1021-00008 · Client 1021 · Correspondence

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CALDERWOOD & HARKNESS LLP Attorneys at Law

200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131

Telephone: (305) 814-7200 Facsimile: (305) 814-7201 www.calderwoodharkness.com

August 11, 2023

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT

VIA HAND DELIVERY AND ENCRYPTED EMAIL

Irene Castellanos, Esq. Westlake Burris & Holt LLP 600 Brickell Avenue, Suite 3100 Miami, Florida 33131

Re: Verimark Hospitality Group Inc. — Coordination of SEC Disclosure Obligations and Pending Form 8-K Filing (Item 4.02) Calderwood & Harkness Matter No. 1021-00008

Dear Irene:

I. Purpose and Context

We write on behalf of our client, the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. ("VHG" or the "Company"), a Delaware corporation whose common stock is publicly traded on the Nasdaq Global Select Market under the ticker symbol VMRK, with principal executive offices located at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. As you are aware, VHG is a diversified hospitality company with operations spanning resort development, timeshare interests, managed hotel properties, and ancillary hospitality services across the southeastern United States and the Caribbean.

Calderwood & Harkness LLP represents the Audit Committee in connection with an independent internal investigation described more fully below. The Audit Committee is currently chaired by Diane Kowalski, an independent director, with fellow independent directors Reginald Faulkner and Sandra Yeung serving as the remaining members of the committee. The Audit Committee retained our firm pursuant to an engagement letter dated July 17, 2023, executed by Ms. Kowalski in her capacity as Audit Committee Chair, to conduct an independent internal investigation into revenue-recognition irregularities and expense-reporting irregularities at VHG's resort-development division, Verimark Coastal Resorts LLC ("VCR"), a wholly owned Florida limited liability company subsidiary with its principal office at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541. The investigation was formally opened on July 24, 2023, at which time Calderwood & Harkness issued document-preservation notices to all relevant custodians and departments within VHG and VCR.

The purpose of this letter is to initiate a structured coordination with your firm, Westlake Burris & Holt LLP, in your capacity as VHG's regular outside securities counsel, regarding the Company's disclosure obligations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Securities and Exchange Commission (the "SEC") arising from the preliminary findings of our investigation. In particular, we seek to coordinate with your firm on the preparation and filing of a Form 8-K under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review), which we believe should be filed promptly. The contemplated filing date, as discussed with the Audit Committee and Company management, is August 14, 2023.

This letter sets forth the relevant background, summarizes the preliminary findings of our investigation to the extent necessary to support your firm's disclosure analysis and drafting efforts, outlines our recommendations regarding the Form 8-K and ongoing disclosure considerations, and proposes coordination protocols between our respective firms. This letter and its contents are protected by the attorney-client privilege, the work-product doctrine, and the common-interest privilege that exists between investigation counsel and securities counsel representing the same corporate client in connection with related matters. We ask that all information contained herein be treated with the highest degree of confidentiality and not be disclosed to any third party without the prior written consent of Calderwood & Harkness and the Audit Committee.

II. Background on the Investigation and Triggering Events

The events giving rise to the Audit Committee's engagement of Calderwood & Harkness and the subsequent opening of the investigation are as follows:

On June 19, 2023, William "Bill" Gentry, CPA, the lead engagement partner at Hargrove, Steen & Aldrich LLP ("HSA"), VHG's independent registered public accounting firm (with offices at 101 East Kennedy Boulevard, Suite 3200, Tampa, Florida 33602), communicated to VHG Chief Financial Officer Thomas Rhett Griffith and Audit Committee Chair Diane Kowalski that HSA had identified a potential material weakness relating to VCR's internal controls over financial reporting. This identification arose during HSA's interim review of VHG's unaudited condensed consolidated financial statements for the quarter ended March 31, 2023 (the "Q1 2023 10-Q Period").

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 the fact that the applicable statutory rescission periods had not expired before the close of the quarter. Under Florida Statute § 721.10, purchasers of timeshare interests are afforded a ten (10) calendar-day rescission period commencing upon the later of the date the purchaser signs the purchase agreement or the date the purchaser receives the last of all documents required to be provided by the developer. HSA determined that VCR had been booking timeshare-interest purchase deposits as completed revenue at the point of contract execution, rather than deferring recognition until the expiration of the rescission period, as required by applicable revenue-recognition standards. HSA further noted that, in a significant number of cases, purchasers had exercised their rescission rights but the corresponding revenue reversals had not been recorded until the subsequent quarter, creating a persistent rolling overstatement of revenue.

Following receipt of HSA's communication, the Audit Committee convened an executive session on July 10, 2023, at which Ms. Kowalski, Mr. Faulkner, and Ms. Yeung discussed HSA's findings and the potential scope and significance of the revenue-recognition issues. The Audit Committee resolved that it was necessary and prudent to retain independent outside counsel to conduct a thorough internal investigation, separate from and independent of Company management. In reaching this determination, the Audit Committee considered, among other things, the potential magnitude of the revenue misstatement, the fact that the issues appeared to span multiple reporting periods, the involvement of senior VCR management in the revenue-recognition process, and the Company's obligations under the Sarbanes-Oxley Act of 2002 ("SOX") and applicable SEC rules.

The engagement letter between the Audit Committee and Calderwood & Harkness was executed by Ms. Kowalski on July 17, 2023. The investigation was formally opened on July 24, 2023. On the same date, Calderwood & Harkness issued written document-preservation notices to all VHG and VCR officers, relevant finance and accounting personnel, and relevant information-technology custodians, directing the preservation of all documents and electronically stored information potentially relevant to the matters under investigation. The preservation notices covered, among other categories, all records relating to timeshare-interest sales, deposits, rescissions, revenue recognition, journal entries, vendor contracts, purchase orders, and internal and external communications involving the identified subjects and relevant accounting and finance personnel.

In connection with the investigation, Calderwood & Harkness retained Crestline Forensic Advisory LLC ("Crestline") as its forensic accounting advisor, engaged under the Kovel doctrine to ensure that Crestline's work and communications remain protected by the attorney-client privilege and work-product doctrine. The Crestline engagement is led by engagement partner Douglas Reinhardt, CPA, CFF, and senior manager Priya Venkatesh, CPA, under Crestline engagement number CFA-VHG-2023-0089. Crestline has been tasked with conducting a detailed forensic analysis of VCR's revenue-recognition practices, performing a transaction-level review of timeshare-interest deposits and rescissions across the investigated period, and examining vendor payment records relating to the expense-reporting irregularities described below.

The investigation has identified three individual subjects: Garrett W. Daskine, Division President of VCR; Nicole Prescott, Vice President of Finance of VCR; and Ryan Mateo Serrano, Controller of VCR. All three individuals were placed on administrative leave effective August 7, 2023, by action of VHG's Chief Executive Officer Margaret "Meg" Calder, following consultation with General Counsel Patricia Navarro and the Audit Committee. Their access to Company systems and facilities has been suspended pending the conclusion of the investigation.

The investigation encompasses two principal areas of inquiry:

(1) Premature Recognition of Timeshare-Interest Deposit Revenue. This area of inquiry concerns the practice at VCR of recognizing timeshare-interest purchase deposits as completed-sale revenue upon execution of the purchase agreement, rather than upon expiration of the statutory rescission period, at VCR properties including but not limited to: (a) the Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, Florida 32541; and (b) the Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228. The investigation is examining the scope of this practice, the periods affected, the aggregate amount of the resulting revenue overstatement, and the individuals responsible for establishing and maintaining this revenue-recognition methodology.

(2) Expense-Reporting Irregularities Involving Fictitious Vendor Invoices. This area of inquiry concerns the identification of fictitious or inflated vendor invoices submitted by or on behalf of VCR personnel through three entities that appear to be shell companies with no legitimate business operations. The investigation is examining the nature and extent of these transactions, the individuals involved, the total amount of funds diverted, and the adequacy of VCR's and VHG's internal controls over accounts payable and vendor management.

