1021-00008 · Client 1021 · Correspondence

letter-to-merritt-dunleavy-termination.docx DOCUMENT Litigation

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PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP Attorneys at Law

200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131 Telephone: (305) 814-6200 Facsimile: (305) 814-6201 www.calderwoodharkness.com

December 18, 2023

VIA EMAIL (jmerritt@merrittdunleavy.com) AND OVERNIGHT COURIER

CONFIDENTIAL

James Corwin Merritt, Esq. Merritt & Dunleavy LLP 801 Brickell Avenue, Suite 2100 Miami, Florida 33131

Re: Termination of Employment of Garrett W. Daskine — Verimark Hospitality Group Inc. / Verimark Coastal Resorts LLC Calderwood & Harkness Matter No. 1021-00008

Dear Mr. Merritt:

This firm represents 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, with its principal corporate headquarters located at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. The purpose of this letter is to formally notify you, as counsel of record for Garrett W. Daskine ("Mr. Daskine"), that VHG has determined to terminate the employment of Mr. Daskine as Division President of Verimark Coastal Resorts LLC ("VCR"), a wholly owned Florida limited liability company subsidiary of VHG, for cause, effective as of December 18, 2023. VCR's principal office is located at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541. This letter sets forth the grounds for such termination, the post-termination obligations of Mr. Daskine, and VHG's reservation of all rights, claims, and remedies arising from the conduct described herein.

I. Background — Investigation Context

As you are aware, the Audit Committee of the Board of Directors of VHG — chaired by Diane Kowalski and comprised of members Reginald Faulkner and Sandra Yeung — opened an internal investigation on July 24, 2023, concerning expense-reporting irregularities and premature revenue-recognition practices at VCR and certain of its managed properties. In connection therewith, Calderwood & Harkness LLP was formally engaged by the Audit Committee on July 17, 2023, to conduct an independent investigation into the scope, nature, and extent of the suspected irregularities. Crestline Forensic Advisory LLC, with engagement partner Douglas Reinhardt, CPA, CFF, was retained as the forensic accounting advisor to assist in the investigation.

As a result of the initial findings of the investigation, Mr. Daskine was placed on paid administrative leave effective August 7, 2023. At the same time, Nicole Prescott, Vice President of Finance of VCR, and Ryan Mateo Serrano, Controller of VCR, were likewise placed on administrative leave pending the completion of the investigation.

Mr. Daskine was interviewed by Calderwood & Harkness on October 4, 2023, at which time you were present and represented Mr. Daskine. During that interview, certain questions were posed to Mr. Daskine regarding the matters described below. A follow-up interview was requested by Calderwood & Harkness via letter dated October 25, 2023, addressed to you. Mr. Daskine, through your office, declined that follow-up interview request. The investigation has now concluded, and the Audit Committee has received and reviewed a comprehensive written report of the findings. The grounds for termination described herein are based upon the findings of the investigation.

II. Grounds for Termination

A. Premature Revenue-Recognition Practices

The investigation determined that Mr. Daskine directed the premature recognition of timeshare-interest purchase deposits as completed-sale revenue at VCR-managed properties, including, without limitation, Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, Florida 32541, and Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228.

Specifically, under Mr. Daskine's direction, revenue from timeshare-interest sales was booked upon the signing of purchase agreements by purchasers, rather than upon the expiration of the statutory ten (10) day rescission period mandated by Florida Statute § 721.10, which grants timeshare purchasers an unconditional right to cancel a purchase contract within ten days of the date of execution or the date on which the purchaser received the last of all documents required to be provided. This practice contravened generally accepted accounting principles ("GAAP"), VHG's stated revenue-recognition policies, applicable SEC guidance, and the requirements of ASC 606, Revenue from Contracts with Customers, which requires that revenue be recognized only when performance obligations have been satisfied and there is no remaining right of cancellation that could result in a significant reversal of revenue previously recognized.

The forensic accounting analysis performed by Crestline Forensic Advisory LLC determined that this practice resulted in an aggregate revenue overstatement of approximately $26.4 million across four fiscal quarters, broken down as follows:

The FY 2022 revenue overstatement of $10.8 million (comprising the Q3 2022 and Q4 2022 amounts) produced an after-tax income overstatement of approximately $8.17 million, representing 5.74% of VHG's reported FY 2022 net income of $142.3 million. The magnitude of this overstatement, both in absolute terms and as a percentage of reported net income, is material to VHG's consolidated financial statements.

