directed to VCR finance and accounting personnel who are witnesses to, but not subjects of, the investigation be coordinated through the designated points of contact to the extent practicable. We recognize that such coordination may not always be possible in the context of routine audit procedures, but we ask that HSA exercise reasonable efforts to avoid inquiries that could inadvertently compromise witness testimony or alert witnesses to the specific areas of investigative focus before the investigation team has had an opportunity to conduct its own interviews.

VIII. Document Preservation

As noted above, C&H issued comprehensive document-preservation notices to VHG on a company-wide basis, and to targeted VCR custodians, on July 24, 2023. These notices require the preservation of all documents and electronically stored information potentially relevant to the matters under investigation, and they suspend any routine document-retention or destruction schedules that might otherwise apply.

We respectfully request that HSA preserve all audit workpapers, correspondence, memoranda, notes (including handwritten notes), electronic communications, and any other records relating to VCR's revenue recognition, internal controls over financial reporting, expense reimbursements, capital-improvement expenditures, vendor-approval processes, purchase-order workflows, and vendor payment processes, from January 1, 2021 forward. We understand that HSA is already subject to professional obligations regarding the retention of audit workpapers under PCAOB Rule 3100 and AS 1215 (Audit Documentation), and the Sarbanes-Oxley Act, Section 802. This request is intended to supplement, not supplant, those existing obligations, and to ensure that HSA is aware of the specific categories of materials that are of particular relevance to the investigation.

We further request that HSA promptly notify C&H if HSA becomes aware of any risk of spoliation, destruction, alteration, or loss of documents or data relevant to the investigation, whether at HSA or at any third party known to HSA.

IX. Scheduling of Informational Interview with Mr. Gentry

As part of its investigation, the C&H team would like to schedule an informational interview with you to discuss HSA's Q1 2023 Interim Review findings in greater detail, including the circumstances surrounding HSA's identification of the $9.8 million revenue-recognition issue, the nature and extent of HSA's communications with VCR finance personnel on that topic, and any other observations or concerns that HSA may have. We would also welcome HSA's perspectives on VCR's internal control environment more broadly.

This interview would be informational in nature. Because HSA is not an employee of VHG, the interview would not be conducted under Upjohn warnings, and HSA would not be a represented party in the same sense as the investigation subjects. The interview would be conducted by Howard Quinn and Liam Donahue, with Douglas Reinhardt of Crestline present to assist with forensic accounting questions.

We propose scheduling this interview during the week of August 14, 2023, at a time and location convenient for you. We are happy to conduct the interview at HSA's Tampa offices, or at another mutually agreeable location. We anticipate the interview will require approximately two to three hours. If HSA desires to have its in-house counsel or outside legal counsel attend the interview, HSA is welcome to do so, and we request that HSA advise us in advance of any counsel who will be present.

X. Confirmation and Acknowledgment

We respectfully request that you confirm HSA's agreement to the coordination protocol set forth in this letter by signing and returning the enclosed copy of this letter in the space provided below, or by providing written confirmation via electronic mail to hquinn@calderwoodharkness.com. If HSA has any suggested modifications, clarifications, or additions to the protocol, we would welcome the opportunity to discuss them and ask that any such suggestions be communicated to me promptly.

We appreciate HSA's cooperation in this matter and recognize the professionalism with which HSA has handled these difficult circumstances. We believe that a coordinated approach will best serve the interests of VHG, its shareholders, and the Audit Committee, and we look forward to working with you and your team in the weeks and months ahead.

Please do not hesitate to contact me directly at (305) 714-8812 or hquinn@calderwoodharkness.com if you have any questions or wish to discuss any aspect of this letter.