III. Summary of Preliminary Findings Relevant to Disclosure Determinations

While the investigation remains ongoing and our findings are subject to revision as additional evidence is gathered and analyzed, we are in a position to share the following preliminary findings with your firm to the extent necessary to support your analysis of VHG's disclosure obligations and your preparation of the contemplated Form 8-K filing.

A. Revenue-Recognition Irregularities

Based on the forensic accounting work performed by Crestline to date, including a transaction-level review of timeshare-interest deposit and rescission records at VCR's Coral Dune Resort & Residences and Palmetto Bluff Club properties, the investigation has determined that the premature revenue-recognition practice described above spans a period of four fiscal quarters, from Q3 2022 (the quarter ended September 30, 2022) through Q2 2023 (the quarter ended June 30, 2023).

The mechanism of the irregularity is as follows: VCR personnel booked timeshare-interest purchase deposits as completed-sale revenue upon the signing of the purchase agreement by the purchaser, rather than deferring recognition until the expiration of the ten (10) calendar-day statutory rescission period under Florida Statute § 721.10. In many instances, purchasers exercised their rescission rights within the statutory period, but the corresponding revenue reversals were not recorded until the following fiscal quarter. This had the effect of creating a persistent rolling overstatement of VCR's revenue in each affected quarter, as new prematurely recognized revenue was recorded while prior-period reversals were belatedly processed. The resulting overstatement was not self-correcting on a quarterly basis because the volume and dollar amount of new premature bookings consistently exceeded the volume and dollar amount of reversals being recorded from the prior quarter.

Crestline's preliminary analysis indicates that the aggregate revenue overstatement across the four affected quarters is approximately $26.4 million, broken down as follows:

To place these figures in context, VCR reported total revenue of approximately $438.7 million for fiscal year 2022, which represented approximately 23.46% of VHG's consolidated revenue of $1.87 billion for the same period. The combined FY 2022 revenue overstatement (Q3 2022 plus Q4 2022) amounts to approximately $10.8 million, which, after application of VHG's effective tax rate of approximately 24.3%, yields an estimated after-tax income impact of approximately $8.17 million (calculated as $10.8 million × (1 – 0.243)). This after-tax impact represents approximately 5.74% of VHG's reported consolidated net income of $142.3 million for fiscal year 2022.

It is also noteworthy that VCR's timeshare rescission rate during the investigated period was approximately 14.3%, which is meaningfully higher than the industry average of approximately 11%. This elevated rescission rate exacerbated the magnitude of the revenue overstatement arising from the premature-booking practice, as a higher proportion of prematurely recognized revenue ultimately required reversal.

B. Expense-Reporting Irregularities

In addition to the revenue-recognition issues, the investigation has uncovered evidence of expense-reporting irregularities at VCR involving the submission and payment of fictitious vendor invoices. Crestline has identified forty-seven (47) fictitious purchase orders totaling approximately $1.83 million, processed over a period of approximately two years from July 2021 through June 2023. These purchase orders were directed to three entities that appear to be shell companies with no legitimate business operations and no substantive history of providing goods or services to VCR or VHG:

(a) Gulf Standard Contracting LLC;

(b) Clearwater Design Collective Inc.; and

The investigation is continuing to examine the ownership and control of these entities, the flow of funds following payment, and the identities of all individuals involved in the creation, approval, and processing of the fictitious purchase orders. While the expense-reporting irregularities are less directly implicated in the immediate non-reliance determination discussed below, they bear materially on the scope of any restatement that may ultimately be required, on the assessment of internal controls over financial reporting, and on potential additional disclosures that VHG may be required to make regarding related-party transactions, potential fraud, and remedial actions.

C. SOX Implications

The preliminary findings described above carry significant implications for VHG's certifications under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 and for the Company's assessment of internal controls over financial reporting under Section 404. HSA's identification of the potential material weakness in VCR's internal controls over revenue recognition, combined with the investigation's findings regarding the scope and duration of the premature revenue-recognition practice, strongly suggests that VHG's previously filed certifications with respect to the effectiveness of internal controls over financial reporting for fiscal year 2022 and the Q1 2023 interim period may have been inaccurate. Additionally, the existence of the expense-reporting irregularities involving fictitious vendor invoices raises further questions about the adequacy of VHG's internal controls over accounts payable and procurement processes. We understand that your firm will need to assess the implications of these findings for VHG's disclosure controls and procedures and internal controls over financial reporting under applicable SEC rules and accounting standards, including the framework established by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").

IV. Item 4.02 Form 8-K — Non-Reliance Disclosure

Based on the preliminary findings summarized above, the Audit Committee, in consultation with VHG management — specifically, CEO Margaret "Meg" Calder, CFO Thomas Rhett Griffith, and General Counsel Patricia Navarro — and with the Company's independent auditor, HSA, has concluded that VHG's previously issued financial statements for the following periods should no longer be relied upon:

(a) The audited consolidated financial statements for fiscal year 2022, as filed with the SEC in VHG's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (which includes the affected Q3 2022 and Q4 2022 periods);

(b) The unaudited condensed consolidated financial statements for the quarter ended March 31, 2023, as filed with the SEC in VHG's Quarterly Report on Form 10-Q for Q1 2023; and

(c) The unaudited condensed consolidated financial statements for the quarter ended June 30, 2023, as filed with the SEC in VHG's Quarterly Report on Form 10-Q for Q2 2023.

The Audit Committee reached this non-reliance determination on August 9, 2023, following a special meeting of the Audit Committee at which Calderwood & Harkness presented its preliminary findings and Crestline presented its forensic accounting analysis. HSA concurs with the Audit Committee's non-reliance determination.

In light of this determination, Calderwood & Harkness recommends that VHG file a Current Report on Form 8-K under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review) promptly. The contemplated filing date is August 14, 2023, which is within four (4) business days of the Audit Committee's August 9, 2023 non-reliance determination, consistent with the requirements of Exchange Act Rule 13a-11.

We respectfully request that Westlake Burris & Holt prepare and finalize the Form 8-K filing. In connection with the drafting, we recommend that the filing include the following elements:

1. Identification of the affected periods. The 8-K should clearly identify the specific financial statements that should no longer be relied upon, including the FY 2022 Annual Report on Form 10-K and the Q1 2023 and Q2 2023 Quarterly Reports on Form 10-Q.

2. Description of the nature of the revenue-recognition issues. The 8-K should include a description, at an appropriate level of generality, of the nature of the revenue-recognition irregularities — specifically, the premature booking of timeshare-interest deposits as completed-sale revenue at VCR properties prior to the expiration of the applicable statutory rescission period — without disclosing specific findings or details that could compromise the integrity of the ongoing investigation.

3. Reference to the Audit Committee's engagement of independent counsel. The 8-K should note that the Audit Committee has engaged independent outside counsel to conduct an internal investigation into the matters giving rise to the non-reliance determination.

4. Disclosure of HSA's role. The 8-K should disclose that VHG's independent auditor, HSA, identified the potential material weakness in VCR's internal controls over financial reporting during its interim review of Q1 2023 financial statements, and that the Audit Committee has concurred with the non-reliance determination. Consistent with Item 4.02(a), the filing should include the letter from HSA required under Item 4.02(b), in which HSA states whether it agrees with the statements made by VHG in the 8-K regarding the non-reliance determination.

5. Authorization of a comprehensive investigation. The 8-K should note that the Audit Committee has authorized a comprehensive investigation into the matters described and that the Company will provide further disclosures as appropriate upon the conclusion of the investigation or as material developments warrant.