In connection with these findings, VHG's independent registered public accounting firm, Hargrove, Steen & Aldrich LLP, identified a potential material weakness in VCR's internal controls over financial reporting, specifically with respect to the revenue-recognition process for timeshare-interest sales. As a consequence, VHG filed a Current Report on Form 8-K with the Securities and Exchange Commission under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review) on August 14, 2023, disclosing that VHG's previously issued financial statements for FY 2022, as well as the interim financial statements for Q1 2023 and Q2 2023, should no longer be relied upon. These findings also have significant implications for VHG's certifications and obligations under Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 ("SOX"), including the CEO and CFO certifications regarding the effectiveness of disclosure controls and procedures and internal controls over financial reporting.

B. Expense-Reimbursement Irregularities and Fictitious Vendor Scheme

The investigation further determined that Mr. Daskine approved fictitious vendor invoices and was the beneficial owner of two shell entities used to divert company funds for his personal use and benefit. Specifically:

(1) Gulf Standard Contracting LLC ("GSC"). GSC was formed on March 12, 2021, as a Florida limited liability company. The registered agent of GSC at the time of its formation was Ryan Serrano, the VCR Controller. The sole member of GSC was Garrett W. Daskine, through a nominee arrangement designed to conceal his beneficial ownership. During the period of the scheme, GSC submitted nineteen (19) fictitious invoices to VCR, purportedly for construction, renovation, and property maintenance services at VCR-managed properties. These nineteen invoices totaled $812,400. No legitimate work was performed by GSC in connection with any of these invoices.

(2) Suncoast Property Services LLC ("SPS"). SPS was formed on November 18, 2021, as a Florida limited liability company. The registered agent of SPS was Panhandle Agent Services Inc., of Tallahassee, Florida. The sole member of SPS was Garrett W. Daskine. During the period of the scheme, SPS submitted twelve (12) fictitious invoices to VCR, purportedly for landscaping, exterior maintenance, and property-services work at VCR-managed properties. These twelve invoices totaled $430,000. No legitimate work was performed by SPS in connection with any of these invoices.

In total, Mr. Daskine received improper payments through these two entities in the aggregate amount of $1,242,400 ($812,400 through GSC and $430,000 through SPS).

The investigation further revealed that, across all three shell entities identified during the course of the investigation — including Clearwater Design Collective Inc., a Florida corporation solely owned by Nicole Prescott, VP of Finance of VCR — VCR Controller Ryan Serrano created a total of forty-seven (47) fictitious purchase orders with an aggregate value of approximately $1.83 million ($812,400 attributable to GSC; $587,600 attributable to Clearwater Design Collective Inc.; and $430,000 attributable to SPS), spanning the period from July 2021 through June 2023. Mr. Serrano's role in creating these purchase orders and routing the invoices through VCR's accounts-payable system was central to the operation of the scheme.

The largest single fictitious invoice identified during the investigation was Invoice No. GSC-2023-007, dated February 14, 2023, in the amount of $94,500, issued by Gulf Standard Contracting LLC and bearing the description "lobby renovation materials — Coral Dune Phase III." No such renovation project existed at Coral Dune Resort & Residences during the relevant period, and no materials were procured or delivered in connection with this invoice.

The forensic accounting analysis conducted by Crestline Forensic Advisory LLC traced the funds disbursed to GSC and SPS to various personal expenditures by Mr. Daskine, including, without limitation: (a) a substantial residential renovation at Mr. Daskine's personal residence, located at 312 Harbor View Lane, Destin, Florida 32541; (b) boat-slip fees at a private marina; (c) luxury-goods purchases at high-end retail establishments; and (d) payments toward personal credit-card balances. The forensic tracing analysis confirmed that the funds diverted through GSC and SPS were not used for any legitimate VCR business purpose.

III. Formal Notice of Termination for Cause

Based on the foregoing findings of the investigation, VHG has determined, upon the recommendation of the Audit Committee of the Board of Directors, to terminate Mr. Daskine's employment as Division President of VCR for cause, effective as of December 18, 2023.