Sincerely,

CALDERWOOD & HARKNESS LLP

By: ________

Howard Quinn Partner

200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131 Telephone: (305) 714-8812

Email: hquinn@calderwoodharkness.com

cc: (via electronic mail)

Diane Kowalski, Chair, Audit Committee, Verimark Hospitality Group Inc. Conrad Ashby, Partner, Calderwood & Harkness LLP Liam Donahue, Associate, Calderwood & Harkness LLP Patricia Navarro, General Counsel, Verimark Hospitality Group Inc. Douglas Reinhardt, CPA, CFF, Crestline Forensic Advisory LLC

Enclosure: Acknowledgment Copy (below)

ACKNOWLEDGMENT AND AGREEMENT

The undersigned, William Gentry, CPA, in his capacity as Lead Engagement Partner of Hargrove, Steen & Aldrich LLP for the Verimark Hospitality Group Inc. engagement, hereby acknowledges receipt of the foregoing letter dated August 9, 2023, from Howard Quinn, Partner, Calderwood & Harkness LLP, regarding the coordination of audit and investigation activities in connection with the internal investigation being conducted on behalf of the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc.

By signing below, the undersigned confirms that Hargrove, Steen & Aldrich LLP agrees to the coordination protocol set forth in the letter, subject to HSA's independent obligations under applicable professional standards, PCAOB auditing standards, SEC rules and regulations, and the Sarbanes-Oxley Act of 2002, and subject to any modifications that may be mutually agreed upon by the parties in writing.