Calderwood & Harkness will review and provide comments on the draft Form 8-K before filing in order to ensure the accuracy of the filing relative to the investigation's findings as they stand, to guard against any inadvertent waiver of the attorney-client privilege or work-product protection over the investigation's underlying materials and communications, and to ensure that the characterization of the investigation and its scope is appropriately calibrated. We emphasize the importance of coordinating the language regarding the investigation's scope and the nature of the findings so as not to compromise the ongoing investigation, prejudice the Company's position in any potential regulatory proceeding or private litigation, or disclose information that could impede the investigation's ability to gather evidence from the identified subjects or other witnesses.

V. Ongoing Disclosure Considerations

Beyond the immediate Form 8-K filing, we wish to flag several ongoing disclosure considerations that will require close coordination between our respective firms in the coming weeks and months.

Additional Form 8-K Filings. As the investigation progresses, material developments may arise that trigger additional Form 8-K filing obligations. These could include, without limitation: (a) material findings regarding the scope or magnitude of the revenue overstatement or the expense-reporting irregularities; (b) personnel actions, such as the termination or resignation of the identified subjects or other Company officers; (c) regulatory inquiries or enforcement actions by the SEC or other governmental authorities; (d) changes in the Company's relationship with its independent auditor; and (e) any litigation filed against the Company or its officers and directors arising from the matters under investigation. We recommend that both firms maintain an ongoing dialogue regarding potential disclosure triggers so that filing decisions can be made promptly and in a coordinated fashion.

Amended 10-K and Amended 10-Qs. Upon the completion of the investigation and the forensic accounting analysis, VHG will be required to file an amended Annual Report on Form 10-K/A for fiscal year 2022 and amended Quarterly Reports on Form 10-Q/A for Q1 2023 and Q2 2023 to reflect the restatement of the Company's financial statements for the affected periods. These amended filings are expected to follow the conclusion of the investigation and the completion of Crestline's forensic analysis, and will need to be prepared in close coordination with HSA, which will be required to re-audit or re-review the restated financial statements, as applicable. We anticipate that Westlake Burris will serve as primary drafting counsel for these amended filings, with Calderwood & Harkness reviewing for factual accuracy and privilege considerations, consistent with the protocols described in Section VI below.

Disclosure of Expense-Reporting Irregularities and Personnel Actions. The expense-reporting irregularities involving fictitious vendor invoices, while secondary to the revenue-recognition issues for purposes of the immediate non-reliance determination, may require separate or additional disclosure depending on the ultimate findings of the investigation. Similarly, the administrative leave of Daskine, Prescott, and Serrano, and any subsequent employment actions (including potential terminations for cause), may require disclosure under applicable SEC rules or Nasdaq listing standards, particularly if any of these individuals is deemed an "executive officer" of VHG or if the personnel actions are deemed material to investors. We recommend that your firm assess whether the administrative-leave actions warrant disclosure in the initial 8-K or in a subsequent filing.

Market Capitalization and Shareholder Considerations. We note for context that VHG's market capitalization was approximately $3.4 billion as of July 2023, based on approximately 88.6 million shares of common stock outstanding. VHG has significant institutional shareholders, including Ashford Capital Management LP, which is a beneficial owner of approximately 7.2% of VHG's outstanding common stock (approximately 6.38 million shares), and Ridgepoint Institutional Partners LLC, which is a beneficial owner of approximately 5.1% of VHG's outstanding common stock (approximately 4.52 million shares), in each case based on the most recent Schedule 13G or 13G/A filings available. The Company's substantial market capitalization, concentrated institutional ownership, and the nature of the issues under investigation create a heightened sensitivity with respect to the completeness and timing of the Company's public disclosures. We are confident that your firm appreciates this dynamic and will ensure that all disclosures are crafted to satisfy the Company's obligations under the Exchange Act, Regulation S-K, and applicable case law regarding the duty to disclose material information.

Potential SEC Enforcement Interest. Given the nature and magnitude of the findings, we believe it is prudent to anticipate potential interest or inquiry from the SEC's Division of Enforcement. It is possible that the filing of the Item 4.02 Form 8-K will prompt an informal inquiry or a formal investigation by the SEC. We recommend that our firms establish a coordinated messaging framework for any communications with the SEC, whether voluntary (such as a proactive Wells submission or a voluntary cooperation approach) or in response to SEC inquiries, subpoenas, or requests for voluntary production. It is essential that any communications with the SEC be jointly discussed and approved by both investigation counsel and securities counsel, in consultation with the Audit Committee and Company management, to ensure consistency and to protect the Company's legal privileges and strategic interests.

VI. Coordination Protocols Between Calderwood & Harkness and Westlake Burris & Holt

To ensure the efficient and effective coordination of our respective firms' responsibilities in connection with the investigation and the Company's disclosure obligations, we propose the following protocols:

(a) Review of Public Disclosures. All public disclosures by VHG relating to the investigation or its findings — including but not limited to SEC filings (Forms 8-K, 10-K/A, 10-Q/A, proxy statements, and Section 16 filings), press releases, investor presentations, earnings call scripts, and analyst communications — shall be reviewed by both Calderwood & Harkness and Westlake Burris & Holt before filing or public release. Neither firm shall authorize or consent to the release of any such disclosure without the review and concurrence of the other firm.

(b) Drafting Responsibilities. Westlake Burris & Holt shall serve as the primary drafting counsel for all SEC filings, including the Form 8-K under Item 4.02, any subsequent Forms 8-K relating to the investigation, the amended Form 10-K/A for fiscal year 2022, and the amended Forms 10-Q/A for Q1 2023 and Q2 2023. Calderwood & Harkness shall review all such filings for factual accuracy relative to the investigation's findings, for consistency with the Audit Committee's directives and determinations, and for the protection of applicable legal privileges. Calderwood & Harkness shall also review any filings for language that could inadvertently waive the attorney-client privilege or work-product protection, or that could compromise the integrity of the ongoing investigation.

(c) Information Sharing. Calderwood & Harkness will provide periodic factual updates to Westlake Burris & Holt to the extent necessary to support accurate and timely disclosure by the Company. These updates will be provided in writing where practicable, and will be clearly marked as privileged and confidential, protected by the attorney-client privilege, the work-product doctrine, and the common-interest privilege. The provision of such updates shall not constitute a waiver of any applicable privilege, and both firms shall take all reasonable steps to preserve the privileged character of shared information.

(d) SEC Communications. Any communications with the SEC, whether initiated by the Company or in response to inquiry, subpoena, or request for voluntary production, shall be coordinated between Calderwood & Harkness and Westlake Burris & Holt. Neither firm shall communicate with the SEC on behalf of VHG regarding the matters under investigation without the prior knowledge and concurrence of the other firm, unless exigent circumstances require an immediate response, in which case the responding firm shall promptly notify the other firm of the substance of the communication.

(e) Securities-Law Analysis. Westlake Burris & Holt shall advise VHG and the Audit Committee on the securities-law implications of the investigation's findings, including materiality assessments under the standard articulated in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), and Basic Inc. v. Levinson, 485 U.S. 224 (1988); Regulation FD considerations under Rule 100 of Regulation FD (17 C.F.R. § 243.100 et seq.) to the extent that investigation-related information may be selectively disclosed to institutional shareholders or analysts; and potential private-litigation exposure, including the risk of securities class action lawsuits under Section 10(b) and Rule 10b-5 of the Exchange Act and derivative actions under state law.

(f) Internal Communications and Board Reporting. Calderwood & Harkness will continue to coordinate with VHG General Counsel Patricia Navarro regarding internal communications to the Board of Directors and senior management, particularly as such communications intersect with the Company's disclosure obligations. We will ensure that board-level reporting on the investigation's status and findings is conducted in a manner that preserves all applicable privileges and does not create unnecessary disclosure obligations. To the extent that board resolutions or committee determinations are required to support SEC filings (such as the Audit Committee's formal non-reliance determination), Calderwood & Harkness will coordinate with your firm to ensure that such resolutions are drafted and adopted in a manner consistent with applicable legal requirements.