The termination for cause is based upon, among other things: (i) Mr. Daskine's direction of the premature revenue-recognition scheme at VCR, which resulted in a material overstatement of VHG's publicly reported financial results; (ii) Mr. Daskine's approval of fictitious vendor invoices submitted by entities that he beneficially owned or controlled; (iii) Mr. Daskine's beneficial ownership of Gulf Standard Contracting LLC and Suncoast Property Services LLC, which entities were used as instrumentalities to embezzle and divert funds belonging to VCR and, ultimately, VHG; and (iv) the resulting substantial harm to VHG, its shareholders, and the investing public. These actions constitute violations of Mr. Daskine's fiduciary duties, his obligations under applicable law, and the terms and conditions of his employment agreement with VHG.

As a seventeen-year veteran of VHG occupying a senior leadership position, Mr. Daskine owed fiduciary duties to VHG and VCR, as well as contractual obligations under his employment agreement, VHG's Code of Business Conduct and Ethics, and VHG's corporate policies, including, without limitation, the VHG Expense Reimbursement Policy, the VHG Revenue Recognition Policy, and the VHG Vendor Management and Procurement Policy. Mr. Daskine's conduct as described herein constitutes a flagrant breach of those duties, obligations, and policies.

IV. Post-Termination Obligations

A. Return of Company Property

Mr. Daskine is required to immediately return all property belonging to VHG, VCR, and their respective affiliates, including, without limitation, all laptop computers, desktop computers, mobile phones, tablets, external storage devices, access badges, keys, key cards, security tokens, and any other electronic devices or access credentials in his possession, custody, or control. Mr. Daskine must also return all documents, files, records, reports, memoranda, correspondence, and any other materials, whether in physical or electronic form, containing or reflecting VHG or VCR proprietary or confidential information. This obligation extends to any copies, summaries, extracts, or derivatives of such materials.

We remind Mr. Daskine and his counsel of the document preservation obligations previously communicated via the litigation hold and preservation notices issued by Calderwood & Harkness on behalf of the Audit Committee, dated July 24, 2023, copies of which were transmitted to you directly. Those preservation obligations remain in full force and effect, and Mr. Daskine must not destroy, alter, conceal, or dispose of any documents, electronically stored information, or other materials that are or may be relevant to the investigation, the matters described in this letter, or any related regulatory, civil, or criminal proceedings.

B. Continuing Confidentiality Obligations

Mr. Daskine is reminded of his continuing obligations of confidentiality with respect to all proprietary, confidential, and trade-secret information of VHG, VCR, and their respective affiliates. These obligations arise under Mr. Daskine's employment agreement, applicable law, and VHG's corporate policies, and they survive the termination of Mr. Daskine's employment. Any non-disclosure, non-competition, or non-solicitation provisions contained in Mr. Daskine's employment agreement remain enforceable to the extent provided therein and in accordance with applicable law. VHG reserves all rights to enforce such provisions.

C. Cooperation Obligations

VHG reserves the right to require Mr. Daskine's reasonable cooperation in any ongoing or future regulatory, administrative, civil, or criminal proceedings arising from or related to the matters described in this letter. Without limitation, this includes the preliminary inquiry currently being conducted by the Division of Enforcement of the United States Securities and Exchange Commission, File No. HO-14237, as well as any related investigation, examination, or proceeding initiated by any federal, state, or self-regulatory body. VHG's expectation of cooperation extends to any civil litigation that may arise from the conduct described herein, including shareholder derivative actions, securities class actions, or other claims. Any cooperation obligations of Mr. Daskine that are set forth in his employment agreement survive termination and remain in full force and effect.

D. Forfeiture, Clawback, and Recovery of Improperly Obtained Payments

VHG expressly reserves all rights with respect to the clawback of incentive-based compensation, the forfeiture of unvested equity awards, and the recovery of any and all improperly obtained payments, benefits, or other compensation received by Mr. Daskine. These rights include, without limitation: (i) the right to recover the sums diverted through Gulf Standard Contracting LLC ($812,400) and Suncoast Property Services LLC ($430,000), totaling $1,242,400; (ii) the right to invoke any clawback provisions contained in Mr. Daskine's employment agreement, VHG's incentive-compensation plans, and VHG's Clawback Policy adopted in compliance with SEC Rule 10D-1 and Nasdaq Listing Rule 5608; and (iii) any rights to recover incentive-based compensation triggered by the financial restatement described herein.

