1021-00008 · Client 1021 · Investigation Analysis

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

MEMORANDUM

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

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

FROM: Liam Donahue, Senior Associate, and Steven Hollander, Associate

Calderwood & Harkness LLP White Collar & Investigations Practice 200 South Biscayne Boulevard, Suite 4400 Miami, FL 33131

DATE: December 28, 2023

RE: Revenue-Recognition Analysis under ASC 606 — Timeshare Interest Sales at Verimark Coastal Resorts LLC

MATTER NO.: 1021-00008

This memorandum was prepared with input from Crestline Forensic Advisory LLC (Engagement No. CFA-VHG-2023-0089; Engagement Partner Douglas Reinhardt, CPA, CFF; Senior Manager Priya Venkatesh, CPA), retained as forensic accounting advisor under the Kovel doctrine at the direction of the Audit Committee of Verimark Hospitality Group Inc. The work product of Crestline Forensic Advisory LLC is incorporated herein and is protected by the attorney-client privilege and the attorney work-product doctrine. This memorandum was prepared under the supervision of Howard Quinn, Responsible Partner, and Conrad Ashby, Billing Partner, Calderwood & Harkness LLP.

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I. Executive Summary

This memorandum sets forth the findings of our analysis of whether Verimark Coastal Resorts LLC ("VCR"), a wholly owned Florida limited liability company subsidiary of Verimark Hospitality Group Inc. ("VHG," Nasdaq: VMRK), a Delaware corporation headquartered at 4100 Bayshore Boulevard, Suite 1200, Tampa, FL 33611, prematurely recognized revenue on timeshare-interest sales in violation of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606"), and applicable Florida law. This memorandum is addressed to the Audit Committee of the Board of Directors of VHG, which authorized this investigation by resolution adopted at an executive session held on July 10, 2023, and which engaged Calderwood & Harkness LLP pursuant to an engagement letter dated July 17, 2023.

Principal Finding. Based on our review of the documentary evidence, witness interviews, and forensic accounting analysis performed by Crestline Forensic Advisory LLC ("Crestline"), we conclude that VCR systematically recognized timeshare-interest purchase deposits as completed-sale revenue upon execution of purchase agreements, rather than upon expiration of the statutory ten-day rescission period mandated by Florida Statute § 721.10. This practice was in direct violation of ASC 606, which requires the existence of an enforceable contract with commercial substance before revenue recognition, and in direct violation of VHG's own Accounting Policy Manual, Section 4.2 (Revenue Recognition — Timeshare Interest Sales), which expressly requires that revenue be recognized only upon expiration of the applicable statutory rescission or cancellation period and confirmation of the non-refundable status of the purchaser's deposit.

Scope of Overstatement. The premature revenue-recognition practice resulted in an aggregate revenue overstatement of $26.4 million across four fiscal quarters, from Q3 FY 2022 (ending September 30, 2022) through Q2 FY 2023 (ending June 30, 2023). The quarterly breakdown of the overstatement is as follows:

Impact on VHG Consolidated Financial Statements. For FY 2022, the combined Q3 and Q4 revenue overstatement was $10.8 million. VHG's FY 2022 consolidated revenue as originally reported was $1.87 billion. The after-tax income overstatement attributable to FY 2022 was approximately $8.17 million, calculated by applying VHG's effective tax rate of 24.3% to the $10.8 million pre-tax overstatement. This after-tax income overstatement of $8.17 million represents approximately 5.74% of VHG's reported FY 2022 net income of $142.3 million. This figure exceeds the commonly applied quantitative materiality threshold of 5% of pre-tax income from continuing operations and, when assessed together with the qualitative factors discussed in this memorandum, renders the overstatement material to VHG's consolidated financial statements.

Key Properties Involved. The premature revenue-recognition practice was concentrated at two VCR resort properties: (1) Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, FL 32541, specifically the Phase III timeshare units; and (2) Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, FL 34228, specifically the Phase II timeshare units. These were the primary active sales programs during the investigation period.

Key Individuals Implicated. The investigation identified three VCR employees who were principally responsible for the premature revenue-recognition practice:

• Garrett W. Daskine, Division President, VCR — directed the premature recognition practice as part of an effort to meet or exceed quarterly revenue targets at the VCR division level, which directly affected his performance-based compensation;

• Nicole Prescott, Vice President of Finance, VCR — implemented the scheme by instructing VCR accounting staff to book purchase deposits as completed-sale revenue upon receipt of executed purchase agreements, before the expiration of the statutory rescission periods, overriding VHG's Accounting Policy Manual, Section 4.2; and

• Ryan Mateo Serrano, Controller, VCR — recorded the journal entries in VCR's accounting system reflecting the prematurely recognized revenue, at the direction of Daskine and Prescott.

Material Weakness. The premature revenue-recognition practice constitutes a material weakness in VCR's internal controls over financial reporting. This conclusion is consistent with the preliminary identification communicated by Hargrove, Steen & Aldrich LLP ("HSA"), VHG's independent registered public accounting firm, on June 19, 2023. The material weakness implicates VHG's certifications under Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, as discussed in detail in Section IX of this memorandum.

Companion Memorandum. This memorandum addresses only the premature revenue-recognition scheme. The separate Expense-Reimbursement Irregularity Analysis memorandum, also dated December 28, 2023, addresses the distinct fictitious vendor scheme that was uncovered during the course of this investigation.

II. Scope and Methodology

A. Scope of Analysis

The scope of this revenue-recognition analysis encompasses the following parameters:

Temporal Scope. The analysis covers four fiscal quarters, from Q3 FY 2022 (the quarter ending September 30, 2022) through Q2 FY 2023 (the quarter ending June 30, 2023). This period was selected because it represents the earliest quarter in which the premature revenue-recognition practice was identified (Q3 FY 2022) through the last quarter before the practice was halted following the commencement of the investigation (Q2 FY 2023). The investigation opened on July 24, 2023, and Daskine, Prescott, and Serrano were placed on administrative leave effective August 7, 2023, at which point the improper practice ceased.

Entities Covered. The analysis covers VCR's timeshare-interest sales operations at two resort properties: (1) Coral Dune Resort & Residences, 14200 Emerald Coast Parkway, Destin, FL 32541, specifically the Phase III timeshare units then under active development and sale; and (2) Palmetto Bluff Club, 3950 Longboat Key Drive, Sarasota, FL 34228, specifically the Phase II timeshare units then under active development and sale. These two properties were the only VCR properties with active timeshare-interest sales programs during the investigation period.

Financial Scope. The analysis encompasses all timeshare-interest purchase agreements and associated deposit transactions recorded as revenue during the four-quarter period. This includes the full contractual revenue amounts recognized at the time of contract signing, not merely the deposit amounts, as VCR's improper practice involved booking the full anticipated revenue from each timeshare-interest sale upon execution of the purchase agreement.

Contextual Financial Data. VCR's FY 2022 reported revenue was $438.7 million, representing approximately 23.46% of VHG's consolidated FY 2022 revenue of $1.87 billion. VCR is thus a significant subsidiary within the VHG corporate structure, and its revenue-recognition practices directly and materially affect VHG's consolidated financial results.

B. Sources of Information

Our findings are based upon a comprehensive review of documentary evidence, witness interviews, and forensic accounting analysis, as described below.

Documentary Evidence. The documents reviewed in connection with this analysis were drawn from the approximately 347,000 documents that have been reviewed to date from the approximately 1.2 million documents collected from eight of the eleven identified custodians. Document collection, processing, and hosting were performed by Triton discovery Solutions Inc. ("Triton"), located at 500 Seventh Avenue, 14th Floor, New York, NY 10018. Triton employed a Technology-Assisted Review ("TAR") 2.0 predictive-coding workflow, which was validated through iterative sampling and quality-control procedures supervised by Calderwood & Harkness's e-discovery team. The specific categories of documents reviewed in connection with this revenue-recognition analysis include, but are not limited to, the following:

• Timeshare-interest purchase agreements executed at Coral Dune Resort & Residences (Phase III) and Palmetto Bluff Club (Phase II) during the investigation period;

• Deposit receipts and payment records associated with each purchase agreement;

• Revenue journal entries recorded in VCR's general ledger for each of the four quarters at issue;

• General ledger extracts from VCR's accounting system (Hollowell & Co.), including detail trial balances, account activity reports, and sub-ledger records for revenue accounts;

• Rescission notices submitted by purchasers during the ten-day rescission window and beyond;

• Cancellation logs maintained by VCR's sales administration department;

• Quarterly close checklists prepared by VCR's accounting department, including the Controller's sign-off notations;

• Internal emails among Daskine, Prescott, and Serrano, recovered from custodian collections, including emails directing the acceleration of revenue recognition at quarter-end;

• Spreadsheets maintained by Prescott tracking deposit amounts, purchase agreement dates, and rescission-period expiration dates;

• Management representation letters submitted by VCR management (over Daskine's and Prescott's signatures) to HSA in connection with its audit and interim review procedures; and

• VHG Accounting Policy Manual, Section 4.2 (Revenue Recognition — Timeshare Interest Sales), and related corporate-level accounting policy documents.