(g) D&O Insurance Notice Obligations. Both firms should remain attentive to the Company's D&O insurance notice obligations. VHG maintains a directors' and officers' liability insurance program that includes a primary tower policy issued by North Atlantic Indemnity Corp. (Policy No. NAI-DOL-2023-004891), with a limit of $25 million per claim and $50 million in the aggregate, for the policy period January 1, 2023 through December 31, 2023, as well as a Side A difference-in-conditions ("DIC") policy issued by Ironbridge Specialty Insurance Ltd., with a limit of $15 million. The filing of the Form 8-K under Item 4.02, as well as any subsequent developments in the investigation or any litigation or regulatory proceedings, may trigger notice obligations under one or both of these policies. We recommend that your firm, in consultation with Calderwood & Harkness and General Counsel Navarro, promptly assess whether notice is required under these policies and, if so, coordinate the preparation and delivery of timely notice to the relevant carriers to preserve the Company's and the individual insureds' coverage rights.

VII. Privilege Protections

We wish to emphasize several important points regarding the preservation of legal privileges in connection with our inter-firm communications and the Company's disclosure obligations.

First, Calderwood & Harkness's communications with Westlake Burris & Holt regarding the investigation's findings, methodology, legal analysis, and strategy are protected by the attorney-client privilege, the work-product doctrine, and the common-interest privilege. Both firms represent VHG (Calderwood & Harkness as Audit Committee counsel and Westlake Burris as securities counsel) in connection with related matters, and our communications in furtherance of these shared legal objectives are entitled to the full protection of the common-interest doctrine. See, e.g., Hunton & Williams v. U.S. Dep't of Justice, 590 F.3d 272 (4th Cir. 2010); In re Teleglobe Commc'ns Corp., 493 F.3d 345 (3d Cir. 2007).

Second, Calderwood & Harkness's provision of factual summaries, preliminary findings, or forensic accounting analyses to Westlake Burris for the limited purpose of supporting your firm's preparation of accurate and compliant SEC filings does not constitute a waiver of the attorney-client privilege or work-product protection. These disclosures are made in confidence, for the purpose of obtaining or providing legal advice, and within the scope of the common-interest relationship. Both firms should ensure that all materials shared in connection with this coordination are clearly marked "PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE — ATTORNEY WORK PRODUCT" and that access to such materials is restricted to attorneys and professional staff with a need to know.

Third, both firms should maintain strict confidentiality regarding all information shared in connection with the investigation and the Company's disclosure obligations. No investigation-related information, findings, or analyses should be disclosed to any third party — including Company personnel outside the Audit Committee and the specifically authorized members of management — without the prior written consent of Calderwood & Harkness and the Audit Committee.

Fourth, and of particular importance in the current context, both firms must exercise extreme caution in drafting SEC filings and other public disclosures to avoid inadvertent disclosure of privileged information or inadvertent waiver of the privilege over the investigation's underlying materials. The Form 8-K and any subsequent filings should describe the investigation and its findings at a level of generality sufficient to satisfy the Company's disclosure obligations, without disclosing the substance of legal advice received, the specific methodologies employed by investigation counsel or forensic accountants, or the content of privileged communications. We recommend that both firms review all draft filings with this principle specifically in mind, and that any questions regarding the appropriate level of disclosure be discussed jointly before language is finalized.

VIII. Requested Next Steps

In light of the foregoing, we respectfully request and propose the following next steps:

1. Circulation of Draft Form 8-K. We request that Westlake Burris circulate a draft Form 8-K under Item 4.02 to Calderwood & Harkness for review and comment no later than Saturday, August 12, 2023. This timeline will allow Calderwood & Harkness to review the draft over the weekend and provide consolidated comments by the morning of Monday, August 14, 2023, in time to permit filing on the contemplated filing date. We recognize that this is an aggressive timeline and appreciate your firm's willingness to accommodate it given the urgency of the disclosure obligation.

2. Joint Coordination Call. We propose scheduling a joint call among the following participants to align on disclosure language, filing timing, and the ongoing coordination protocols described above:

• Howard Quinn, Conrad Ashby, and Liam Donahue (Calderwood & Harkness LLP)

• Irene Castellanos and relevant members of your team (Westlake Burris & Holt LLP)

• Patricia Navarro, General Counsel, VHG

• Thomas Rhett Griffith, Chief Financial Officer, VHG

We are available for this call at your earliest convenience and suggest that it take place no later than the afternoon of Friday, August 11, 2023, or the morning of Saturday, August 12, 2023, to ensure that the draft 8-K can be prepared on schedule.

3. Regulation FD and Nasdaq Listing-Rule Considerations. We request that Westlake Burris advise the Audit Committee and Company management on any immediate Regulation FD or Nasdaq listing-rule considerations arising from the non-reliance determination, including but not limited to: (a) whether the non-reliance determination triggers any disclosure obligations under Nasdaq Listing Rule 5250(c)(1) (material event notification) or any other applicable listing standard; (b) whether any selective disclosure has occurred or is at risk of occurring in connection with the Audit Committee's discussions with HSA, Company management, or others; and (c) whether VHG should consider issuing a press release concurrent with the Form 8-K filing. We note that the Company's next scheduled earnings call for Q2 2023 results has not yet been publicly announced, and recommend that any announcement be coordinated with the 8-K filing.

4. Transfer Agent Notification. We request that Westlake Burris confirm the status of any notice to Continental Registrar & Trust Co. (VHG's transfer agent, with offices at 1700 Broadway, Suite 1400, New York, New York 10019) regarding any anticipated shareholder communications that may be required or advisable in connection with the non-reliance determination. We understand that certain shareholder communications or notices may be warranted, and recommend that these be coordinated in advance of the 8-K filing to the extent practicable.

IX. Closing

We are prepared to discuss any of the matters addressed in this letter at your convenience, and we look forward to working closely with your firm to ensure that VHG meets its disclosure obligations in a timely, accurate, and privilege-protective manner. We recognize that the matters described in this letter are time-sensitive and of the utmost importance to VHG, its shareholders, and the Audit Committee, and we appreciate your firm's prompt attention to these issues.

Please do not hesitate to reach out to any of the following Calderwood & Harkness contacts with questions or to coordinate on next steps:

Howard Quinn, Partner Direct: (305) 814-7218

Email: hquinn@calderwoodharkness.com

Liam Donahue, Senior Associate Direct: (305) 814-7244

Email: ldonahue@calderwoodharkness.com

For day-to-day coordination purposes, Liam Donahue and working associate Steven Hollander (direct: (305) 814-7261; email: shollander@calderwoodharkness.com) will serve as Calderwood & Harkness's primary points of contact for your team. Howard Quinn and partner Conrad Ashby will remain actively involved in all substantive review and strategic decisions.

We look forward to a productive and well-coordinated collaboration with your firm throughout this matter.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Howard Quinn Partner, White Collar Defense & Investigations Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131 Direct: (305) 814-7218

Email: hquinn@calderwoodharkness.com

cc: Conrad Ashby, Esq., Partner, Calderwood & Harkness LLP

Diane Kowalski, Audit Committee Chair, Verimark Hospitality Group Inc. (via separate privileged transmission)

Patricia Navarro, Esq., General Counsel, Verimark Hospitality Group Inc.