Additionally, Mr. Daskine is advised that the termination for cause may affect any claims for indemnification or advancement of expenses under VHG's Amended and Restated Certificate of Incorporation, VHG's Amended and Restated Bylaws, and any applicable indemnification agreement, as well as coverage under VHG's directors' and officers' liability insurance program, including the primary directors' and officers' liability insurance policy issued by North Atlantic Indemnity Corp. (Policy No. NAI-DOL-2023-004891) and the Side A Difference-in-Conditions coverage issued by Ironbridge Specialty Insurance Ltd. VHG reserves the right to contest any claim for indemnification, advancement, or insurance coverage to the extent permitted by applicable law, VHG's organizational documents, and the terms and conditions of the applicable insurance policies.

E. Document Preservation

As referenced above, the litigation hold and document preservation obligations communicated to Mr. Daskine and to your firm on July 24, 2023, remain in full force and effect. Mr. Daskine is strictly prohibited from destroying, altering, concealing, or otherwise disposing of any documents, electronically stored information, communications, recordings, or other materials that are or may be relevant to the internal investigation, any regulatory inquiry, or any actual or reasonably anticipated litigation. Failure to comply with these obligations may result in the imposition of sanctions and adverse consequences in any subsequent legal proceeding, and may constitute an independent violation of applicable law.

V. Reservation of Rights

VHG expressly reserves all rights, claims, and remedies available to it at law and in equity against Mr. Daskine, whether arising under federal or state law, contract, or otherwise. Without limitation, these include claims for breach of fiduciary duty, fraud, constructive fraud, conversion, civil theft, unjust enrichment, breach of contract, breach of the implied covenant of good faith and fair dealing, aiding and abetting, conspiracy, and violation of the federal securities laws, including Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, as well as any applicable state securities laws.

Nothing in this letter, and no action taken or not taken by VHG, the Audit Committee, or Calderwood & Harkness in connection herewith, shall be construed as a waiver, release, or relinquishment of any right, claim, or remedy that VHG may have against Mr. Daskine. All such rights, claims, and remedies are expressly preserved. VHG's decision to terminate Mr. Daskine's employment for cause does not limit or preclude VHG from pursuing any additional remedies or taking any further action.

In connection with the foregoing, VHG has filed, or intends to file, an amended Annual Report on Form 10-K for fiscal year 2022 and amended Quarterly Reports on Form 10-Q for the quarters ended March 31, 2023, and June 30, 2023, reflecting the financial restatement necessitated by the revenue-recognition irregularities described in Section II.A above. VHG reserves the right to seek recovery from Mr. Daskine for any and all costs, expenses, losses, damages, fines, penalties, and other amounts incurred by VHG in connection with the restatement and related matters.

VI. Request for Acknowledgment

We respectfully request that you confirm receipt of this letter and provide a written acknowledgment on behalf of Mr. Daskine that he has received the notification of termination for cause set forth herein, that he understands the post-termination obligations described in Section IV, and that the document preservation obligations communicated on July 24, 2023, remain in full force and effect. Please direct your written acknowledgment to the undersigned at the address set forth above, or via email at hquinn@calderwoodharkness.com, at your earliest convenience, and in any event no later than December 29, 2023.

Should you have any questions regarding the foregoing, or should you wish to discuss any aspect of this matter, please do not hesitate to contact me directly at (305) 814-6217.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Howard Quinn, Partner Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131 Telephone: (305) 814-6217

Email: hquinn@calderwoodharkness.com

cc: Diane Kowalski, Chair, Audit Committee, Board of Directors, Verimark Hospitality Group Inc. Conrad Ashby, Esq., Calderwood & Harkness LLP Patricia Navarro, Esq., General Counsel, Verimark Hospitality Group Inc. Irene Castellanos, Esq., Westlake Burris & Holt LLP (outside securities counsel)

Enclosures: None. The formal termination letter from VHG Human Resources has been transmitted separately to Mr. Merritt under cover letter of even date.