HARGROVE, STEEN & ALDRICH LLP

By: ________

Name: William Gentry, CPA

Title: Lead Engagement Partner

Date: ________

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Attorneys at Law 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131 Telephone: (305) 714-8800 Facsimile: (305) 714-8801 www.calderwoodharkness.com
Howard Quinn Partner Direct: (305) 714-8812 hquinn@calderwoodharkness.com
August 9, 2023
VIA HAND DELIVERY AND ELECTRONIC MAIL (wgentry@hsa-cpa.com)
William "Bill" Gentry, CPA Lead Engagement Partner Hargrove, Steen & Aldrich LLP 101 East Kennedy Boulevard, Suite 3200 Tampa, Florida 33602
Re: Coordination of Audit and Investigation Activities — Verimark Hospitality Group Inc. (Internal Investigation)
Matter Reference: 1021-00008
Dear Bill:
I. Introduction and Purpose
I write in my capacity as the Responsible Partner at Calderwood & Harkness LLP ("C&H" or the "Firm") in connection with the matter referenced above. As you are aware, C&H represents the Audit Committee (the "Audit Committee") of the Board of Directors of Verimark Hospitality Group Inc. ("VHG"), a Delaware corporation whose common stock is publicly traded on the Nasdaq Stock Market under the ticker symbol VMRK. VHG maintains its principal executive offices at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. The Audit Committee is currently composed of three independent directors: Diane Kowalski (Chair), Reginald Faulkner, and Sandra Yeung.
Calderwood & Harkness was formally engaged by the Audit Committee on July 17, 2023, pursuant to a written engagement letter of the same date, to conduct an independent internal investigation into certain expense-reporting irregularities and revenue-recognition practices at VHG's wholly owned subsidiary, Verimark Coastal Resorts LLC ("VCR"), a Florida limited liability company with its principal office at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541. The investigation was formally opened on July 24, 2023, with the issuance of company-wide and targeted document-preservation notices to relevant custodians.
The purpose of this letter is threefold. First, it is intended to establish clear and workable protocols for the coordination of C&H's investigation on behalf of the Audit Committee with Hargrove, Steen & Aldrich LLP's ("HSA") ongoing audit and interim review activities for VHG. Second, it sets forth the terms governing information-sharing arrangements between our respective teams. Third, it addresses the protections that must be maintained with respect to privileged materials generated in the course of the investigation. We believe that a well-defined coordination framework will serve the interests of all parties, facilitate the efficient discharge of our respective responsibilities, and ensure that the Audit Committee receives the benefit of both the independent investigation and the external audit process in a manner that preserves all applicable privileges.
II. Background and Reference to HSA's June 19, 2023 Communication
We acknowledge and appreciate HSA's longstanding role as VHG's independent registered public accounting firm. HSA has served in that capacity since VHG's fiscal year ending December 31, 2019, and we recognize the depth of institutional knowledge that HSA has accumulated regarding VHG's operations, internal controls, and financial reporting practices.
This letter follows upon, and is informed in significant part by, the written communication dated June 19, 2023, from you to VHG's Chief Financial Officer, Thomas Rhett Griffith, and to Audit Committee Chair Diane Kowalski. In that communication, HSA identified a potential material weakness relating to VCR's internal controls over financial reporting, which was discovered during HSA's interim review procedures performed in connection with VHG's Quarterly Report on Form 10-Q for the quarter ending March 31, 2023 (the "Q1 2023 Interim Review").
Specifically, HSA noted that approximately $9.8 million in timeshare-interest deposits at VCR properties had been recorded as completed-sale revenue in Q1 2023, notwithstanding that the applicable rescission periods — ten (10) calendar days under Florida Statute § 721.10 — had not expired before the close of the quarter. This finding raised serious questions about VCR's application of the revenue-recognition criteria set forth in Accounting Standards Codification Topic 606 (Revenue from Contracts with Customers) ("ASC 606") and related guidance applicable to timeshare and vacation-ownership transactions.
HSA's June 19, 2023 communication was a significant factor in the Audit Committee's decision, reached during an executive session of the Board held on July 10, 2023, to retain independent outside counsel to conduct a thorough investigation. We understand that this matter has also given rise to HSA's own professional concerns, and that HSA may need to perform additional audit and review procedures in connection with VHG's fiscal year 2022 annual audit, the Q1 2023 interim review, and the upcoming interim review for the quarter ending June 30, 2023 (the "Q2 2023 Interim Review"). We are committed to ensuring that our investigation does not impede or unduly complicate HSA's ability to discharge its independent obligations.
III. Scope of the Investigation
For HSA's reference, and to provide context for the coordination protocols set forth below, we describe briefly the two principal workstreams of the investigation.