Witness Interviews. A total of twenty-two interviews of eighteen unique witnesses were conducted during the course of the investigation. The following interviews are specifically relied upon in this revenue-recognition analysis:

1. William "Bill" Gentry, Lead Engagement Partner, HSA — interviewed on August 15, 2023. This interview was informational in nature and was conducted without Upjohn warnings, as Mr. Gentry is not an employee, officer, or director of VHG. Mr. Gentry provided background on HSA's identification of the potential revenue-recognition issue during its Q1 2023 interim review and the circumstances surrounding his June 19, 2023 communication to VHG CFO Griffith and Audit Committee Chair Kowalski.

2. Thomas Rhett Griffith, Chief Financial Officer, VHG — interviewed on August 22, 2023. Appropriate Upjohn warnings were provided at the outset of the interview.

3. Ryan Mateo Serrano, Controller, VCR — interviewed on September 27, 2023 (Session 1) and December 5, 2023 (Session 2). Session 2 was conducted pursuant to a cooperation agreement executed by Serrano on November 15, 2023. At both sessions, Serrano's personal counsel, Marco A. Ruiz of Coletti & Ruiz PA, was present. Appropriate Upjohn warnings were provided at the outset of Session 1.

4. Garrett W. Daskine, Division President, VCR — interviewed on October 4, 2023. Daskine's personal counsel, James Corwin Merritt of Merritt & Dunleavy LLP, was present. Appropriate Upjohn warnings were provided at the outset of the interview. Daskine declined a follow-up interview request.

5. Nicole Prescott, Vice President of Finance, VCR — interviewed on October 11, 2023 (Session 1) and November 8, 2023 (Session 2). Prescott's personal counsel, Candace O'Brien Langford of Langford Pace LLP, was present at both sessions. Appropriate Upjohn warnings were provided at the outset of Session 1.

6. Additional VCR sales and accounting personnel were also interviewed as part of the broader investigation. In total, twenty-two interviews of eighteen unique witnesses were conducted. Those additional interviews provided corroborative background information regarding VCR's standard sales and accounting processes, but the five witness categories identified above are the principal sources relied upon for the specific findings in this memorandum.

Forensic Accounting Analysis. Forensic accounting analysis was performed by Crestline Forensic Advisory LLC ("Crestline"), retained under the Kovel doctrine at the direction of the Audit Committee. The Crestline engagement was led by Douglas Reinhardt, CPA, CFF (Engagement Partner) and Priya Venkatesh, CPA (Senior Manager). Crestline performed transaction-level testing of all timeshare-interest purchase agreements during the four-quarter investigation period, including: (a) rescission-period timing analysis, comparing revenue-recognition dates to rescission-period expiration dates for each agreement; (b) revenue-reversal tracing, tracking the disposition of prematurely recognized revenue when purchasers exercised their rescission rights; and (c) quantification of the net overstatement for each quarter, taking into account both prematurely recognized revenue and the timing of subsequent reversals.

C. Analytical Framework

The analytical framework applied in this memorandum comprises the following authorities and standards:

Applicable Accounting Standard. ASC 606, Revenue from Contracts with Customers, as issued by the Financial Accounting Standards Board ("FASB"), provides the authoritative framework for revenue recognition. ASC 606 establishes a five-step model for determining when and how revenue should be recognized: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) performance obligations are satisfied.

Applicable State Law. Florida Statute § 721.10 provides that a purchaser of a timeshare interest may cancel the purchase agreement within ten calendar days after the date of execution of the agreement or the date on which the purchaser received the last of all documents required to be provided to the purchaser, whichever is later. The rescission right is unconditional, and the purchaser need not state a reason for exercising it. Upon exercise of the rescission right, the seller must refund the full deposit within twenty days. The existence of this statutory rescission right has direct implications for the timing of revenue recognition under ASC 606, as discussed in detail in Section IV below.

Internal VHG Revenue-Recognition Policy. VHG's Accounting Policy Manual, Section 4.2 (Revenue Recognition — Timeshare Interest Sales), requires that revenue from timeshare-interest sales be recognized only upon "expiration of the applicable statutory rescission or cancellation period and confirmation of non-refundable status of the purchaser's deposit." This policy is consistent with the requirements of ASC 606 and, as applied to Florida timeshare-interest sales, effectively requires that revenue not be recognized until at least ten calendar days after execution of the purchase agreement, assuming no rescission notice is received during the statutory window.

Relevant Regulatory Framework. In addition to the foregoing accounting standards and state law, the analysis is informed by: (a) Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 ("SOX"), governing CEO/CFO certifications and internal controls over financial reporting, respectively; (b) SEC Regulation S-X, governing the form and content of financial statements filed with the SEC; and (c) SEC Staff Accounting Bulletin No. 99, Materiality ("SAB 99"), and SEC Staff Accounting Bulletin No. 104, Revenue Recognition ("SAB 104"), providing interpretive guidance on materiality assessments and revenue-recognition principles.

III. Background: VCR Timeshare-Interest Sales Operations

A. Business Model

Verimark Coastal Resorts LLC is a wholly owned subsidiary of Verimark Hospitality Group Inc., organized as a Florida limited liability company, with its principal office located at 7820 Gulf Breeze Parkway, Suite 400, Destin, FL 32541. VCR's core business is the development and sale of timeshare interests — commonly referred to in the industry as "vacation ownership interests" — at resort properties located primarily along Florida's Gulf Coast region. VCR's timeshare-interest sales operations represent the company's primary revenue stream and a material contributor to VHG's consolidated financial performance.

During FY 2022, VCR reported revenue of $438.7 million, representing approximately 23.46% of VHG's consolidated FY 2022 revenue of $1.87 billion. VCR is thus the single largest operating subsidiary within the VHG corporate structure in terms of revenue contribution, underscoring the significance of VCR's revenue-recognition practices to VHG's overall financial reporting.

During the investigation period (Q3 FY 2022 through Q2 FY 2023), VCR's active timeshare-interest sales programs were concentrated at two properties: (1) Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, FL 32541, where Phase III timeshare units were under active development and sale; and (2) Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, FL 34228, where Phase II timeshare units were under active development and sale. These two properties accounted for substantially all of VCR's new timeshare-interest sales volume during the relevant period. Other VCR properties were in various stages of development or had substantially completed their initial sales programs and were generating revenue primarily from ongoing management fees and resort operations rather than new timeshare-interest sales.

B. Standard Sales Process

The standard process for selling timeshare interests at VCR's resort properties follows a well-established sequence that is common in the vacation ownership industry. The process begins with a sales presentation, typically conducted on-site at the resort property, during which prospective purchasers are introduced to the timeshare concept, the specific property and unit types available, and the pricing and financing options. If the prospective purchaser elects to proceed, the following steps occur:

1. Execution of Purchase Agreement. The prospective purchaser signs a timeshare-interest purchase agreement, which is a binding contract (subject to the statutory rescission right described below) setting forth the material terms of the sale, including the identity of the unit or unit category, the designated use periods, the total purchase price, the deposit amount, the payment schedule, and the terms and conditions governing the purchaser's use of the timeshare interest.

2. Payment of Initial Deposit. At the time of execution of the purchase agreement, the purchaser pays an initial deposit, which typically ranges from 10% to 20% of the total purchase price. Deposits are received by VCR and held in escrow or trust accounts as required by Florida law until the expiration of the rescission period.

3. Statutory Rescission Period. Under Florida Statute § 721.10, the purchaser has a ten-calendar-day right of rescission from the date of execution of the purchase agreement. This right is unconditional — the purchaser may cancel for any reason or no reason at all within the ten-day window. The rescission right is a consumer-protection provision mandated by Florida law and cannot be waived or shortened by contract. If the purchaser exercises the rescission right within the statutory period, VCR is obligated to refund the full deposit within twenty days of receipt of the rescission notice.

4. Expiration of Rescission Period. Only after the ten-day rescission period expires without the purchaser having submitted a rescission notice does the sale become non-cancellable and the deposit non-refundable. At this point — and only at this point — VHG's Accounting Policy Manual, Section 4.2, authorizes the recognition of revenue from the timeshare-interest sale.

5. Completion of Sale. Following the expiration of the rescission period, the remaining balance of the purchase price is collected according to the payment schedule (which may include purchaser financing provided by VCR or third-party lenders), and the timeshare interest is transferred to the purchaser in accordance with applicable Florida law and the terms of the purchase agreement.

The critical control point in this process, from a revenue-recognition perspective, is Step 4 — the expiration of the rescission period. VHG's Accounting Policy Manual, Section 4.2, was designed to align with ASC 606's requirement that a contract must have commercial substance and enforceable rights and obligations before revenue may be recognized. Because the statutory rescission right renders the purchase agreement cancellable at the purchaser's sole discretion for a period of ten calendar days, the contract does not achieve the requisite enforceability under ASC 606 until the rescission window has closed.

C. Rescission Rates

The rescission rate — the percentage of timeshare-interest purchase agreements that are cancelled by purchasers exercising their statutory rescission rights — is a significant operational and financial metric for timeshare developers. During the investigation period (Q3 FY 2022 through Q2 FY 2023), VCR's actual timeshare rescission rate was approximately 14.3%. This rate is notably higher than the industry average of approximately 11%, as reported by the American Resort Development Association ("ARDA") in its annual statistical review for calendar year 2022.