Fiscal Quarter	Revenue Overstatement
Q3 2022 (July — September 2022)	$4,700,000
Q4 2022 (October — December 2022)	$6,100,000
Q1 2023 (January — March 2023)	$9,800,000
Q2 2023 (April — June 2023)	$5,800,000
Total	$26,400,000

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Attorneys at Law
200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131 Telephone: (305) 814-6200 Facsimile: (305) 814-6201 www.calderwoodharkness.com
December 18, 2023
VIA EMAIL (jmerritt@merrittdunleavy.com) AND OVERNIGHT COURIER
CONFIDENTIAL
James Corwin Merritt, Esq. Merritt & Dunleavy LLP 801 Brickell Avenue, Suite 2100 Miami, Florida 33131
Re: Termination of Employment of Garrett W. Daskine — Verimark Hospitality Group Inc. / Verimark Coastal Resorts LLC Calderwood & Harkness Matter No. 1021-00008
Dear Mr. Merritt:
This firm represents 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, with its principal corporate headquarters located at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. The purpose of this letter is to formally notify you, as counsel of record for Garrett W. Daskine ("Mr. Daskine"), that VHG has determined to terminate the employment of Mr. Daskine as Division President of Verimark Coastal Resorts LLC ("VCR"), a wholly owned Florida limited liability company subsidiary of VHG, for cause, effective as of December 18, 2023. VCR's principal office is located at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541. This letter sets forth the grounds for such termination, the post-termination obligations of Mr. Daskine, and VHG's reservation of all rights, claims, and remedies arising from the conduct described herein.
I. Background — Investigation Context
As you are aware, the Audit Committee of the Board of Directors of VHG — chaired by Diane Kowalski and comprised of members Reginald Faulkner and Sandra Yeung — opened an internal investigation on July 24, 2023, concerning expense-reporting irregularities and premature revenue-recognition practices at VCR and certain of its managed properties. In connection therewith, Calderwood & Harkness LLP was formally engaged by the Audit Committee on July 17, 2023, to conduct an independent investigation into the scope, nature, and extent of the suspected irregularities. Crestline Forensic Advisory LLC, with engagement partner Douglas Reinhardt, CPA, CFF, was retained as the forensic accounting advisor to assist in the investigation.
As a result of the initial findings of the investigation, Mr. Daskine was placed on paid administrative leave effective August 7, 2023. At the same time, Nicole Prescott, Vice President of Finance of VCR, and Ryan Mateo Serrano, Controller of VCR, were likewise placed on administrative leave pending the completion of the investigation.
Mr. Daskine was interviewed by Calderwood & Harkness on October 4, 2023, at which time you were present and represented Mr. Daskine. During that interview, certain questions were posed to Mr. Daskine regarding the matters described below. A follow-up interview was requested by Calderwood & Harkness via letter dated October 25, 2023, addressed to you. Mr. Daskine, through your office, declined that follow-up interview request. The investigation has now concluded, and the Audit Committee has received and reviewed a comprehensive written report of the findings. The grounds for termination described herein are based upon the findings of the investigation.
II. Grounds for Termination
A. Premature Revenue-Recognition Practices
The investigation determined that Mr. Daskine directed the premature recognition of timeshare-interest purchase deposits as completed-sale revenue at VCR-managed properties, including, without limitation, Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, Florida 32541, and Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228.
Specifically, under Mr. Daskine's direction, revenue from timeshare-interest sales was booked upon the signing of purchase agreements by purchasers, rather than upon the expiration of the statutory ten (10) day rescission period mandated by Florida Statute § 721.10, which grants timeshare purchasers an unconditional right to cancel a purchase contract within ten days of the date of execution or the date on which the purchaser received the last of all documents required to be provided. This practice contravened generally accepted accounting principles ("GAAP"), VHG's stated revenue-recognition policies, applicable SEC guidance, and the requirements of ASC 606, Revenue from Contracts with Customers, which requires that revenue be recognized only when performance obligations have been satisfied and there is no remaining right of cancellation that could result in a significant reversal of revenue previously recognized.
The forensic accounting analysis performed by Crestline Forensic Advisory LLC determined that this practice resulted in an aggregate revenue overstatement of approximately $26.4 million across four fiscal quarters, broken down as follows:
The FY 2022 revenue overstatement of $10.8 million (comprising the Q3 2022 and Q4 2022 amounts) produced an after-tax income overstatement of approximately $8.17 million, representing 5.74% of VHG's reported FY 2022 net income of $142.3 million. The magnitude of this overstatement, both in absolute terms and as a percentage of reported net income, is material to VHG's consolidated financial statements.
In connection with these findings, VHG's independent registered public accounting firm, Hargrove, Steen & Aldrich LLP, identified a potential material weakness in VCR's internal controls over financial reporting, specifically with respect to the revenue-recognition process for timeshare-interest sales. As a consequence, VHG filed a Current Report on Form 8-K with the Securities and Exchange Commission under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review) on August 14, 2023, disclosing that VHG's previously issued financial statements for FY 2022, as well as the interim financial statements for Q1 2023 and Q2 2023, should no longer be relied upon. These findings also have significant implications for VHG's certifications and obligations under Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 ("SOX"), including the CEO and CFO certifications regarding the effectiveness of disclosure controls and procedures and internal controls over financial reporting.
B. Expense-Reimbursement Irregularities and Fictitious Vendor Scheme
The investigation further determined that Mr. Daskine approved fictitious vendor invoices and was the beneficial owner of two shell entities used to divert company funds for his personal use and benefit. Specifically:
(1) Gulf Standard Contracting LLC ("GSC"). GSC was formed on March 12, 2021, as a Florida limited liability company. The registered agent of GSC at the time of its formation was Ryan Serrano, the VCR Controller. The sole member of GSC was Garrett W. Daskine, through a nominee arrangement designed to conceal his beneficial ownership. During the period of the scheme, GSC submitted nineteen (19) fictitious invoices to VCR, purportedly for construction, renovation, and property maintenance services at VCR-managed properties. These nineteen invoices totaled $812,400. No legitimate work was performed by GSC in connection with any of these invoices.
(2) Suncoast Property Services LLC ("SPS"). SPS was formed on November 18, 2021, as a Florida limited liability company. The registered agent of SPS was Panhandle Agent Services Inc., of Tallahassee, Florida. The sole member of SPS was Garrett W. Daskine. During the period of the scheme, SPS submitted twelve (12) fictitious invoices to VCR, purportedly for landscaping, exterior maintenance, and property-services work at VCR-managed properties. These twelve invoices totaled $430,000. No legitimate work was performed by SPS in connection with any of these invoices.
In total, Mr. Daskine received improper payments through these two entities in the aggregate amount of $1,242,400 ($812,400 through GSC and $430,000 through SPS).
The investigation further revealed that, across all three shell entities identified during the course of the investigation — including Clearwater Design Collective Inc., a Florida corporation solely owned by Nicole Prescott, VP of Finance of VCR — VCR Controller Ryan Serrano created a total of forty-seven (47) fictitious purchase orders with an aggregate value of approximately $1.83 million ($812,400 attributable to GSC; $587,600 attributable to Clearwater Design Collective Inc.; and $430,000 attributable to SPS), spanning the period from July 2021 through June 2023. Mr. Serrano's role in creating these purchase orders and routing the invoices through VCR's accounts-payable system was central to the operation of the scheme.
The largest single fictitious invoice identified during the investigation was Invoice No. GSC-2023-007, dated February 14, 2023, in the amount of $94,500, issued by Gulf Standard Contracting LLC and bearing the description "lobby renovation materials — Coral Dune Phase III." No such renovation project existed at Coral Dune Resort & Residences during the relevant period, and no materials were procured or delivered in connection with this invoice.
The forensic accounting analysis conducted by Crestline Forensic Advisory LLC traced the funds disbursed to GSC and SPS to various personal expenditures by Mr. Daskine, including, without limitation: (a) a substantial residential renovation at Mr. Daskine's personal residence, located at 312 Harbor View Lane, Destin, Florida 32541; (b) boat-slip fees at a private marina; (c) luxury-goods purchases at high-end retail establishments; and (d) payments toward personal credit-card balances. The forensic tracing analysis confirmed that the funds diverted through GSC and SPS were not used for any legitimate VCR business purpose.
III. Formal Notice of Termination for Cause
Based on the foregoing findings of the investigation, VHG has determined, upon the recommendation of the Audit Committee of the Board of Directors, to terminate Mr. Daskine's employment as Division President of VCR for cause, effective as of December 18, 2023.