(a) Revenue-Recognition Irregularities. The first workstream involves a detailed examination of the premature recognition of timeshare-interest deposits at VCR-managed properties, with a particular focus on two properties: (i) the Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, Florida 32541, and (ii) the Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228. The period under examination for this workstream spans from Q3 2022 (the quarter ending September 30, 2022) through Q2 2023 (the quarter ending June 30, 2023), encompassing four fiscal quarters. The investigation team is reviewing, among other things, the timing and manner of revenue recognition for timeshare-interest sales, the treatment of buyer rescission rights under applicable Florida law, the accuracy of management's representations to HSA during the relevant interim and annual review and audit periods, and any internal communications that bear on the intent and knowledge of the individuals involved.
(b) Expense-Reporting Irregularities. The second workstream involves an examination of potentially fictitious vendor invoices and purchase orders that appear to have been submitted through VCR's capital-improvement budgets during the period from approximately July 2021 through June 2023. This workstream encompasses a review of vendor-approval processes, purchase-order authorization workflows, payment disbursement records, and the existence and legitimacy of vendors reflected in VCR's accounts payable system. Preliminary analysis by our forensic accounting advisors has identified certain patterns of concern that warrant further investigation.
The investigation team is composed of the following personnel:
Calderwood & Harkness LLP: Howard Quinn (Responsible Partner), Conrad Ashby (Partner), Liam Donahue (Lead Associate), and Steven Hollander (Associate).
Crestline Forensic Advisory LLC ("Crestline"): Douglas Reinhardt, CPA, CFF (Engagement Partner), and Priya Venkatesh, CPA (Senior Manager). Crestline's engagement is identified under engagement number CFA-VHG-2023-0089. Crestline has been retained as a forensic accounting advisor under the Kovel doctrine at the direction of the Audit Committee. See United States v. Kovel, 296 F.2d 918 (2d Cir. 1961). Accordingly, Crestline's work is performed under the supervision of, and at the direction of, C&H counsel, and the communications between Crestline and C&H are protected by the attorney-client privilege and the work-product doctrine.
Triton discovery Solutions Inc. ("Triton"): Triton has been engaged to provide electronic discovery and data-collection support for the investigation, including the forensic imaging of custodial devices, collection of electronic mail and other electronically stored information ("ESI"), and hosting of a document-review platform.
The investigation currently involves three subjects: Garrett W. Daskine (VCR Division President), Nicole Prescott (VCR Vice President of Finance), and Ryan Mateo Serrano (VCR Controller). All three individuals were placed on paid administrative leave effective August 7, 2023, pending the outcome of the investigation. Each has been instructed to preserve all documents and communications in his or her possession, custody, or control that may be relevant to the matters under investigation, and each has been advised not to communicate with other employees regarding the substance of the investigation.
IV. Information-Sharing Protocol
The orderly exchange of relevant information between the investigation team and HSA is essential to ensure that both the investigation and the external audit can proceed effectively. The following protocol is proposed to govern such exchanges.
A. Sharing of Information from HSA to the Investigation Team
We respectfully request that HSA make available to C&H and Crestline, upon reasonable request and at mutually convenient times, the following categories of materials to the extent they relate to VCR's revenue recognition, internal controls over financial reporting, expense-reimbursement processes, capital-improvement expenditure approvals, and vendor payment processes:
(1) Audit workpapers and supporting schedules from HSA's annual audit of VHG's financial statements for the fiscal year ending December 31, 2022, to the extent they pertain to VCR operations, timeshare-interest revenue recognition, and internal controls testing;
(2) Interim review documentation prepared in connection with HSA's Q1 2023 Interim Review, including, in particular, the workpapers that support HSA's identification of the $9.8 million in prematurely recognized timeshare-interest deposits;
(3) Any documentation prepared by HSA reflecting VCR's revenue-recognition policies, including management's documented application of ASC 606 to timeshare-interest sales, and any memoranda or working papers prepared by HSA evaluating the appropriateness of such policies;
(4) All prior written and electronic communications between HSA engagement team members and VCR finance personnel — including but not limited to Garrett W. Daskine, Nicole Prescott, and Ryan Mateo Serrano — regarding the application of ASC 606 to timeshare-interest sales, the treatment of buyer rescission periods, and the timing of revenue recognition;
(5) Any management representation letters received by HSA from VHG or VCR management for the fiscal year 2022 audit or the Q1 2023 Interim Review;
(6) Any documentation relating to HSA's assessment of VCR's capital-improvement expenditures, vendor-approval processes, purchase-order workflows, or accounts payable procedures; and
(7) Any additional findings, concerns, or observations that may arise in the course of HSA's ongoing audit or review work relating to VCR, as they come to HSA's attention.