Fiscal Quarter	Quarter Ending	Estimated Overstatement
Q3 2022	September 30, 2022	$4.7 million
Q4 2022	December 31, 2022	$6.1 million
Q1 2023	March 31, 2023	$9.8 million
Q2 2023	June 30, 2023	$5.8 million
Total	$26.4 million

CALDERWOOD & HARKNESS LLP Attorneys at Law
200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131
Telephone: (305) 814-7200 Facsimile: (305) 814-7201 www.calderwoodharkness.com
August 11, 2023
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT
VIA HAND DELIVERY AND ENCRYPTED EMAIL
Irene Castellanos, Esq. Westlake Burris & Holt LLP 600 Brickell Avenue, Suite 3100 Miami, Florida 33131
Re: Verimark Hospitality Group Inc. — Coordination of SEC Disclosure Obligations and Pending Form 8-K Filing (Item 4.02) Calderwood & Harkness Matter No. 1021-00008
Dear Irene:
I. Purpose and Context
We write on behalf of our client, the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. ("VHG" or the "Company"), a Delaware corporation whose common stock is publicly traded on the Nasdaq Global Select Market under the ticker symbol VMRK, with principal executive offices located at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. As you are aware, VHG is a diversified hospitality company with operations spanning resort development, timeshare interests, managed hotel properties, and ancillary hospitality services across the southeastern United States and the Caribbean.
Calderwood & Harkness LLP represents the Audit Committee in connection with an independent internal investigation described more fully below. The Audit Committee is currently chaired by Diane Kowalski, an independent director, with fellow independent directors Reginald Faulkner and Sandra Yeung serving as the remaining members of the committee. The Audit Committee retained our firm pursuant to an engagement letter dated July 17, 2023, executed by Ms. Kowalski in her capacity as Audit Committee Chair, to conduct an independent internal investigation into revenue-recognition irregularities and expense-reporting irregularities at VHG's resort-development division, Verimark Coastal Resorts LLC ("VCR"), a wholly owned Florida limited liability company subsidiary with its principal office at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541. The investigation was formally opened on July 24, 2023, at which time Calderwood & Harkness issued document-preservation notices to all relevant custodians and departments within VHG and VCR.
The purpose of this letter is to initiate a structured coordination with your firm, Westlake Burris & Holt LLP, in your capacity as VHG's regular outside securities counsel, regarding the Company's disclosure obligations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Securities and Exchange Commission (the "SEC") arising from the preliminary findings of our investigation. In particular, we seek to coordinate with your firm on the preparation and filing of a Form 8-K under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review), which we believe should be filed promptly. The contemplated filing date, as discussed with the Audit Committee and Company management, is August 14, 2023.
This letter sets forth the relevant background, summarizes the preliminary findings of our investigation to the extent necessary to support your firm's disclosure analysis and drafting efforts, outlines our recommendations regarding the Form 8-K and ongoing disclosure considerations, and proposes coordination protocols between our respective firms. This letter and its contents are protected by the attorney-client privilege, the work-product doctrine, and the common-interest privilege that exists between investigation counsel and securities counsel representing the same corporate client in connection with related matters. We ask that all information contained herein be treated with the highest degree of confidentiality and not be disclosed to any third party without the prior written consent of Calderwood & Harkness and the Audit Committee.
II. Background on the Investigation and Triggering Events
The events giving rise to the Audit Committee's engagement of Calderwood & Harkness and the subsequent opening of the investigation are as follows:
On June 19, 2023, William "Bill" Gentry, CPA, the lead engagement partner at Hargrove, Steen & Aldrich LLP ("HSA"), VHG's independent registered public accounting firm (with offices at 101 East Kennedy Boulevard, Suite 3200, Tampa, Florida 33602), communicated to VHG Chief Financial Officer Thomas Rhett Griffith and Audit Committee Chair Diane Kowalski that HSA had identified a potential material weakness relating to VCR's internal controls over financial reporting. This identification arose during HSA's interim review of VHG's unaudited condensed consolidated financial statements for the quarter ended March 31, 2023 (the "Q1 2023 10-Q Period").
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 the fact that the applicable statutory rescission periods had not expired before the close of the quarter. Under Florida Statute § 721.10, purchasers of timeshare interests are afforded a ten (10) calendar-day rescission period commencing upon the later of the date the purchaser signs the purchase agreement or the date the purchaser receives the last of all documents required to be provided by the developer. HSA determined that VCR had been booking timeshare-interest purchase deposits as completed revenue at the point of contract execution, rather than deferring recognition until the expiration of the rescission period, as required by applicable revenue-recognition standards. HSA further noted that, in a significant number of cases, purchasers had exercised their rescission rights but the corresponding revenue reversals had not been recorded until the subsequent quarter, creating a persistent rolling overstatement of revenue.
Following receipt of HSA's communication, the Audit Committee convened an executive session on July 10, 2023, at which Ms. Kowalski, Mr. Faulkner, and Ms. Yeung discussed HSA's findings and the potential scope and significance of the revenue-recognition issues. The Audit Committee resolved that it was necessary and prudent to retain independent outside counsel to conduct a thorough internal investigation, separate from and independent of Company management. In reaching this determination, the Audit Committee considered, among other things, the potential magnitude of the revenue misstatement, the fact that the issues appeared to span multiple reporting periods, the involvement of senior VCR management in the revenue-recognition process, and the Company's obligations under the Sarbanes-Oxley Act of 2002 ("SOX") and applicable SEC rules.
The engagement letter between the Audit Committee and Calderwood & Harkness was executed by Ms. Kowalski on July 17, 2023. The investigation was formally opened on July 24, 2023. On the same date, Calderwood & Harkness issued written document-preservation notices to all VHG and VCR officers, relevant finance and accounting personnel, and relevant information-technology custodians, directing the preservation of all documents and electronically stored information potentially relevant to the matters under investigation. The preservation notices covered, among other categories, all records relating to timeshare-interest sales, deposits, rescissions, revenue recognition, journal entries, vendor contracts, purchase orders, and internal and external communications involving the identified subjects and relevant accounting and finance personnel.
In connection with the investigation, Calderwood & Harkness retained Crestline Forensic Advisory LLC ("Crestline") as its forensic accounting advisor, engaged under the Kovel doctrine to ensure that Crestline's work and communications remain protected by the attorney-client privilege and work-product doctrine. The Crestline engagement is led by engagement partner Douglas Reinhardt, CPA, CFF, and senior manager Priya Venkatesh, CPA, under Crestline engagement number CFA-VHG-2023-0089. Crestline has been tasked with conducting a detailed forensic analysis of VCR's revenue-recognition practices, performing a transaction-level review of timeshare-interest deposits and rescissions across the investigated period, and examining vendor payment records relating to the expense-reporting irregularities described below.
The investigation has identified three individual subjects: Garrett W. Daskine, Division President of VCR; Nicole Prescott, Vice President of Finance of VCR; and Ryan Mateo Serrano, Controller of VCR. All three individuals were placed on administrative leave effective August 7, 2023, by action of VHG's Chief Executive Officer Margaret "Meg" Calder, following consultation with General Counsel Patricia Navarro and the Audit Committee. Their access to Company systems and facilities has been suspended pending the conclusion of the investigation.
The investigation encompasses two principal areas of inquiry:
(1) Premature Recognition of Timeshare-Interest Deposit Revenue. This area of inquiry concerns the practice at VCR of recognizing timeshare-interest purchase deposits as completed-sale revenue upon execution of the purchase agreement, rather than upon expiration of the statutory rescission period, at VCR properties including but not limited to: (a) the Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, Florida 32541; and (b) the Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228. The investigation is examining the scope of this practice, the periods affected, the aggregate amount of the resulting revenue overstatement, and the individuals responsible for establishing and maintaining this revenue-recognition methodology.