The termination for cause is based upon, among other things: (i) Mr. Daskine's direction of the premature revenue-recognition scheme at VCR, which resulted in a material overstatement of VHG's publicly reported financial results; (ii) Mr. Daskine's approval of fictitious vendor invoices submitted by entities that he beneficially owned or controlled; (iii) Mr. Daskine's beneficial ownership of Gulf Standard Contracting LLC and Suncoast Property Services LLC, which entities were used as instrumentalities to embezzle and divert funds belonging to VCR and, ultimately, VHG; and (iv) the resulting substantial harm to VHG, its shareholders, and the investing public. These actions constitute violations of Mr. Daskine's fiduciary duties, his obligations under applicable law, and the terms and conditions of his employment agreement with VHG.
As a seventeen-year veteran of VHG occupying a senior leadership position, Mr. Daskine owed fiduciary duties to VHG and VCR, as well as contractual obligations under his employment agreement, VHG's Code of Business Conduct and Ethics, and VHG's corporate policies, including, without limitation, the VHG Expense Reimbursement Policy, the VHG Revenue Recognition Policy, and the VHG Vendor Management and Procurement Policy. Mr. Daskine's conduct as described herein constitutes a flagrant breach of those duties, obligations, and policies.
IV. Post-Termination Obligations
A. Return of Company Property
Mr. Daskine is required to immediately return all property belonging to VHG, VCR, and their respective affiliates, including, without limitation, all laptop computers, desktop computers, mobile phones, tablets, external storage devices, access badges, keys, key cards, security tokens, and any other electronic devices or access credentials in his possession, custody, or control. Mr. Daskine must also return all documents, files, records, reports, memoranda, correspondence, and any other materials, whether in physical or electronic form, containing or reflecting VHG or VCR proprietary or confidential information. This obligation extends to any copies, summaries, extracts, or derivatives of such materials.
We remind Mr. Daskine and his counsel of the document preservation obligations previously communicated via the litigation hold and preservation notices issued by Calderwood & Harkness on behalf of the Audit Committee, dated July 24, 2023, copies of which were transmitted to you directly. Those preservation obligations remain in full force and effect, and Mr. Daskine must not destroy, alter, conceal, or dispose of any documents, electronically stored information, or other materials that are or may be relevant to the investigation, the matters described in this letter, or any related regulatory, civil, or criminal proceedings.
B. Continuing Confidentiality Obligations
Mr. Daskine is reminded of his continuing obligations of confidentiality with respect to all proprietary, confidential, and trade-secret information of VHG, VCR, and their respective affiliates. These obligations arise under Mr. Daskine's employment agreement, applicable law, and VHG's corporate policies, and they survive the termination of Mr. Daskine's employment. Any non-disclosure, non-competition, or non-solicitation provisions contained in Mr. Daskine's employment agreement remain enforceable to the extent provided therein and in accordance with applicable law. VHG reserves all rights to enforce such provisions.
C. Cooperation Obligations
VHG reserves the right to require Mr. Daskine's reasonable cooperation in any ongoing or future regulatory, administrative, civil, or criminal proceedings arising from or related to the matters described in this letter. Without limitation, this includes the preliminary inquiry currently being conducted by the Division of Enforcement of the United States Securities and Exchange Commission, File No. HO-14237, as well as any related investigation, examination, or proceeding initiated by any federal, state, or self-regulatory body. VHG's expectation of cooperation extends to any civil litigation that may arise from the conduct described herein, including shareholder derivative actions, securities class actions, or other claims. Any cooperation obligations of Mr. Daskine that are set forth in his employment agreement survive termination and remain in full force and effect.
D. Forfeiture, Clawback, and Recovery of Improperly Obtained Payments
VHG expressly reserves all rights with respect to the clawback of incentive-based compensation, the forfeiture of unvested equity awards, and the recovery of any and all improperly obtained payments, benefits, or other compensation received by Mr. Daskine. These rights include, without limitation: (i) the right to recover the sums diverted through Gulf Standard Contracting LLC ($812,400) and Suncoast Property Services LLC ($430,000), totaling $1,242,400; (ii) the right to invoke any clawback provisions contained in Mr. Daskine's employment agreement, VHG's incentive-compensation plans, and VHG's Clawback Policy adopted in compliance with SEC Rule 10D-1 and Nasdaq Listing Rule 5608; and (iii) any rights to recover incentive-based compensation triggered by the financial restatement described herein.