We recognize that certain of these materials may be subject to HSA's own professional obligations regarding workpaper confidentiality. We are prepared to execute a reasonable access agreement, consistent with applicable PCAOB and AICPA standards, to facilitate the exchange. We ask that all such sharing be coordinated through the designated points of contact identified in Section IV.C below, to ensure an orderly process and to minimize disruption to HSA's ongoing engagement activities.
B. Sharing of Information from the Investigation Team to HSA
C&H recognizes that HSA, in its capacity as VHG's independent auditor, has a legitimate and important need for information developed during the investigation, insofar as such information is relevant to HSA's assessment of VHG's financial statements, internal controls, and compliance with applicable accounting standards. Accordingly, C&H will, at appropriate junctures and with the express authorization of the Audit Committee, share non-privileged factual findings with HSA to the extent necessary for HSA to fulfill its audit and review obligations under PCAOB auditing standards.
Such sharing will, however, be subject to the following limitations and conditions:
(1) Disclosures to HSA will be limited to factual information. Attorney mental impressions, legal analyses, strategy memoranda, and materials constituting attorney work product will not be disclosed to HSA, and HSA should not request or expect to receive such materials.
(2) Any disclosures of factual information to HSA will be documented in writing, including a description of the information disclosed and the date of disclosure. Each such disclosure will be approved in advance by the Audit Committee or its Chair, Diane Kowalski, prior to being made. C&H will maintain a log of all such disclosures.
(3) The timing and content of disclosures will be determined at C&H's discretion, in consultation with the Audit Committee, taking into account the stage of the investigation, the sensitivity of the information, and the potential impact of premature disclosure on the integrity of the investigation.
We believe this approach appropriately balances HSA's need for information against the imperative of preserving the integrity and privilege protections of the investigation.
C. Designated Points of Contact
To maintain orderly coordination and to avoid miscommunication, all substantive communications between C&H, Crestline, and HSA regarding the investigation and related audit matters shall be directed through the following designated points of contact:
For Calderwood & Harkness LLP:
•  Primary: Howard Quinn, Partner — (305) 714-8812 / hquinn@calderwoodharkness.com
•  Secondary: Liam Donahue, Associate — (305) 714-8847 / ldonahue@calderwoodharkness.com
For Hargrove, Steen & Aldrich LLP:
•  Primary: William Gentry, Lead Engagement Partner — (813) 227-6500 / wgentry@hsa-cpa.com
All substantive communications between C&H or Crestline, on the one hand, and HSA, on the other hand, should flow through these individuals. To the extent HSA identifies an additional or alternative point of contact (such as an HSA in-house counsel or a quality-review partner), we request that HSA advise us promptly so that we may update our records accordingly.
V. Privilege Protections
A. Preservation of Attorney-Client Privilege and Work-Product Protections
We wish to emphasize certain critical points regarding the privileged nature of the investigation and the materials generated in connection therewith.
The investigation is being conducted under the direction and at the privilege of the Audit Committee of VHG's Board of Directors. Communications between C&H and the Audit Committee, and communications between C&H and Crestline made in furtherance of the rendering of legal advice, are protected by the attorney-client privilege. Work product generated by C&H attorneys and by Crestline personnel working at the direction of C&H is protected by the work-product doctrine. See Fed. R. Civ. P. 26(b)(3); Hickman v. Taylor, 329 U.S. 495 (1947); In re Grand Jury Subpoena Dated March 24, 2003, 265 F. Supp. 2d 321 (S.D.N.Y. 2003).
As noted above, Crestline Forensic Advisory LLC has been retained under the Kovel doctrine as an agent of counsel. Crestline's analyses, findings, work product, and communications with C&H are encompassed within the attorney-client privilege and the work-product doctrine. See United States v. Kovel, 296 F.2d 918 (2d Cir. 1961). The sharing of non-privileged factual information with HSA as described in Section IV.B above does not constitute, and should not be construed as, a waiver of privilege over attorney work product, legal conclusions, attorney mental impressions, or any other privileged materials.
We respectfully request that HSA treat all information received from the investigation team as confidential and refrain from disclosing such information to any third party, except to the extent required by applicable professional standards (including PCAOB auditing standards), regulatory requirements, or compulsory legal process. In the event HSA receives a request, subpoena, or other compulsory process directed at information received from the investigation team, we request that HSA promptly notify C&H and the Audit Committee before making any disclosure, to the extent permitted by law.
B. HSA's Independent Obligations
We acknowledge and respect that HSA has independent professional obligations that are not, and cannot be, circumscribed by this coordination protocol. HSA is bound by the auditing standards promulgated by the Public Company Accounting Oversight Board ("PCAOB"), including but not limited to AS 2401 (Consideration of Fraud in a Financial Statement Audit) and AS 2201 (An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements). HSA is also subject to the rules of professional conduct governing certified public accountants in the State of Florida, the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"), and the requirements of the Sarbanes-Oxley Act of 2002.