(2) Expense-Reporting Irregularities Involving Fictitious Vendor Invoices. This area of inquiry concerns the identification of fictitious or inflated vendor invoices submitted by or on behalf of VCR personnel through three entities that appear to be shell companies with no legitimate business operations. The investigation is examining the nature and extent of these transactions, the individuals involved, the total amount of funds diverted, and the adequacy of VCR's and VHG's internal controls over accounts payable and vendor management.
III. Summary of Preliminary Findings Relevant to Disclosure Determinations
While the investigation remains ongoing and our findings are subject to revision as additional evidence is gathered and analyzed, we are in a position to share the following preliminary findings with your firm to the extent necessary to support your analysis of VHG's disclosure obligations and your preparation of the contemplated Form 8-K filing.
A. Revenue-Recognition Irregularities
Based on the forensic accounting work performed by Crestline to date, including a transaction-level review of timeshare-interest deposit and rescission records at VCR's Coral Dune Resort & Residences and Palmetto Bluff Club properties, the investigation has determined that the premature revenue-recognition practice described above spans a period of four fiscal quarters, from Q3 2022 (the quarter ended September 30, 2022) through Q2 2023 (the quarter ended June 30, 2023).
The mechanism of the irregularity is as follows: VCR personnel booked timeshare-interest purchase deposits as completed-sale revenue upon the signing of the purchase agreement by the purchaser, rather than deferring recognition until the expiration of the ten (10) calendar-day statutory rescission period under Florida Statute § 721.10. In many instances, purchasers exercised their rescission rights within the statutory period, but the corresponding revenue reversals were not recorded until the following fiscal quarter. This had the effect of creating a persistent rolling overstatement of VCR's revenue in each affected quarter, as new prematurely recognized revenue was recorded while prior-period reversals were belatedly processed. The resulting overstatement was not self-correcting on a quarterly basis because the volume and dollar amount of new premature bookings consistently exceeded the volume and dollar amount of reversals being recorded from the prior quarter.
Crestline's preliminary analysis indicates that the aggregate revenue overstatement across the four affected quarters is approximately $26.4 million, broken down as follows:
To place these figures in context, VCR reported total revenue of approximately $438.7 million for fiscal year 2022, which represented approximately 23.46% of VHG's consolidated revenue of $1.87 billion for the same period. The combined FY 2022 revenue overstatement (Q3 2022 plus Q4 2022) amounts to approximately $10.8 million, which, after application of VHG's effective tax rate of approximately 24.3%, yields an estimated after-tax income impact of approximately $8.17 million (calculated as $10.8 million × (1 – 0.243)). This after-tax impact represents approximately 5.74% of VHG's reported consolidated net income of $142.3 million for fiscal year 2022.
It is also noteworthy that VCR's timeshare rescission rate during the investigated period was approximately 14.3%, which is meaningfully higher than the industry average of approximately 11%. This elevated rescission rate exacerbated the magnitude of the revenue overstatement arising from the premature-booking practice, as a higher proportion of prematurely recognized revenue ultimately required reversal.
B. Expense-Reporting Irregularities
In addition to the revenue-recognition issues, the investigation has uncovered evidence of expense-reporting irregularities at VCR involving the submission and payment of fictitious vendor invoices. Crestline has identified forty-seven (47) fictitious purchase orders totaling approximately $1.83 million, processed over a period of approximately two years from July 2021 through June 2023. These purchase orders were directed to three entities that appear to be shell companies with no legitimate business operations and no substantive history of providing goods or services to VCR or VHG:
(a) Gulf Standard Contracting LLC;
(b) Clearwater Design Collective Inc.; and
(c) Suncoast Property Services LLC.
The investigation is continuing to examine the ownership and control of these entities, the flow of funds following payment, and the identities of all individuals involved in the creation, approval, and processing of the fictitious purchase orders. While the expense-reporting irregularities are less directly implicated in the immediate non-reliance determination discussed below, they bear materially on the scope of any restatement that may ultimately be required, on the assessment of internal controls over financial reporting, and on potential additional disclosures that VHG may be required to make regarding related-party transactions, potential fraud, and remedial actions.
C. SOX Implications
The preliminary findings described above carry significant implications for VHG's certifications under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 and for the Company's assessment of internal controls over financial reporting under Section 404. HSA's identification of the potential material weakness in VCR's internal controls over revenue recognition, combined with the investigation's findings regarding the scope and duration of the premature revenue-recognition practice, strongly suggests that VHG's previously filed certifications with respect to the effectiveness of internal controls over financial reporting for fiscal year 2022 and the Q1 2023 interim period may have been inaccurate. Additionally, the existence of the expense-reporting irregularities involving fictitious vendor invoices raises further questions about the adequacy of VHG's internal controls over accounts payable and procurement processes. We understand that your firm will need to assess the implications of these findings for VHG's disclosure controls and procedures and internal controls over financial reporting under applicable SEC rules and accounting standards, including the framework established by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
IV. Item 4.02 Form 8-K — Non-Reliance Disclosure
Based on the preliminary findings summarized above, the Audit Committee, in consultation with VHG management — specifically, CEO Margaret "Meg" Calder, CFO Thomas Rhett Griffith, and General Counsel Patricia Navarro — and with the Company's independent auditor, HSA, has concluded that VHG's previously issued financial statements for the following periods should no longer be relied upon:
(a) The audited consolidated financial statements for fiscal year 2022, as filed with the SEC in VHG's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (which includes the affected Q3 2022 and Q4 2022 periods);
(b) The unaudited condensed consolidated financial statements for the quarter ended March 31, 2023, as filed with the SEC in VHG's Quarterly Report on Form 10-Q for Q1 2023; and
(c) The unaudited condensed consolidated financial statements for the quarter ended June 30, 2023, as filed with the SEC in VHG's Quarterly Report on Form 10-Q for Q2 2023.
The Audit Committee reached this non-reliance determination on August 9, 2023, following a special meeting of the Audit Committee at which Calderwood & Harkness presented its preliminary findings and Crestline presented its forensic accounting analysis. HSA concurs with the Audit Committee's non-reliance determination.
In light of this determination, Calderwood & Harkness recommends that VHG file a Current Report on Form 8-K under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review) promptly. The contemplated filing date is August 14, 2023, which is within four (4) business days of the Audit Committee's August 9, 2023 non-reliance determination, consistent with the requirements of Exchange Act Rule 13a-11.
We respectfully request that Westlake Burris & Holt prepare and finalize the Form 8-K filing. In connection with the drafting, we recommend that the filing include the following elements:
1. Identification of the affected periods. The 8-K should clearly identify the specific financial statements that should no longer be relied upon, including the FY 2022 Annual Report on Form 10-K and the Q1 2023 and Q2 2023 Quarterly Reports on Form 10-Q.
2. Description of the nature of the revenue-recognition issues. The 8-K should include a description, at an appropriate level of generality, of the nature of the revenue-recognition irregularities — specifically, the premature booking of timeshare-interest deposits as completed-sale revenue at VCR properties prior to the expiration of the applicable statutory rescission period — without disclosing specific findings or details that could compromise the integrity of the ongoing investigation.
3. Reference to the Audit Committee's engagement of independent counsel. The 8-K should note that the Audit Committee has engaged independent outside counsel to conduct an internal investigation into the matters giving rise to the non-reliance determination.
4. Disclosure of HSA's role. The 8-K should disclose that VHG's independent auditor, HSA, identified the potential material weakness in VCR's internal controls over financial reporting during its interim review of Q1 2023 financial statements, and that the Audit Committee has concurred with the non-reliance determination. Consistent with Item 4.02(a), the filing should include the letter from HSA required under Item 4.02(b), in which HSA states whether it agrees with the statements made by VHG in the 8-K regarding the non-reliance determination.