The elevated rescission rate at VCR is relevant to this analysis for two reasons. First, it means that a material portion of the deposits that VCR booked as revenue at the time of agreement signing were subsequently rescinded, necessitating revenue reversals. Because VCR's improper practice involved booking revenue at the time of signing rather than at the expiration of the rescission period, these reversals were not recorded until the following quarter, creating a persistent "rolling" overstatement that carried forward from quarter to quarter. Second, the elevated rescission rate provides further support, under the variable-consideration constraint of ASC 606-10-32-8, that a significant revenue reversal was probable, which independently required that the constraint be applied to limit the amount of revenue recognized.

IV. ASC 606 Revenue-Recognition Framework Applied to Timeshare Interest Sales

ASC 606 establishes a comprehensive, principles-based framework for revenue recognition, organized around a five-step model. This section applies each step of the ASC 606 model to VCR's timeshare-interest sales and identifies the specific points at which VCR's premature revenue-recognition practice deviated from the requirements of the standard.

A. Step 1: Identify the Contract with the Customer

Under ASC 606-10-25-1, an entity recognizes revenue from a contract with a customer only when all of the following criteria are met:

(a) The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations;

(b) The entity can identify each party's rights regarding the goods or services to be transferred;

(d) The contract has commercial substance (i.e., the risk, timing, or amount of the entity's future cash flows is expected to change as a result of the contract); and

(e) It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

The critical issue for purposes of this analysis is criterion (d) — commercial substance — and, more broadly, the threshold question of whether an enforceable contract exists during the ten-day statutory rescission period. During the rescission window, the purchaser retains a unilateral, unconditional right to cancel the contract and receive a full refund of the deposit. The purchase agreement is therefore not yet an enforceable contract in the sense contemplated by ASC 606 because the purchaser can, without cause or penalty, void the agreement at any time during the ten-day period. Until the rescission period expires, the contract lacks the commercial substance and enforceable rights and obligations required by Step 1. The entity cannot reasonably conclude that it will collect the consideration to which it is entitled (criterion (e)) when the purchaser has an absolute right to reclaim the deposit.

VCR's practice of recognizing revenue at the time of contract signing — before the rescission period had expired — failed to satisfy Step 1 because no enforceable contract existed during the rescission window. Revenue recognized prior to the expiration of the rescission period was, by definition, recognized in the absence of a valid contract under ASC 606.

The FASB's Basis for Conclusions accompanying ASC 606 confirms that contracts with unilateral termination rights that are exercisable without penalty should generally not give rise to revenue recognition until the termination right lapses. The Florida statutory rescission right is precisely such a unilateral termination right: it is exercisable without penalty, without cause, and results in a full refund of all consideration paid. The existence of this right during the ten-day window means that no enforceable contract exists under ASC 606 until the window closes.

B. Step 2: Identify the Performance Obligations

Under ASC 606-10-25-14, an entity evaluates the goods and services promised in a contract and identifies as a performance obligation each promise to transfer to the customer either (a) a good or service (or a bundle of goods or services) that is distinct, or (b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

In the context of a timeshare-interest sale, the primary performance obligation is the transfer of the timeshare interest itself — that is, the conveyance to the purchaser of the right to use a specific unit (or unit category) at the resort property for designated time periods in accordance with the terms of the timeshare plan. This performance obligation is distinct and represents the core of the economic exchange between VCR and the purchaser.

Secondary performance obligations may also exist in a timeshare-interest sale, including, for example: (a) access to resort amenities such as pools, fitness centers, and recreational facilities; (b) ongoing management services for the timeshare property; and (c) membership in a vacation exchange club or loyalty program. During the investigation period, VCR accounted for these secondary performance obligations separately from the primary timeshare-interest transfer, and the identification and treatment of these secondary obligations are not at issue in this analysis. The premature revenue-recognition practice related solely to the timing of recognition of revenue associated with the primary performance obligation — the transfer of the timeshare interest.

C. Step 3: Determine the Transaction Price

Under ASC 606-10-32-2, the transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. In a timeshare-interest sale, the transaction price is the total contractual purchase price of the timeshare interest, net of any incentives, discounts, or promotional allowances offered to the purchaser.

Deposit amounts paid by purchasers at the time of execution of the purchase agreement varied during the investigation period but typically ranged from 10% to 20% of the total purchase price. However, VCR's improper practice was not limited to the premature recognition of the deposit amount alone. In many instances, VCR recorded the full contractual revenue — that is, the total purchase price of the timeshare interest — at the time of contract signing, even though only the deposit had been received. This practice further compounded the overstatement, as it resulted in the recognition of both the deposit and the remaining balance of the purchase price before the rescission period had expired and before the performance obligation had been satisfied.

D. Step 4: Allocate the Transaction Price

Under ASC 606-10-32-28, an entity allocates the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis. As noted in Section IV.B above, the secondary performance obligations in VCR's timeshare-interest sales were accounted for separately, and the allocation of the transaction price among performance obligations is not a significant issue in this analysis. The allocation to the primary timeshare-interest performance obligation was generally appropriate. The central deficiency identified in this analysis relates to the timing of recognition (Step 5), not the allocation of the transaction price (Step 4).

E. Step 5: Recognize Revenue When (or As) Performance Obligations Are Satisfied

Under ASC 606-10-25-30, an entity recognizes revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service. For a performance obligation satisfied at a point in time, the entity recognizes revenue at the point in time at which the customer obtains control.

In the context of a timeshare-interest sale, the transfer of control of the timeshare interest to the purchaser is a point-in-time event. The purchaser cannot be said to have obtained control of the timeshare interest while the statutory rescission period remains open, because during that period, the purchaser retains the right to unilaterally void the transaction and recover the full deposit. Control, within the meaning of ASC 606, implies the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset, while also bearing the risks associated with it. When the purchaser has an absolute right to rescind the contract and recover the full consideration paid, the purchaser has not yet assumed the risks of ownership, and control has not transferred.

VCR improperly recognized revenue at the point of contract signing — that is, at the moment the purchase agreement was executed and the deposit was received — before the ten-day statutory rescission period had expired. This was a direct violation of ASC 606-10-25-30, because the performance obligation (transfer of the timeshare interest) had not been satisfied, and control had not transferred to the customer, at the time revenue was recorded.

F. Variable Consideration and Constraint (ASC 606-10-32-8)

In addition to the Step 1 and Step 5 violations discussed above, VCR's premature revenue-recognition practice also implicated the variable-consideration constraint set forth in ASC 606-10-32-8. Under this provision, an entity includes in the transaction price some or all of an amount of variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

The right of rescission introduces variable consideration into the timeshare-interest purchase transaction. At the time of contract signing, there is inherent uncertainty as to whether the transaction will be consummated — the purchaser may exercise the rescission right, resulting in a full refund of the deposit and a reversal of any revenue recognized. This uncertainty is not remote or speculative; during the investigation period, VCR's actual rescission rate was approximately 14.3%, meaning that roughly one out of every seven purchase agreements was cancelled during the rescission window. This rate exceeds the industry average of approximately 11% and is, by any measure, a material rate of cancellation.

Under the constraint on variable consideration, VCR should not have recognized revenue to the extent that it was probable that a significant reversal would occur. Given a 14.3% rescission rate, it was highly probable that a significant portion of the revenue recognized at contract signing would be reversed when purchasers exercised their rescission rights. The failure to apply the variable-consideration constraint represents an additional, independent violation of ASC 606.

V. Quantification of Revenue Overstatement

A. Methodology. The quantification of the revenue overstatement was performed by Crestline Forensic Advisory LLC under the supervision of Calderwood & Harkness LLP. Crestline's forensic accounting team, led by Douglas Reinhardt, CPA, CFF (Engagement Partner) and Priya Venkatesh, CPA (Senior Manager), performed transaction-level testing of all timeshare-interest purchase agreements executed at Coral Dune Resort & Residences (Phase III) and Palmetto Bluff Club (Phase II) during each of the four quarters within the investigation period.

For each purchase agreement, Crestline compared the following three data points:

(a) The date on which revenue was recorded in VCR's general ledger in connection with the purchase agreement;

(b) The date on which the ten-day statutory rescission period under Florida Statute § 721.10 expired, calculated as ten calendar days from the later of the date of execution of the purchase agreement or the date on which the purchaser received the last of all documents required to be provided under Florida law; and

Revenue was classified as "prematurely recognized" if it was recorded in VCR's general ledger before the rescission period had expired. The overstatement for each quarter represents the net amount of revenue that was prematurely recognized — that is, the amount of revenue recognized before the rescission period expired that was either (i) subsequently rescinded by the purchaser (resulting in a revenue reversal that was deferred to the following quarter) or (ii) still within the rescission window at the quarter-end close date (meaning the sale had not yet become final as of the quarter-end).

It is important to note that the overstatement figures presented below represent the net impact on each quarter's financial results, not merely the gross amount of prematurely recognized revenue. The "rolling" nature of the scheme — in which reversals from the prior quarter's prematurely recognized sales were booked in the current quarter, while new premature recognitions were added — required a careful netting analysis to isolate the true overstatement attributable to each quarter.

B. Quarter-by-Quarter Analysis

Q3 FY 2022 (Quarter Ending September 30, 2022). Q3 FY 2022 is the first identified quarter in which the premature revenue-recognition practice was in effect. The overstatement amount for Q3 FY 2022 was $4.7 million.