Nothing in this letter or in the coordination protocol set forth herein is intended to interfere with, limit, or qualify HSA's exercise of independent professional judgment. HSA remains free to conduct such additional audit procedures, tests, and inquiries as it deems necessary in its professional judgment, subject only to the coordination requests set forth in Section VII below with respect to investigation subjects.
If, in the course of its audit or review activities, HSA determines that it must communicate findings, observations, or conclusions to the SEC, the PCAOB, or any other regulatory body pursuant to its independent obligations — including, without limitation, reporting obligations under Section 10A of the Securities Exchange Act of 1934 — HSA will endeavor to provide reasonable advance notice to C&H and the Audit Committee before making any such communication, except where advance notice is prohibited by law, regulation, or applicable professional standards.
VI. Coordination with Other Parties
We wish to make HSA aware of certain other parties involved in this matter to facilitate orderly coordination.
VHG's outside securities counsel, Westlake Burris & Holt LLP ("WBH"), is advising VHG on its SEC disclosure obligations in connection with the matters under investigation. The WBH engagement is led by Irene Castellanos, Lead Partner, at WBH's office located at 600 Brickell Avenue, Suite 3100, Miami, Florida 33131. Among the matters on which WBH is advising are VHG's potential filing obligations under Form 8-K, including, in particular, whether a filing is required under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review), as well as potential restatement considerations.
We anticipate that HSA may need to coordinate directly with WBH on disclosure-related matters, including with respect to the content and timing of any Item 4.02 disclosure and the letter that HSA may be required to furnish to the SEC in connection with such a disclosure. We have no objection to direct communication between HSA and WBH on disclosure matters; however, we request that any such coordination be communicated to C&H to ensure that the investigation team maintains full awareness of developments that may affect the scope, timing, or conclusions of the investigation.
VHG's General Counsel, Patricia Navarro, has been informed of this coordination protocol and supports its implementation. Ms. Navarro has been cooperating fully with the investigation and has facilitated access to VHG's books, records, and systems as requested by C&H and Crestline.
Finally, we note that we are aware of the possibility that the SEC Division of Enforcement may open a preliminary inquiry or formal investigation into the matters at issue. In the event that occurs, prompt and coordinated communication regarding any regulatory requests, investigative subpoenas, or voluntary requests for production directed to HSA will be essential. We request that HSA promptly notify C&H if HSA receives any communication from the SEC, the PCAOB, or any other regulatory or law enforcement authority relating to VHG, VCR, or the matters under investigation.
VII. Avoidance of Interference with the Investigation
To preserve the integrity of the investigation and to avoid potential conflicts with the investigation team's interview schedule and the Upjohn protocols that have been implemented, we respectfully request that HSA refrain from conducting independent interviews, depositions, or other direct contacts with the three investigation subjects — Garrett W. Daskine, Nicole Prescott, and Ryan Mateo Serrano — without first coordinating with C&H through the designated points of contact identified in Section IV.C above. This request is not intended to prevent HSA from fulfilling its audit obligations; rather, it is intended to ensure that HSA's inquiries do not inadvertently compromise the investigation's interview sequencing, create confusion regarding applicable privilege protections, or interfere with the subjects' rights.
We note for your awareness that each of the three investigation subjects has retained individual legal counsel:
•  Garrett W. Daskine is represented by Merritt & Dunleavy LLP (James Corwin Merritt, Partner);
•  Nicole Prescott is represented by Langford Pace LLP (Candace O'Brien Langford, Partner); and
•  Ryan Mateo Serrano is represented by Coletti & Ruiz PA (Marco A. Ruiz, Shareholder).
Any communications by HSA with these individuals should take into account the fact that each is represented by counsel. To the extent HSA determines that it must communicate directly with any investigation subject in order to fulfill its audit obligations, we ask that HSA first advise C&H so that we can coordinate appropriately and, if necessary, arrange for individual counsel to be present.
In addition, we request that any audit inquiries directed to VCR finance and accounting personnel who are witnesses to, but not subjects of, the investigation be coordinated through the designated points of contact to the extent practicable. We recognize that such coordination may not always be possible in the context of routine audit procedures, but we ask that HSA exercise reasonable efforts to avoid inquiries that could inadvertently compromise witness testimony or alert witnesses to the specific areas of investigative focus before the investigation team has had an opportunity to conduct its own interviews.
VIII. Document Preservation