5. Authorization of a comprehensive investigation. The 8-K should note that the Audit Committee has authorized a comprehensive investigation into the matters described and that the Company will provide further disclosures as appropriate upon the conclusion of the investigation or as material developments warrant.
Calderwood & Harkness will review and provide comments on the draft Form 8-K before filing in order to ensure the accuracy of the filing relative to the investigation's findings as they stand, to guard against any inadvertent waiver of the attorney-client privilege or work-product protection over the investigation's underlying materials and communications, and to ensure that the characterization of the investigation and its scope is appropriately calibrated. We emphasize the importance of coordinating the language regarding the investigation's scope and the nature of the findings so as not to compromise the ongoing investigation, prejudice the Company's position in any potential regulatory proceeding or private litigation, or disclose information that could impede the investigation's ability to gather evidence from the identified subjects or other witnesses.
V. Ongoing Disclosure Considerations
Beyond the immediate Form 8-K filing, we wish to flag several ongoing disclosure considerations that will require close coordination between our respective firms in the coming weeks and months.
Additional Form 8-K Filings. As the investigation progresses, material developments may arise that trigger additional Form 8-K filing obligations. These could include, without limitation: (a) material findings regarding the scope or magnitude of the revenue overstatement or the expense-reporting irregularities; (b) personnel actions, such as the termination or resignation of the identified subjects or other Company officers; (c) regulatory inquiries or enforcement actions by the SEC or other governmental authorities; (d) changes in the Company's relationship with its independent auditor; and (e) any litigation filed against the Company or its officers and directors arising from the matters under investigation. We recommend that both firms maintain an ongoing dialogue regarding potential disclosure triggers so that filing decisions can be made promptly and in a coordinated fashion.
Amended 10-K and Amended 10-Qs. Upon the completion of the investigation and the forensic accounting analysis, VHG will be required to file an amended Annual Report on Form 10-K/A for fiscal year 2022 and amended Quarterly Reports on Form 10-Q/A for Q1 2023 and Q2 2023 to reflect the restatement of the Company's financial statements for the affected periods. These amended filings are expected to follow the conclusion of the investigation and the completion of Crestline's forensic analysis, and will need to be prepared in close coordination with HSA, which will be required to re-audit or re-review the restated financial statements, as applicable. We anticipate that Westlake Burris will serve as primary drafting counsel for these amended filings, with Calderwood & Harkness reviewing for factual accuracy and privilege considerations, consistent with the protocols described in Section VI below.
Disclosure of Expense-Reporting Irregularities and Personnel Actions. The expense-reporting irregularities involving fictitious vendor invoices, while secondary to the revenue-recognition issues for purposes of the immediate non-reliance determination, may require separate or additional disclosure depending on the ultimate findings of the investigation. Similarly, the administrative leave of Daskine, Prescott, and Serrano, and any subsequent employment actions (including potential terminations for cause), may require disclosure under applicable SEC rules or Nasdaq listing standards, particularly if any of these individuals is deemed an "executive officer" of VHG or if the personnel actions are deemed material to investors. We recommend that your firm assess whether the administrative-leave actions warrant disclosure in the initial 8-K or in a subsequent filing.
Market Capitalization and Shareholder Considerations. We note for context that VHG's market capitalization was approximately $3.4 billion as of July 2023, based on approximately 88.6 million shares of common stock outstanding. VHG has significant institutional shareholders, including Ashford Capital Management LP, which is a beneficial owner of approximately 7.2% of VHG's outstanding common stock (approximately 6.38 million shares), and Ridgepoint Institutional Partners LLC, which is a beneficial owner of approximately 5.1% of VHG's outstanding common stock (approximately 4.52 million shares), in each case based on the most recent Schedule 13G or 13G/A filings available. The Company's substantial market capitalization, concentrated institutional ownership, and the nature of the issues under investigation create a heightened sensitivity with respect to the completeness and timing of the Company's public disclosures. We are confident that your firm appreciates this dynamic and will ensure that all disclosures are crafted to satisfy the Company's obligations under the Exchange Act, Regulation S-K, and applicable case law regarding the duty to disclose material information.
Potential SEC Enforcement Interest. Given the nature and magnitude of the findings, we believe it is prudent to anticipate potential interest or inquiry from the SEC's Division of Enforcement. It is possible that the filing of the Item 4.02 Form 8-K will prompt an informal inquiry or a formal investigation by the SEC. We recommend that our firms establish a coordinated messaging framework for any communications with the SEC, whether voluntary (such as a proactive Wells submission or a voluntary cooperation approach) or in response to SEC inquiries, subpoenas, or requests for voluntary production. It is essential that any communications with the SEC be jointly discussed and approved by both investigation counsel and securities counsel, in consultation with the Audit Committee and Company management, to ensure consistency and to protect the Company's legal privileges and strategic interests.
VI. Coordination Protocols Between Calderwood & Harkness and Westlake Burris & Holt
To ensure the efficient and effective coordination of our respective firms' responsibilities in connection with the investigation and the Company's disclosure obligations, we propose the following protocols:
(a) Review of Public Disclosures. All public disclosures by VHG relating to the investigation or its findings — including but not limited to SEC filings (Forms 8-K, 10-K/A, 10-Q/A, proxy statements, and Section 16 filings), press releases, investor presentations, earnings call scripts, and analyst communications — shall be reviewed by both Calderwood & Harkness and Westlake Burris & Holt before filing or public release. Neither firm shall authorize or consent to the release of any such disclosure without the review and concurrence of the other firm.
(b) Drafting Responsibilities. Westlake Burris & Holt shall serve as the primary drafting counsel for all SEC filings, including the Form 8-K under Item 4.02, any subsequent Forms 8-K relating to the investigation, the amended Form 10-K/A for fiscal year 2022, and the amended Forms 10-Q/A for Q1 2023 and Q2 2023. Calderwood & Harkness shall review all such filings for factual accuracy relative to the investigation's findings, for consistency with the Audit Committee's directives and determinations, and for the protection of applicable legal privileges. Calderwood & Harkness shall also review any filings for language that could inadvertently waive the attorney-client privilege or work-product protection, or that could compromise the integrity of the ongoing investigation.
(c) Information Sharing. Calderwood & Harkness will provide periodic factual updates to Westlake Burris & Holt to the extent necessary to support accurate and timely disclosure by the Company. These updates will be provided in writing where practicable, and will be clearly marked as privileged and confidential, protected by the attorney-client privilege, the work-product doctrine, and the common-interest privilege. The provision of such updates shall not constitute a waiver of any applicable privilege, and both firms shall take all reasonable steps to preserve the privileged character of shared information.
(d) SEC Communications. Any communications with the SEC, whether initiated by the Company or in response to inquiry, subpoena, or request for voluntary production, shall be coordinated between Calderwood & Harkness and Westlake Burris & Holt. Neither firm shall communicate with the SEC on behalf of VHG regarding the matters under investigation without the prior knowledge and concurrence of the other firm, unless exigent circumstances require an immediate response, in which case the responding firm shall promptly notify the other firm of the substance of the communication.
(e) Securities-Law Analysis. Westlake Burris & Holt shall advise VHG and the Audit Committee on the securities-law implications of the investigation's findings, including materiality assessments under the standard articulated in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), and Basic Inc. v. Levinson, 485 U.S. 224 (1988); Regulation FD considerations under Rule 100 of Regulation FD (17 C.F.R. § 243.100 et seq.) to the extent that investigation-related information may be selectively disclosed to institutional shareholders or analysts; and potential private-litigation exposure, including the risk of securities class action lawsuits under Section 10(b) and Rule 10b-5 of the Exchange Act and derivative actions under state law.