This overstatement was primarily attributable to Phase III timeshare-interest sales at Coral Dune Resort & Residences in Destin, Florida. Crestline's transaction-level analysis determined that revenue was recorded for timeshare-interest purchase agreements signed during the final ten days of September 2022 — specifically, agreements executed between approximately September 20, 2022 and September 30, 2022 — with rescission periods that extended into October 2022. Because the rescission periods had not expired as of the September 30, 2022 quarter-end date, this revenue was prematurely recognized. A portion of these sales were subsequently rescinded by purchasers in early October 2022; the corresponding revenue reversals were not booked until Q4 FY 2022, further compounding the distortion of quarterly results.

The documentary evidence reviewed in connection with Q3 FY 2022 includes quarterly close checklists prepared by Serrano, which contain notations indicating "pending rescission" next to specific revenue entries — an acknowledgment by the Controller that the rescission periods had not yet expired at the time the entries were recorded. Despite this awareness, the entries were booked as completed-sale revenue at Prescott's direction.

Q4 FY 2022 (Quarter Ending December 31, 2022). The overstatement amount for Q4 FY 2022 was $6.1 million, reflecting increased sales volume during the holiday season at both Coral Dune Resort & Residences and Palmetto Bluff Club.

The Q4 overstatement follows the same pattern identified in Q3: revenue was recognized for purchase agreements signed in the final ten days of December 2022, with rescission periods extending into January 2023. The elevated sales volume during the holiday season — a period of peak timeshare sales activity across the industry — resulted in a larger absolute overstatement than in Q3, even though the underlying mechanism was identical.

Combined with the Q3 overstatement of $4.7 million, the total FY 2022 revenue overstatement was $10.8 million ($4.7 million + $6.1 million). This is the figure that directly affects VHG's FY 2022 Form 10-K and the associated CEO and CFO certifications under SOX Section 302.

Q1 FY 2023 (Quarter Ending March 31, 2023). The overstatement amount for Q1 FY 2023 was $9.8 million — the largest quarterly overstatement during the investigation period.

This quarter merits particular attention for several reasons. First, the $9.8 million overstatement was the specific amount identified by HSA during its interim review of VHG's Q1 2023 Form 10-Q filing (for the period ending March 31, 2023). On June 19, 2023, HSA's lead engagement partner, William Gentry, communicated to VHG CFO Thomas Rhett Griffith and Audit Committee Chair Diane Kowalski that HSA had identified $9.8 million in timeshare-interest deposits that had been recorded as completed-sale revenue in VCR's general ledger despite the applicable rescission periods not having expired before the March 31, 2023 quarter-end date. This communication was the catalyst for the Audit Committee's executive session on July 10, 2023, and its subsequent decision to retain independent counsel.

Second, the elevated overstatement in Q1 FY 2023 reflects an aggressive end-of-quarter sales push directed by Daskine. Internal emails recovered from custodian collections show that Daskine instructed VCR's sales teams at both Coral Dune and Palmetto Bluff to "accelerate closings" in the final days of March 2023 to meet or exceed quarterly revenue targets. This sales push resulted in a concentration of purchase agreements signed in the last week of March 2023 — agreements for which the ten-day rescission periods extended well into April 2023. Prescott's tracking spreadsheets confirm that she was aware that a significant volume of agreements signed in late March had rescission periods expiring in April, yet she directed Serrano to record the revenue in Q1 FY 2023.

Third, the Q1 FY 2023 overstatement, combined with the Q3 and Q4 FY 2022 overstatements, demonstrates a pattern of escalation. The quarterly overstatement amounts increased from $4.7 million in Q3 FY 2022 to $6.1 million in Q4 FY 2022 to $9.8 million in Q1 FY 2023, suggesting that the practice was not a one-time deviation but rather a systematic and intensifying scheme to inflate VCR's quarterly revenue results.

Q2 FY 2023 (Quarter Ending June 30, 2023). The overstatement amount for Q2 FY 2023 was $5.8 million. This was the last quarter in which the premature revenue-recognition practice was in effect. The practice ceased upon the opening of the investigation on July 24, 2023, and the placement of Daskine, Prescott, and Serrano on administrative leave effective August 7, 2023.

The Q2 FY 2023 overstatement includes prematurely recognized revenue from purchase agreements signed at both Coral Dune Resort & Residences and Palmetto Bluff Club. The lower overstatement relative to Q1 FY 2023 appears to reflect the seasonal pattern of timeshare sales (Q1, encompassing the spring season, tends to be a higher-volume period than Q2) rather than any voluntary moderation of the improper practice by VCR management.

C. Aggregate Overstatement Summary

The aggregate revenue overstatement across the four-quarter investigation period is as follows:

The aggregate overstatement of $26.4 million represents the cumulative amount of revenue prematurely recognized across the four quarters. As noted above, the FY 2022 component of this total is $10.8 million (Q3 + Q4), and the FY 2023 year-to-date component through Q2 is $15.6 million (Q1 + Q2).

D. Percentage Analysis

To provide context for the magnitude of the overstatement, the following percentage analysis is presented:

• FY 2022 overstatement ($10.8 million) as a percentage of VCR FY 2022 reported revenue ($438.7 million): approximately 2.46%.

• FY 2022 overstatement ($10.8 million) as a percentage of VHG consolidated FY 2022 revenue ($1.87 billion): approximately 0.58%.

While the revenue overstatement as a percentage of VHG consolidated revenue is relatively modest, the income impact is significantly more material, as discussed in Section VI below. This is because the prematurely recognized revenue had minimal associated direct costs — the deposits had been received, but the performance obligations (transfer of timeshare interests) had not yet been rendered, and accordingly, the associated cost of sales had not been incurred. The revenue overstatement therefore fell almost entirely to the pre-tax income line, resulting in a disproportionately large impact on net income and earnings per share.

VI. Impact on VHG Consolidated Financial Statements

A. Revenue Impact

The impact of the premature revenue-recognition practice on VHG's consolidated revenue for FY 2022 is summarized as follows:

• VHG FY 2022 consolidated revenue (as originally reported in the Form 10-K): $1.87 billion

• VCR FY 2022 revenue (as originally reported, prior to intercompany eliminations): $438.7 million

• FY 2022 revenue overstatement attributable to the premature recognition practice: $10.8 million (Q3 FY 2022: $4.7 million + Q4 FY 2022: $6.1 million)

• Estimated restated VCR FY 2022 revenue: $438.7 million − $10.8 million = $427.9 million

• Estimated restated VHG FY 2022 consolidated revenue: $1.87 billion − $10.8 million ≈ $1,859.2 million

• VCR's restated share of VHG consolidated revenue: approximately 23.02% (compared to 23.46% as originally reported)

B. Net Income Impact

The net income impact of the overstatement is particularly significant because, as noted above, the prematurely recognized revenue had minimal associated direct costs. The deposits were received and recorded as revenue, but the underlying performance obligations had not been fulfilled, and accordingly, the costs associated with those obligations (e.g., construction costs, unit finishing, transfer costs) had not yet been incurred or recognized. The revenue overstatement therefore passed through almost entirely to pre-tax income.

• VHG FY 2022 reported net income: $142.3 million

• VHG effective tax rate (per the original FY 2022 Form 10-K): 24.3%

• Pre-tax income overstatement attributable to FY 2022: $10.8 million (assuming, conservatively, that the costs associated with the overstated revenue were not correspondingly inflated, which is appropriate given that performance had not yet been rendered)

• After-tax income overstatement: $10.8 million × (1 − 0.243) = approximately $8.17 million

• After-tax income overstatement as a percentage of reported FY 2022 net income: $8.17 million ÷ $142.3 million = approximately 5.74%

The 5.74% figure exceeds the commonly applied quantitative materiality threshold of 5% of pre-tax income from continuing operations, which has been widely recognized by the SEC and the auditing profession as a benchmark (though not a bright-line test) for quantitative materiality. Under the framework established by SAB 99, even overstatements that fall below the 5% threshold may be material when qualitative factors are considered. Here, the overstatement exceeds the quantitative threshold and is accompanied by significant qualitative factors (discussed in Section X below), leaving no reasonable doubt as to its materiality.

C. Earnings Per Share Impact

The impact of the revenue overstatement on VHG's earnings per share is calculated as follows:

• VHG shares outstanding (basic, approximate): 88.6 million

• FY 2022 reported EPS (basic, approximate): $142.3 million ÷ 88.6 million ≈ $1.61 per share

• Overstatement impact on EPS: $8.17 million ÷ 88.6 million ≈ $0.09 per share

• Estimated restated FY 2022 EPS (basic, approximate): $1.61 − $0.09 ≈ $1.52 per share

The $0.09 per share overstatement represents approximately 5.6% of the originally reported EPS of $1.61 per share. This magnitude of EPS misstatement is material to investors and is the type of information that a reasonable investor would consider important in making an investment decision, consistent with the standard articulated in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), and its progeny.

D. Market Capitalization Context

VHG's market capitalization as of July 2023, prior to the public disclosure of the investigation, was approximately $3.4 billion. VHG's common stock trades on the Nasdaq Global Select Market under the ticker symbol VMRK. The materiality of the revenue overstatement and the associated net income and EPS misstatements should be assessed in the context of VHG's market position, its Nasdaq listing, and the expectations of VHG's investor base. Public company investors in the hospitality and vacation ownership sector closely monitor revenue trends, earnings growth, and the operational performance of key subsidiaries. The premature revenue-recognition practice at VCR inflated these metrics in a manner that may have affected analyst estimates, institutional investment decisions, and the trading price of VHG's common stock.