Additionally, Mr. Daskine is advised that the termination for cause may affect any claims for indemnification or advancement of expenses under VHG's Amended and Restated Certificate of Incorporation, VHG's Amended and Restated Bylaws, and any applicable indemnification agreement, as well as coverage under VHG's directors' and officers' liability insurance program, including the primary directors' and officers' liability insurance policy issued by North Atlantic Indemnity Corp. (Policy No. NAI-DOL-2023-004891) and the Side A Difference-in-Conditions coverage issued by Ironbridge Specialty Insurance Ltd. VHG reserves the right to contest any claim for indemnification, advancement, or insurance coverage to the extent permitted by applicable law, VHG's organizational documents, and the terms and conditions of the applicable insurance policies.
E. Document Preservation
As referenced above, the litigation hold and document preservation obligations communicated to Mr. Daskine and to your firm on July 24, 2023, remain in full force and effect. Mr. Daskine is strictly prohibited from destroying, altering, concealing, or otherwise disposing of any documents, electronically stored information, communications, recordings, or other materials that are or may be relevant to the internal investigation, any regulatory inquiry, or any actual or reasonably anticipated litigation. Failure to comply with these obligations may result in the imposition of sanctions and adverse consequences in any subsequent legal proceeding, and may constitute an independent violation of applicable law.
V. Reservation of Rights
VHG expressly reserves all rights, claims, and remedies available to it at law and in equity against Mr. Daskine, whether arising under federal or state law, contract, or otherwise. Without limitation, these include claims for breach of fiduciary duty, fraud, constructive fraud, conversion, civil theft, unjust enrichment, breach of contract, breach of the implied covenant of good faith and fair dealing, aiding and abetting, conspiracy, and violation of the federal securities laws, including Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, as well as any applicable state securities laws.
Nothing in this letter, and no action taken or not taken by VHG, the Audit Committee, or Calderwood & Harkness in connection herewith, shall be construed as a waiver, release, or relinquishment of any right, claim, or remedy that VHG may have against Mr. Daskine. All such rights, claims, and remedies are expressly preserved. VHG's decision to terminate Mr. Daskine's employment for cause does not limit or preclude VHG from pursuing any additional remedies or taking any further action.
In connection with the foregoing, VHG has filed, or intends to file, an amended Annual Report on Form 10-K for fiscal year 2022 and amended Quarterly Reports on Form 10-Q for the quarters ended March 31, 2023, and June 30, 2023, reflecting the financial restatement necessitated by the revenue-recognition irregularities described in Section II.A above. VHG reserves the right to seek recovery from Mr. Daskine for any and all costs, expenses, losses, damages, fines, penalties, and other amounts incurred by VHG in connection with the restatement and related matters.
VI. Request for Acknowledgment
We respectfully request that you confirm receipt of this letter and provide a written acknowledgment on behalf of Mr. Daskine that he has received the notification of termination for cause set forth herein, that he understands the post-termination obligations described in Section IV, and that the document preservation obligations communicated on July 24, 2023, remain in full force and effect. Please direct your written acknowledgment to the undersigned at the address set forth above, or via email at hquinn@calderwoodharkness.com, at your earliest convenience, and in any event no later than December 29, 2023.
Should you have any questions regarding the foregoing, or should you wish to discuss any aspect of this matter, please do not hesitate to contact me directly at (305) 814-6217.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Howard Quinn, Partner Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131 Telephone: (305) 814-6217
Email: hquinn@calderwoodharkness.com
cc: Diane Kowalski, Chair, Audit Committee, Board of Directors, Verimark Hospitality Group Inc. Conrad Ashby, Esq., Calderwood & Harkness LLP Patricia Navarro, Esq., General Counsel, Verimark Hospitality Group Inc. Irene Castellanos, Esq., Westlake Burris & Holt LLP (outside securities counsel)
Enclosures: None. The formal termination letter from VHG Human Resources has been transmitted separately to Mr. Merritt under cover letter of even date.
Fiscal Quarter | Revenue Overstatement
Q3 2022 (July — September 2022) | $4,700,000
Q4 2022 (October — December 2022) | $6,100,000
Q1 2023 (January — March 2023) | $9,800,000
Q2 2023 (April — June 2023) | $5,800,000
Total | $26,400,000

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