(f) Internal Communications and Board Reporting. Calderwood & Harkness will continue to coordinate with VHG General Counsel Patricia Navarro regarding internal communications to the Board of Directors and senior management, particularly as such communications intersect with the Company's disclosure obligations. We will ensure that board-level reporting on the investigation's status and findings is conducted in a manner that preserves all applicable privileges and does not create unnecessary disclosure obligations. To the extent that board resolutions or committee determinations are required to support SEC filings (such as the Audit Committee's formal non-reliance determination), Calderwood & Harkness will coordinate with your firm to ensure that such resolutions are drafted and adopted in a manner consistent with applicable legal requirements.
(g) D&O Insurance Notice Obligations. Both firms should remain attentive to the Company's D&O insurance notice obligations. VHG maintains a directors' and officers' liability insurance program that includes a primary tower policy issued by North Atlantic Indemnity Corp. (Policy No. NAI-DOL-2023-004891), with a limit of $25 million per claim and $50 million in the aggregate, for the policy period January 1, 2023 through December 31, 2023, as well as a Side A difference-in-conditions ("DIC") policy issued by Ironbridge Specialty Insurance Ltd., with a limit of $15 million. The filing of the Form 8-K under Item 4.02, as well as any subsequent developments in the investigation or any litigation or regulatory proceedings, may trigger notice obligations under one or both of these policies. We recommend that your firm, in consultation with Calderwood & Harkness and General Counsel Navarro, promptly assess whether notice is required under these policies and, if so, coordinate the preparation and delivery of timely notice to the relevant carriers to preserve the Company's and the individual insureds' coverage rights.
VII. Privilege Protections
We wish to emphasize several important points regarding the preservation of legal privileges in connection with our inter-firm communications and the Company's disclosure obligations.
First, Calderwood & Harkness's communications with Westlake Burris & Holt regarding the investigation's findings, methodology, legal analysis, and strategy are protected by the attorney-client privilege, the work-product doctrine, and the common-interest privilege. Both firms represent VHG (Calderwood & Harkness as Audit Committee counsel and Westlake Burris as securities counsel) in connection with related matters, and our communications in furtherance of these shared legal objectives are entitled to the full protection of the common-interest doctrine. See, e.g., Hunton & Williams v. U.S. Dep't of Justice, 590 F.3d 272 (4th Cir. 2010); In re Teleglobe Commc'ns Corp., 493 F.3d 345 (3d Cir. 2007).
Second, Calderwood & Harkness's provision of factual summaries, preliminary findings, or forensic accounting analyses to Westlake Burris for the limited purpose of supporting your firm's preparation of accurate and compliant SEC filings does not constitute a waiver of the attorney-client privilege or work-product protection. These disclosures are made in confidence, for the purpose of obtaining or providing legal advice, and within the scope of the common-interest relationship. Both firms should ensure that all materials shared in connection with this coordination are clearly marked "PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE — ATTORNEY WORK PRODUCT" and that access to such materials is restricted to attorneys and professional staff with a need to know.
Third, both firms should maintain strict confidentiality regarding all information shared in connection with the investigation and the Company's disclosure obligations. No investigation-related information, findings, or analyses should be disclosed to any third party — including Company personnel outside the Audit Committee and the specifically authorized members of management — without the prior written consent of Calderwood & Harkness and the Audit Committee.
Fourth, and of particular importance in the current context, both firms must exercise extreme caution in drafting SEC filings and other public disclosures to avoid inadvertent disclosure of privileged information or inadvertent waiver of the privilege over the investigation's underlying materials. The Form 8-K and any subsequent filings should describe the investigation and its findings at a level of generality sufficient to satisfy the Company's disclosure obligations, without disclosing the substance of legal advice received, the specific methodologies employed by investigation counsel or forensic accountants, or the content of privileged communications. We recommend that both firms review all draft filings with this principle specifically in mind, and that any questions regarding the appropriate level of disclosure be discussed jointly before language is finalized.
VIII. Requested Next Steps
In light of the foregoing, we respectfully request and propose the following next steps:
1. Circulation of Draft Form 8-K. We request that Westlake Burris circulate a draft Form 8-K under Item 4.02 to Calderwood & Harkness for review and comment no later than Saturday, August 12, 2023. This timeline will allow Calderwood & Harkness to review the draft over the weekend and provide consolidated comments by the morning of Monday, August 14, 2023, in time to permit filing on the contemplated filing date. We recognize that this is an aggressive timeline and appreciate your firm's willingness to accommodate it given the urgency of the disclosure obligation.
2. Joint Coordination Call. We propose scheduling a joint call among the following participants to align on disclosure language, filing timing, and the ongoing coordination protocols described above:
• Howard Quinn, Conrad Ashby, and Liam Donahue (Calderwood & Harkness LLP)
• Irene Castellanos and relevant members of your team (Westlake Burris & Holt LLP)
• Patricia Navarro, General Counsel, VHG
• Thomas Rhett Griffith, Chief Financial Officer, VHG
We are available for this call at your earliest convenience and suggest that it take place no later than the afternoon of Friday, August 11, 2023, or the morning of Saturday, August 12, 2023, to ensure that the draft 8-K can be prepared on schedule.
3. Regulation FD and Nasdaq Listing-Rule Considerations. We request that Westlake Burris advise the Audit Committee and Company management on any immediate Regulation FD or Nasdaq listing-rule considerations arising from the non-reliance determination, including but not limited to: (a) whether the non-reliance determination triggers any disclosure obligations under Nasdaq Listing Rule 5250(c)(1) (material event notification) or any other applicable listing standard; (b) whether any selective disclosure has occurred or is at risk of occurring in connection with the Audit Committee's discussions with HSA, Company management, or others; and (c) whether VHG should consider issuing a press release concurrent with the Form 8-K filing. We note that the Company's next scheduled earnings call for Q2 2023 results has not yet been publicly announced, and recommend that any announcement be coordinated with the 8-K filing.
4. Transfer Agent Notification. We request that Westlake Burris confirm the status of any notice to Continental Registrar & Trust Co. (VHG's transfer agent, with offices at 1700 Broadway, Suite 1400, New York, New York 10019) regarding any anticipated shareholder communications that may be required or advisable in connection with the non-reliance determination. We understand that certain shareholder communications or notices may be warranted, and recommend that these be coordinated in advance of the 8-K filing to the extent practicable.
IX. Closing
We are prepared to discuss any of the matters addressed in this letter at your convenience, and we look forward to working closely with your firm to ensure that VHG meets its disclosure obligations in a timely, accurate, and privilege-protective manner. We recognize that the matters described in this letter are time-sensitive and of the utmost importance to VHG, its shareholders, and the Audit Committee, and we appreciate your firm's prompt attention to these issues.
Please do not hesitate to reach out to any of the following Calderwood & Harkness contacts with questions or to coordinate on next steps:
Howard Quinn, Partner Direct: (305) 814-7218
Email: hquinn@calderwoodharkness.com
Liam Donahue, Senior Associate Direct: (305) 814-7244
Email: ldonahue@calderwoodharkness.com
For day-to-day coordination purposes, Liam Donahue and working associate Steven Hollander (direct: (305) 814-7261; email: shollander@calderwoodharkness.com) will serve as Calderwood & Harkness's primary points of contact for your team. Howard Quinn and partner Conrad Ashby will remain actively involved in all substantive review and strategic decisions.
We look forward to a productive and well-coordinated collaboration with your firm throughout this matter.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Howard Quinn Partner, White Collar Defense & Investigations Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131 Direct: (305) 814-7218
Email: hquinn@calderwoodharkness.com
cc: Conrad Ashby, Esq., Partner, Calderwood & Harkness LLP
Diane Kowalski, Audit Committee Chair, Verimark Hospitality Group Inc. (via separate privileged transmission)
Patricia Navarro, Esq., General Counsel, Verimark Hospitality Group Inc.
Fiscal Quarter | Quarter Ending | Estimated Overstatement
Q3 2022 | September 30, 2022 | $4.7 million
Q4 2022 | December 31, 2022 | $6.1 million
Q1 2023 | March 31, 2023 | $9.8 million
Q2 2023 | June 30, 2023 | $5.8 million
Total | $26.4 million

CALDERWOOD & HARKNESS LLP Attorneys at Law

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CALDERWOOD & HARKNESS LLP

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