E. Balance Sheet and Cash Flow Considerations

The premature revenue-recognition practice also affected VHG's balance sheet presentation. Specifically:

• Accounts Receivable. Revenue recognized before the rescission period expired resulted in the overstatement of accounts receivable on VHG's consolidated balance sheet. The receivables booked in connection with the prematurely recognized revenue represented amounts that were not yet due and owing because the underlying contracts had not yet become enforceable.

• Deferred Revenue / Customer Deposits. Correspondingly, the premature recognition of revenue resulted in an understatement of deferred revenue and customer deposit liabilities. Properly stated, the deposits received during the rescission window should have been classified as customer deposit liabilities (a liability account) rather than as revenue. By classifying the deposits as revenue rather than as liabilities, VCR understated its obligations to refund deposits to purchasers who exercised their rescission rights.

• Cash Flow. The premature revenue recognition did not itself generate a cash-flow impact — cash was received as deposits regardless of whether the revenue was recognized immediately or deferred until the rescission period expired. However, the financial statement presentation was misleading as to the nature and timing of cash receipts. The cash-flow statement would properly classify the deposits as operating cash receipts, but the income statement and balance sheet presentations were distorted by the premature recognition.

VII. Mechanism and Responsible Individuals

A. Description of the Scheme

The premature revenue-recognition practice at VCR was not the result of an innocent error, a difference of professional judgment, or a change in accounting estimates. Rather, it was a deliberate and systematic effort, directed by senior VCR division management, to inflate VCR's quarterly revenue results by recording timeshare-interest purchase deposits as completed-sale revenue before the statutory ten-day rescission period under Florida Statute § 721.10 had expired.

The three individuals principally responsible for the scheme were:

Garrett W. Daskine, Division President, VCR. Daskine, a seventeen-year VHG veteran, was the most senior executive at the VCR division level during the investigation period. As Division President, Daskine had overall responsibility for VCR's operations, including sales, finance, and property development. The investigation determined that Daskine directed the premature revenue-recognition practice. Internal emails recovered from custodian collections, spanning the four-quarter investigation period, show Daskine instructing Prescott to "book everything we've closed this quarter" and to "get the numbers in before the quarter closes," without regard to whether the rescission periods had expired. Daskine's motivation appears to have been driven by a desire to meet or exceed quarterly revenue targets at the VCR division level, which directly affected his performance-based compensation. Under VHG's executive compensation structure, Daskine's annual bonus was tied, in part, to VCR's achievement of quarterly and annual revenue targets as approved by the VHG Compensation Committee.

Nicole Prescott, Vice President of Finance, VCR. Prescott, a nine-year VHG veteran, was the senior finance executive at the VCR division level during the investigation period. As VP of Finance, Prescott was responsible for VCR's financial reporting, budgeting, and accounting operations. The investigation determined that Prescott implemented Daskine's directive by instructing the VCR accounting staff — specifically, Controller Ryan Mateo Serrano — to book timeshare-interest purchase deposits as completed-sale revenue upon receipt of executed purchase agreements, without waiting for the expiration of the ten-day rescission period. Prescott's implementation of the scheme involved an explicit override of VHG's Accounting Policy Manual, Section 4.2, which she was aware required revenue recognition only upon expiration of the rescission period. Prescott maintained spreadsheets that tracked deposit amounts, purchase agreement execution dates, and rescission-period expiration dates for each transaction, demonstrating that she was fully aware that revenue was being recorded before the rescission window had closed. During her interviews (October 11 and November 8, 2023), Prescott acknowledged awareness that the rescission periods had not expired at the time revenue was recorded but characterized the practice as "industry standard" — a characterization that is unsupported by the accounting standards and, based on our review, is factually inaccurate. Prescott's performance-based compensation was also affected by VCR's quarterly revenue results, providing a personal financial motivation for the practice.

Ryan Mateo Serrano, Controller, VCR. Serrano, a five-year VHG veteran, served as VCR's Controller during the investigation period. In this capacity, Serrano was responsible for recording journal entries in VCR's accounting system (Hollowell & Co.) and preparing the quarterly close checklists used by the VCR accounting department. The investigation determined that Serrano executed the journal entries recording the prematurely recognized revenue at the direction of Prescott. Serrano's quarterly close checklists contain notations indicating "pending rescission" next to specific revenue entries, confirming that Serrano was aware that the rescission periods had not expired at the time the entries were recorded. Serrano cooperated with the investigation, executing a cooperation agreement on November 15, 2023, and providing detailed testimony in two interview sessions (September 27 and December 5, 2023) regarding the instructions he received from Daskine and Prescott, the specific journal entries he recorded, and the internal procedures (or lack thereof) that allowed the practice to continue undetected.

Mechanics of the "Rolling" Overstatement. The scheme operated as follows. At the end of each quarter, Prescott and Serrano would record as completed-sale revenue the full contractual amounts from all timeshare-interest purchase agreements executed during the final days of the quarter, regardless of whether the ten-day rescission periods had expired. When purchasers subsequently exercised their rescission rights — at a rate of approximately 14.3% during the investigation period — the revenue reversals were not booked until the following quarter. This created a persistent "rolling" overstatement that carried forward from quarter to quarter: each quarter's financial results included (a) revenue from the current quarter's prematurely recognized sales, partially offset by (b) reversals of the prior quarter's prematurely recognized sales that were rescinded. Because new premature recognitions exceeded reversals in each quarter (due to growing sales volumes), the net overstatement increased over time.

B. Evidence Supporting Findings

The findings described above are supported by three categories of evidence, each of which independently corroborates the others:

Interview Testimony.

Serrano's Testimony. Ryan Mateo Serrano provided the most detailed account of the scheme's operation. In his first interview session (September 27, 2023), Serrano described receiving direct verbal instructions from Prescott to book deposits as revenue "as soon as the signed contracts come in" and stated that Daskine had separately told him during a quarterly close meeting that "we need to recognize everything we've sold — don't hold anything back." In his second interview session (December 5, 2023, conducted pursuant to his November 15, 2023 cooperation agreement), Serrano provided additional detail, including descriptions of specific quarter-end conversations in which Prescott identified the exact agreements that needed to be booked before the quarter closed, using her tracking spreadsheets to identify the relevant transactions. Serrano's personal counsel, Marco A. Ruiz of Coletti & Ruiz PA, was present at both sessions.

Prescott's Testimony. Nicole Prescott, in her two interview sessions (October 11 and November 8, 2023), acknowledged that she was aware that the rescission periods had not expired for certain purchase agreements at the time revenue was recorded. However, she characterized the practice as "industry standard" and stated that she believed the rescission rate was low enough that the premature recognition was immaterial. This characterization is unsupported by the accounting standards. ASC 606 does not permit an entity to recognize revenue before an enforceable contract exists, regardless of the expected rescission rate. Moreover, VCR's actual rescission rate of 14.3% was materially higher than the 11% industry average, further undermining Prescott's purported justification. Prescott's personal counsel, Candace O'Brien Langford of Langford Pace LLP, was present at both sessions.

Daskine's Testimony. Garrett W. Daskine, in his single interview session (October 4, 2023), denied that he directed the premature revenue-recognition practice. However, he admitted to being aware of the practice and stated that he "trusted Nicole [Prescott] and her team to handle the accounting." This admission of awareness, combined with the documentary evidence described below, supports the conclusion that Daskine directed the scheme. Daskine declined a follow-up interview request. His personal counsel, James Corwin Merritt of Merritt & Dunleavy LLP, was present at the October 4, 2023 session.

Documentary Evidence.

The documentary evidence supporting our findings includes the following key categories:

Internal Emails from Daskine to Prescott. Emails recovered from custodian collections include multiple communications from Daskine to Prescott directing the acceleration of revenue recognition at quarter-end. For example, an email dated September 28, 2022 (two days before the Q3 FY 2022 quarter close) states: "Nicole — make sure we book everything we've closed this quarter. I don't want any slippage into October." A similar email dated March 28, 2023 (three days before the Q1 FY 2023 quarter close) states: "We need to get the numbers in before the quarter closes. Everything that's signed goes on the books." These emails, read in context, demonstrate that Daskine was directing Prescott to record revenue from signed purchase agreements without regard to whether the rescission periods had expired.

Prescott's Tracking Spreadsheets. Prescott maintained detailed spreadsheets tracking deposit amounts, purchase agreement execution dates, and rescission-period expiration dates for each timeshare-interest sale. These spreadsheets demonstrate that Prescott was aware of the specific rescission-period expiration date for each agreement and was therefore aware that revenue was being recorded before the rescission window closed. The spreadsheets were used by Prescott to identify the specific transactions to be booked at quarter-end and to calculate the total revenue amounts to be recognized.

Serrano's Quarterly Close Checklists. The quarterly close checklists prepared by Serrano contain handwritten notations indicating "pending rescission" next to specific revenue entries. These notations confirm that Serrano knew, at the time he recorded the journal entries, that the rescission periods had not yet expired. Despite this awareness, Serrano recorded the entries at Prescott's direction.

Forensic Accounting Analysis by Crestline.