As noted above, C&H issued comprehensive document-preservation notices to VHG on a company-wide basis, and to targeted VCR custodians, on July 24, 2023. These notices require the preservation of all documents and electronically stored information potentially relevant to the matters under investigation, and they suspend any routine document-retention or destruction schedules that might otherwise apply.
We respectfully request that HSA preserve all audit workpapers, correspondence, memoranda, notes (including handwritten notes), electronic communications, and any other records relating to VCR's revenue recognition, internal controls over financial reporting, expense reimbursements, capital-improvement expenditures, vendor-approval processes, purchase-order workflows, and vendor payment processes, from January 1, 2021 forward. We understand that HSA is already subject to professional obligations regarding the retention of audit workpapers under PCAOB Rule 3100 and AS 1215 (Audit Documentation), and the Sarbanes-Oxley Act, Section 802. This request is intended to supplement, not supplant, those existing obligations, and to ensure that HSA is aware of the specific categories of materials that are of particular relevance to the investigation.
We further request that HSA promptly notify C&H if HSA becomes aware of any risk of spoliation, destruction, alteration, or loss of documents or data relevant to the investigation, whether at HSA or at any third party known to HSA.
IX. Scheduling of Informational Interview with Mr. Gentry
As part of its investigation, the C&H team would like to schedule an informational interview with you to discuss HSA's Q1 2023 Interim Review findings in greater detail, including the circumstances surrounding HSA's identification of the $9.8 million revenue-recognition issue, the nature and extent of HSA's communications with VCR finance personnel on that topic, and any other observations or concerns that HSA may have. We would also welcome HSA's perspectives on VCR's internal control environment more broadly.
This interview would be informational in nature. Because HSA is not an employee of VHG, the interview would not be conducted under Upjohn warnings, and HSA would not be a represented party in the same sense as the investigation subjects. The interview would be conducted by Howard Quinn and Liam Donahue, with Douglas Reinhardt of Crestline present to assist with forensic accounting questions.
We propose scheduling this interview during the week of August 14, 2023, at a time and location convenient for you. We are happy to conduct the interview at HSA's Tampa offices, or at another mutually agreeable location. We anticipate the interview will require approximately two to three hours. If HSA desires to have its in-house counsel or outside legal counsel attend the interview, HSA is welcome to do so, and we request that HSA advise us in advance of any counsel who will be present.
X. Confirmation and Acknowledgment
We respectfully request that you confirm HSA's agreement to the coordination protocol set forth in this letter by signing and returning the enclosed copy of this letter in the space provided below, or by providing written confirmation via electronic mail to hquinn@calderwoodharkness.com. If HSA has any suggested modifications, clarifications, or additions to the protocol, we would welcome the opportunity to discuss them and ask that any such suggestions be communicated to me promptly.
We appreciate HSA's cooperation in this matter and recognize the professionalism with which HSA has handled these difficult circumstances. We believe that a coordinated approach will best serve the interests of VHG, its shareholders, and the Audit Committee, and we look forward to working with you and your team in the weeks and months ahead.
Please do not hesitate to contact me directly at (305) 714-8812 or hquinn@calderwoodharkness.com if you have any questions or wish to discuss any aspect of this letter.
Sincerely,
CALDERWOOD & HARKNESS LLP
By: ________
Howard Quinn Partner
200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131 Telephone: (305) 714-8812
Email: hquinn@calderwoodharkness.com
cc: (via electronic mail)
Diane Kowalski, Chair, Audit Committee, Verimark Hospitality Group Inc. Conrad Ashby, Partner, Calderwood & Harkness LLP Liam Donahue, Associate, Calderwood & Harkness LLP Patricia Navarro, General Counsel, Verimark Hospitality Group Inc. Douglas Reinhardt, CPA, CFF, Crestline Forensic Advisory LLC
Enclosure: Acknowledgment Copy (below)
ACKNOWLEDGMENT AND AGREEMENT
The undersigned, William Gentry, CPA, in his capacity as Lead Engagement Partner of Hargrove, Steen & Aldrich LLP for the Verimark Hospitality Group Inc. engagement, hereby acknowledges receipt of the foregoing letter dated August 9, 2023, from Howard Quinn, Partner, Calderwood & Harkness LLP, regarding the coordination of audit and investigation activities in connection with the internal investigation being conducted on behalf of the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc.
By signing below, the undersigned confirms that Hargrove, Steen & Aldrich LLP agrees to the coordination protocol set forth in the letter, subject to HSA's independent obligations under applicable professional standards, PCAOB auditing standards, SEC rules and regulations, and the Sarbanes-Oxley Act of 2002, and subject to any modifications that may be mutually agreed upon by the parties in writing.
HARGROVE, STEEN & ALDRICH LLP
By: ________
Name: William Gentry, CPA
Title: Lead Engagement Partner
Date: ________

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP

ACKNOWLEDGMENT AND AGREEMENT

HARGROVE, STEEN & ALDRICH LLP

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