Crestline's transaction-level analysis provided the quantitative foundation for the findings in this memorandum. For each timeshare-interest purchase agreement executed during the four-quarter investigation period, Crestline matched the purchase agreement date, the revenue-recognition date (as recorded in VCR's general ledger), the rescission-period expiration date (calculated under Florida Statute § 721.10), and the cancellation date (if applicable). This matching exercise confirmed that revenue was systematically recognized before the rescission period expired, quantified the overstatement for each quarter, and traced the subsequent reversals when purchasers exercised their rescission rights.

C. CFO and CEO Awareness

The investigation also examined whether VHG's Chief Financial Officer or Chief Executive Officer were aware of the premature revenue-recognition practice at VCR.

CFO Thomas Rhett Griffith. Griffith was interviewed on August 22, 2023. He stated that he was not aware of the specific practice of premature revenue recognition at VCR. Griffith acknowledged that VCR's revenue growth had outpaced internal expectations during the investigation period and that

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Audit Committee of the Board of Directors of Verimark Hospitality Group Inc.
Diane Kowalski, Chair Reginald Faulkner, Member Sandra Yeung, Member
FROM: Liam Donahue, Senior Associate, and Steven Hollander, Associate
Calderwood & Harkness LLP White Collar & Investigations Practice 200 South Biscayne Boulevard, Suite 4400 Miami, FL 33131
DATE: December 28, 2023
RE: Revenue-Recognition Analysis under ASC 606 — Timeshare Interest Sales at Verimark Coastal Resorts LLC
MATTER NO.: 1021-00008
This memorandum was prepared with input from Crestline Forensic Advisory LLC (Engagement No. CFA-VHG-2023-0089; Engagement Partner Douglas Reinhardt, CPA, CFF; Senior Manager Priya Venkatesh, CPA), retained as forensic accounting advisor under the Kovel doctrine at the direction of the Audit Committee of Verimark Hospitality Group Inc. The work product of Crestline Forensic Advisory LLC is incorporated herein and is protected by the attorney-client privilege and the attorney work-product doctrine. This memorandum was prepared under the supervision of Howard Quinn, Responsible Partner, and Conrad Ashby, Billing Partner, Calderwood & Harkness LLP.
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I. Executive Summary
This memorandum sets forth the findings of our analysis of whether Verimark Coastal Resorts LLC ("VCR"), a wholly owned Florida limited liability company subsidiary of Verimark Hospitality Group Inc. ("VHG," Nasdaq: VMRK), a Delaware corporation headquartered at 4100 Bayshore Boulevard, Suite 1200, Tampa, FL 33611, prematurely recognized revenue on timeshare-interest sales in violation of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606"), and applicable Florida law. This memorandum is addressed to the Audit Committee of the Board of Directors of VHG, which authorized this investigation by resolution adopted at an executive session held on July 10, 2023, and which engaged Calderwood & Harkness LLP pursuant to an engagement letter dated July 17, 2023.
Principal Finding. Based on our review of the documentary evidence, witness interviews, and forensic accounting analysis performed by Crestline Forensic Advisory LLC ("Crestline"), we conclude that VCR systematically recognized timeshare-interest purchase deposits as completed-sale revenue upon execution of purchase agreements, rather than upon expiration of the statutory ten-day rescission period mandated by Florida Statute § 721.10. This practice was in direct violation of ASC 606, which requires the existence of an enforceable contract with commercial substance before revenue recognition, and in direct violation of VHG's own Accounting Policy Manual, Section 4.2 (Revenue Recognition — Timeshare Interest Sales), which expressly requires that revenue be recognized only upon expiration of the applicable statutory rescission or cancellation period and confirmation of the non-refundable status of the purchaser's deposit.
Scope of Overstatement. The premature revenue-recognition practice resulted in an aggregate revenue overstatement of $26.4 million across four fiscal quarters, from Q3 FY 2022 (ending September 30, 2022) through Q2 FY 2023 (ending June 30, 2023). The quarterly breakdown of the overstatement is as follows:
Impact on VHG Consolidated Financial Statements. For FY 2022, the combined Q3 and Q4 revenue overstatement was $10.8 million. VHG's FY 2022 consolidated revenue as originally reported was $1.87 billion. The after-tax income overstatement attributable to FY 2022 was approximately $8.17 million, calculated by applying VHG's effective tax rate of 24.3% to the $10.8 million pre-tax overstatement. This after-tax income overstatement of $8.17 million represents approximately 5.74% of VHG's reported FY 2022 net income of $142.3 million. This figure exceeds the commonly applied quantitative materiality threshold of 5% of pre-tax income from continuing operations and, when assessed together with the qualitative factors discussed in this memorandum, renders the overstatement material to VHG's consolidated financial statements.
Key Properties Involved. The premature revenue-recognition practice was concentrated at two VCR resort properties: (1) Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, FL 32541, specifically the Phase III timeshare units; and (2) Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, FL 34228, specifically the Phase II timeshare units. These were the primary active sales programs during the investigation period.
Key Individuals Implicated. The investigation identified three VCR employees who were principally responsible for the premature revenue-recognition practice:
• Garrett W. Daskine, Division President, VCR — directed the premature recognition practice as part of an effort to meet or exceed quarterly revenue targets at the VCR division level, which directly affected his performance-based compensation;
• Nicole Prescott, Vice President of Finance, VCR — implemented the scheme by instructing VCR accounting staff to book purchase deposits as completed-sale revenue upon receipt of executed purchase agreements, before the expiration of the statutory rescission periods, overriding VHG's Accounting Policy Manual, Section 4.2; and
• Ryan Mateo Serrano, Controller, VCR — recorded the journal entries in VCR's accounting system reflecting the prematurely recognized revenue, at the direction of Daskine and Prescott.
Material Weakness. The premature revenue-recognition practice constitutes a material weakness in VCR's internal controls over financial reporting. This conclusion is consistent with the preliminary identification communicated by Hargrove, Steen & Aldrich LLP ("HSA"), VHG's independent registered public accounting firm, on June 19, 2023. The material weakness implicates VHG's certifications under Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, as discussed in detail in Section IX of this memorandum.
Companion Memorandum. This memorandum addresses only the premature revenue-recognition scheme. The separate Expense-Reimbursement Irregularity Analysis memorandum, also dated December 28, 2023, addresses the distinct fictitious vendor scheme that was uncovered during the course of this investigation.
II. Scope and Methodology
A. Scope of Analysis
The scope of this revenue-recognition analysis encompasses the following parameters:
Temporal Scope. The analysis covers four fiscal quarters, from Q3 FY 2022 (the quarter ending September 30, 2022) through Q2 FY 2023 (the quarter ending June 30, 2023). This period was selected because it represents the earliest quarter in which the premature revenue-recognition practice was identified (Q3 FY 2022) through the last quarter before the practice was halted following the commencement of the investigation (Q2 FY 2023). The investigation opened on July 24, 2023, and Daskine, Prescott, and Serrano were placed on administrative leave effective August 7, 2023, at which point the improper practice ceased.
Entities Covered. The analysis covers VCR's timeshare-interest sales operations at two resort properties: (1) Coral Dune Resort & Residences, 14200 Emerald Coast Parkway, Destin, FL 32541, specifically the Phase III timeshare units then under active development and sale; and (2) Palmetto Bluff Club, 3950 Longboat Key Drive, Sarasota, FL 34228, specifically the Phase II timeshare units then under active development and sale. These two properties were the only VCR properties with active timeshare-interest sales programs during the investigation period.
Financial Scope. The analysis encompasses all timeshare-interest purchase agreements and associated deposit transactions recorded as revenue during the four-quarter period. This includes the full contractual revenue amounts recognized at the time of contract signing, not merely the deposit amounts, as VCR's improper practice involved booking the full anticipated revenue from each timeshare-interest sale upon execution of the purchase agreement.
Contextual Financial Data. VCR's FY 2022 reported revenue was $438.7 million, representing approximately 23.46% of VHG's consolidated FY 2022 revenue of $1.87 billion. VCR is thus a significant subsidiary within the VHG corporate structure, and its revenue-recognition practices directly and materially affect VHG's consolidated financial results.
B. Sources of Information
Our findings are based upon a comprehensive review of documentary evidence, witness interviews, and forensic accounting analysis, as described below.
Documentary Evidence. The documents reviewed in connection with this analysis were drawn from the approximately 347,000 documents that have been reviewed to date from the approximately 1.2 million documents collected from eight of the eleven identified custodians. Document collection, processing, and hosting were performed by Triton discovery Solutions Inc. ("Triton"), located at 500 Seventh Avenue, 14th Floor, New York, NY 10018. Triton employed a Technology-Assisted Review ("TAR") 2.0 predictive-coding workflow, which was validated through iterative sampling and quality-control procedures supervised by Calderwood & Harkness's e-discovery team. The specific categories of documents reviewed in connection with this revenue-recognition analysis include, but are not limited to, the following:
• Timeshare-interest purchase agreements executed at Coral Dune Resort & Residences (Phase III) and Palmetto Bluff Club (Phase II) during the investigation period;
• Deposit receipts and payment records associated with each purchase agreement;
• Revenue journal entries recorded in VCR's general ledger for each of the four quarters at issue;
• General ledger extracts from VCR's accounting system (Hollowell & Co.), including detail trial balances, account activity reports, and sub-ledger records for revenue accounts;
• Rescission notices submitted by purchasers during the ten-day rescission window and beyond;
• Cancellation logs maintained by VCR's sales administration department;
• Quarterly close checklists prepared by VCR's accounting department, including the Controller's sign-off notations;
• Internal emails among Daskine, Prescott, and Serrano, recovered from custodian collections, including emails directing the acceleration of revenue recognition at quarter-end;
• Spreadsheets maintained by Prescott tracking deposit amounts, purchase agreement dates, and rescission-period expiration dates;
• Management representation letters submitted by VCR management (over Daskine's and Prescott's signatures) to HSA in connection with its audit and interim review procedures; and
• VHG Accounting Policy Manual, Section 4.2 (Revenue Recognition — Timeshare Interest Sales), and related corporate-level accounting policy documents.
Witness Interviews. A total of twenty-two interviews of eighteen unique witnesses were conducted during the course of the investigation. The following interviews are specifically relied upon in this revenue-recognition analysis:
1. William "Bill" Gentry, Lead Engagement Partner, HSA — interviewed on August 15, 2023. This interview was informational in nature and was conducted without Upjohn warnings, as Mr. Gentry is not an employee, officer, or director of VHG. Mr. Gentry provided background on HSA's identification of the potential revenue-recognition issue during its Q1 2023 interim review and the circumstances surrounding his June 19, 2023 communication to VHG CFO Griffith and Audit Committee Chair Kowalski.
2. Thomas Rhett Griffith, Chief Financial Officer, VHG — interviewed on August 22, 2023. Appropriate Upjohn warnings were provided at the outset of the interview.
3. Ryan Mateo Serrano, Controller, VCR — interviewed on September 27, 2023 (Session 1) and December 5, 2023 (Session 2). Session 2 was conducted pursuant to a cooperation agreement executed by Serrano on November 15, 2023. At both sessions, Serrano's personal counsel, Marco A. Ruiz of Coletti & Ruiz PA, was present. Appropriate Upjohn warnings were provided at the outset of Session 1.
4. Garrett W. Daskine, Division President, VCR — interviewed on October 4, 2023. Daskine's personal counsel, James Corwin Merritt of Merritt & Dunleavy LLP, was present. Appropriate Upjohn warnings were provided at the outset of the interview. Daskine declined a follow-up interview request.
5. Nicole Prescott, Vice President of Finance, VCR — interviewed on October 11, 2023 (Session 1) and November 8, 2023 (Session 2). Prescott's personal counsel, Candace O'Brien Langford of Langford Pace LLP, was present at both sessions. Appropriate Upjohn warnings were provided at the outset of Session 1.
6. Additional VCR sales and accounting personnel were also interviewed as part of the broader investigation. In total, twenty-two interviews of eighteen unique witnesses were conducted. Those additional interviews provided corroborative background information regarding VCR's standard sales and accounting processes, but the five witness categories identified above are the principal sources relied upon for the specific findings in this memorandum.
Forensic Accounting Analysis. Forensic accounting analysis was performed by Crestline Forensic Advisory LLC ("Crestline"), retained under the Kovel doctrine at the direction of the Audit Committee. The Crestline engagement was led by Douglas Reinhardt, CPA, CFF (Engagement Partner) and Priya Venkatesh, CPA (Senior Manager). Crestline performed transaction-level testing of all timeshare-interest purchase agreements during the four-quarter investigation period, including: (a) rescission-period timing analysis, comparing revenue-recognition dates to rescission-period expiration dates for each agreement; (b) revenue-reversal tracing, tracking the disposition of prematurely recognized revenue when purchasers exercised their rescission rights; and (c) quantification of the net overstatement for each quarter, taking into account both prematurely recognized revenue and the timing of subsequent reversals.
C. Analytical Framework
The analytical framework applied in this memorandum comprises the following authorities and standards:
Applicable Accounting Standard. ASC 606, Revenue from Contracts with Customers, as issued by the Financial Accounting Standards Board ("FASB"), provides the authoritative framework for revenue recognition. ASC 606 establishes a five-step model for determining when and how revenue should be recognized: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) performance obligations are satisfied.
Applicable State Law. Florida Statute § 721.10 provides that a purchaser of a timeshare interest may cancel the purchase agreement within ten calendar days after the date of execution of the agreement or the date on which the purchaser received the last of all documents required to be provided to the purchaser, whichever is later. The rescission right is unconditional, and the purchaser need not state a reason for exercising it. Upon exercise of the rescission right, the seller must refund the full deposit within twenty days. The existence of this statutory rescission right has direct implications for the timing of revenue recognition under ASC 606, as discussed in detail in Section IV below.
Internal VHG Revenue-Recognition Policy. VHG's Accounting Policy Manual, Section 4.2 (Revenue Recognition — Timeshare Interest Sales), requires that revenue from timeshare-interest sales be recognized only upon "expiration of the applicable statutory rescission or cancellation period and confirmation of non-refundable status of the purchaser's deposit." This policy is consistent with the requirements of ASC 606 and, as applied to Florida timeshare-interest sales, effectively requires that revenue not be recognized until at least ten calendar days after execution of the purchase agreement, assuming no rescission notice is received during the statutory window.
Relevant Regulatory Framework. In addition to the foregoing accounting standards and state law, the analysis is informed by: (a) Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 ("SOX"), governing CEO/CFO certifications and internal controls over financial reporting, respectively; (b) SEC Regulation S-X, governing the form and content of financial statements filed with the SEC; and (c) SEC Staff Accounting Bulletin No. 99, Materiality ("SAB 99"), and SEC Staff Accounting Bulletin No. 104, Revenue Recognition ("SAB 104"), providing interpretive guidance on materiality assessments and revenue-recognition principles.
III. Background: VCR Timeshare-Interest Sales Operations
A. Business Model
Verimark Coastal Resorts LLC is a wholly owned subsidiary of Verimark Hospitality Group Inc., organized as a Florida limited liability company, with its principal office located at 7820 Gulf Breeze Parkway, Suite 400, Destin, FL 32541. VCR's core business is the development and sale of timeshare interests — commonly referred to in the industry as "vacation ownership interests" — at resort properties located primarily along Florida's Gulf Coast region. VCR's timeshare-interest sales operations represent the company's primary revenue stream and a material contributor to VHG's consolidated financial performance.
During FY 2022, VCR reported revenue of $438.7 million, representing approximately 23.46% of VHG's consolidated FY 2022 revenue of $1.87 billion. VCR is thus the single largest operating subsidiary within the VHG corporate structure in terms of revenue contribution, underscoring the significance of VCR's revenue-recognition practices to VHG's overall financial reporting.
During the investigation period (Q3 FY 2022 through Q2 FY 2023), VCR's active timeshare-interest sales programs were concentrated at two properties: (1) Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, FL 32541, where Phase III timeshare units were under active development and sale; and (2) Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, FL 34228, where Phase II timeshare units were under active development and sale. These two properties accounted for substantially all of VCR's new timeshare-interest sales volume during the relevant period. Other VCR properties were in various stages of development or had substantially completed their initial sales programs and were generating revenue primarily from ongoing management fees and resort operations rather than new timeshare-interest sales.
B. Standard Sales Process
The standard process for selling timeshare interests at VCR's resort properties follows a well-established sequence that is common in the vacation ownership industry. The process begins with a sales presentation, typically conducted on-site at the resort property, during which prospective purchasers are introduced to the timeshare concept, the specific property and unit types available, and the pricing and financing options. If the prospective purchaser elects to proceed, the following steps occur:
1. Execution of Purchase Agreement. The prospective purchaser signs a timeshare-interest purchase agreement, which is a binding contract (subject to the statutory rescission right described below) setting forth the material terms of the sale, including the identity of the unit or unit category, the designated use periods, the total purchase price, the deposit amount, the payment schedule, and the terms and conditions governing the purchaser's use of the timeshare interest.
2. Payment of Initial Deposit. At the time of execution of the purchase agreement, the purchaser pays an initial deposit, which typically ranges from 10% to 20% of the total purchase price. Deposits are received by VCR and held in escrow or trust accounts as required by Florida law until the expiration of the rescission period.
3. Statutory Rescission Period. Under Florida Statute § 721.10, the purchaser has a ten-calendar-day right of rescission from the date of execution of the purchase agreement. This right is unconditional — the purchaser may cancel for any reason or no reason at all within the ten-day window. The rescission right is a consumer-protection provision mandated by Florida law and cannot be waived or shortened by contract. If the purchaser exercises the rescission right within the statutory period, VCR is obligated to refund the full deposit within twenty days of receipt of the rescission notice.
4. Expiration of Rescission Period. Only after the ten-day rescission period expires without the purchaser having submitted a rescission notice does the sale become non-cancellable and the deposit non-refundable. At this point — and only at this point — VHG's Accounting Policy Manual, Section 4.2, authorizes the recognition of revenue from the timeshare-interest sale.
5. Completion of Sale. Following the expiration of the rescission period, the remaining balance of the purchase price is collected according to the payment schedule (which may include purchaser financing provided by VCR or third-party lenders), and the timeshare interest is transferred to the purchaser in accordance with applicable Florida law and the terms of the purchase agreement.
The critical control point in this process, from a revenue-recognition perspective, is Step 4 — the expiration of the rescission period. VHG's Accounting Policy Manual, Section 4.2, was designed to align with ASC 606's requirement that a contract must have commercial substance and enforceable rights and obligations before revenue may be recognized. Because the statutory rescission right renders the purchase agreement cancellable at the purchaser's sole discretion for a period of ten calendar days, the contract does not achieve the requisite enforceability under ASC 606 until the rescission window has closed.
C. Rescission Rates
The rescission rate — the percentage of timeshare-interest purchase agreements that are cancelled by purchasers exercising their statutory rescission rights — is a significant operational and financial metric for timeshare developers. During the investigation period (Q3 FY 2022 through Q2 FY 2023), VCR's actual timeshare rescission rate was approximately 14.3%. This rate is notably higher than the industry average of approximately 11%, as reported by the American Resort Development Association ("ARDA") in its annual statistical review for calendar year 2022.
The elevated rescission rate at VCR is relevant to this analysis for two reasons. First, it means that a material portion of the deposits that VCR booked as revenue at the time of agreement signing were subsequently rescinded, necessitating revenue reversals. Because VCR's improper practice involved booking revenue at the time of signing rather than at the expiration of the rescission period, these reversals were not recorded until the following quarter, creating a persistent "rolling" overstatement that carried forward from quarter to quarter. Second, the elevated rescission rate provides further support, under the variable-consideration constraint of ASC 606-10-32-8, that a significant revenue reversal was probable, which independently required that the constraint be applied to limit the amount of revenue recognized.
IV. ASC 606 Revenue-Recognition Framework Applied to Timeshare Interest Sales
ASC 606 establishes a comprehensive, principles-based framework for revenue recognition, organized around a five-step model. This section applies each step of the ASC 606 model to VCR's timeshare-interest sales and identifies the specific points at which VCR's premature revenue-recognition practice deviated from the requirements of the standard.
A. Step 1: Identify the Contract with the Customer
Under ASC 606-10-25-1, an entity recognizes revenue from a contract with a customer only when all of the following criteria are met:
(a) The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations;
(b) The entity can identify each party's rights regarding the goods or services to be transferred;
(c) The entity can identify the payment terms for the goods or services to be transferred;
(d) The contract has commercial substance (i.e., the risk, timing, or amount of the entity's future cash flows is expected to change as a result of the contract); and
(e) It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
The critical issue for purposes of this analysis is criterion (d) — commercial substance — and, more broadly, the threshold question of whether an enforceable contract exists during the ten-day statutory rescission period. During the rescission window, the purchaser retains a unilateral, unconditional right to cancel the contract and receive a full refund of the deposit. The purchase agreement is therefore not yet an enforceable contract in the sense contemplated by ASC 606 because the purchaser can, without cause or penalty, void the agreement at any time during the ten-day period. Until the rescission period expires, the contract lacks the commercial substance and enforceable rights and obligations required by Step 1. The entity cannot reasonably conclude that it will collect the consideration to which it is entitled (criterion (e)) when the purchaser has an absolute right to reclaim the deposit.
VCR's practice of recognizing revenue at the time of contract signing — before the rescission period had expired — failed to satisfy Step 1 because no enforceable contract existed during the rescission window. Revenue recognized prior to the expiration of the rescission period was, by definition, recognized in the absence of a valid contract under ASC 606.
The FASB's Basis for Conclusions accompanying ASC 606 confirms that contracts with unilateral termination rights that are exercisable without penalty should generally not give rise to revenue recognition until the termination right lapses. The Florida statutory rescission right is precisely such a unilateral termination right: it is exercisable without penalty, without cause, and results in a full refund of all consideration paid. The existence of this right during the ten-day window means that no enforceable contract exists under ASC 606 until the window closes.
B. Step 2: Identify the Performance Obligations
Under ASC 606-10-25-14, an entity evaluates the goods and services promised in a contract and identifies as a performance obligation each promise to transfer to the customer either (a) a good or service (or a bundle of goods or services) that is distinct, or (b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
In the context of a timeshare-interest sale, the primary performance obligation is the transfer of the timeshare interest itself — that is, the conveyance to the purchaser of the right to use a specific unit (or unit category) at the resort property for designated time periods in accordance with the terms of the timeshare plan. This performance obligation is distinct and represents the core of the economic exchange between VCR and the purchaser.
Secondary performance obligations may also exist in a timeshare-interest sale, including, for example: (a) access to resort amenities such as pools, fitness centers, and recreational facilities; (b) ongoing management services for the timeshare property; and (c) membership in a vacation exchange club or loyalty program. During the investigation period, VCR accounted for these secondary performance obligations separately from the primary timeshare-interest transfer, and the identification and treatment of these secondary obligations are not at issue in this analysis. The premature revenue-recognition practice related solely to the timing of recognition of revenue associated with the primary performance obligation — the transfer of the timeshare interest.
C. Step 3: Determine the Transaction Price
Under ASC 606-10-32-2, the transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. In a timeshare-interest sale, the transaction price is the total contractual purchase price of the timeshare interest, net of any incentives, discounts, or promotional allowances offered to the purchaser.
Deposit amounts paid by purchasers at the time of execution of the purchase agreement varied during the investigation period but typically ranged from 10% to 20% of the total purchase price. However, VCR's improper practice was not limited to the premature recognition of the deposit amount alone. In many instances, VCR recorded the full contractual revenue — that is, the total purchase price of the timeshare interest — at the time of contract signing, even though only the deposit had been received. This practice further compounded the overstatement, as it resulted in the recognition of both the deposit and the remaining balance of the purchase price before the rescission period had expired and before the performance obligation had been satisfied.
D. Step 4: Allocate the Transaction Price
Under ASC 606-10-32-28, an entity allocates the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis. As noted in Section IV.B above, the secondary performance obligations in VCR's timeshare-interest sales were accounted for separately, and the allocation of the transaction price among performance obligations is not a significant issue in this analysis. The allocation to the primary timeshare-interest performance obligation was generally appropriate. The central deficiency identified in this analysis relates to the timing of recognition (Step 5), not the allocation of the transaction price (Step 4).
E. Step 5: Recognize Revenue When (or As) Performance Obligations Are Satisfied
Under ASC 606-10-25-30, an entity recognizes revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service. For a performance obligation satisfied at a point in time, the entity recognizes revenue at the point in time at which the customer obtains control.
In the context of a timeshare-interest sale, the transfer of control of the timeshare interest to the purchaser is a point-in-time event. The purchaser cannot be said to have obtained control of the timeshare interest while the statutory rescission period remains open, because during that period, the purchaser retains the right to unilaterally void the transaction and recover the full deposit. Control, within the meaning of ASC 606, implies the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset, while also bearing the risks associated with it. When the purchaser has an absolute right to rescind the contract and recover the full consideration paid, the purchaser has not yet assumed the risks of ownership, and control has not transferred.
VCR improperly recognized revenue at the point of contract signing — that is, at the moment the purchase agreement was executed and the deposit was received — before the ten-day statutory rescission period had expired. This was a direct violation of ASC 606-10-25-30, because the performance obligation (transfer of the timeshare interest) had not been satisfied, and control had not transferred to the customer, at the time revenue was recorded.
F. Variable Consideration and Constraint (ASC 606-10-32-8)
In addition to the Step 1 and Step 5 violations discussed above, VCR's premature revenue-recognition practice also implicated the variable-consideration constraint set forth in ASC 606-10-32-8. Under this provision, an entity includes in the transaction price some or all of an amount of variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The right of rescission introduces variable consideration into the timeshare-interest purchase transaction. At the time of contract signing, there is inherent uncertainty as to whether the transaction will be consummated — the purchaser may exercise the rescission right, resulting in a full refund of the deposit and a reversal of any revenue recognized. This uncertainty is not remote or speculative; during the investigation period, VCR's actual rescission rate was approximately 14.3%, meaning that roughly one out of every seven purchase agreements was cancelled during the rescission window. This rate exceeds the industry average of approximately 11% and is, by any measure, a material rate of cancellation.
Under the constraint on variable consideration, VCR should not have recognized revenue to the extent that it was probable that a significant reversal would occur. Given a 14.3% rescission rate, it was highly probable that a significant portion of the revenue recognized at contract signing would be reversed when purchasers exercised their rescission rights. The failure to apply the variable-consideration constraint represents an additional, independent violation of ASC 606.
V. Quantification of Revenue Overstatement
A. Methodology. The quantification of the revenue overstatement was performed by Crestline Forensic Advisory LLC under the supervision of Calderwood & Harkness LLP. Crestline's forensic accounting team, led by Douglas Reinhardt, CPA, CFF (Engagement Partner) and Priya Venkatesh, CPA (Senior Manager), performed transaction-level testing of all timeshare-interest purchase agreements executed at Coral Dune Resort & Residences (Phase III) and Palmetto Bluff Club (Phase II) during each of the four quarters within the investigation period.
For each purchase agreement, Crestline compared the following three data points:
(a) The date on which revenue was recorded in VCR's general ledger in connection with the purchase agreement;
(b) The date on which the ten-day statutory rescission period under Florida Statute § 721.10 expired, calculated as ten calendar days from the later of the date of execution of the purchase agreement or the date on which the purchaser received the last of all documents required to be provided under Florida law; and
(c) Whether and when the purchaser exercised rescission rights (if at all).
Revenue was classified as "prematurely recognized" if it was recorded in VCR's general ledger before the rescission period had expired. The overstatement for each quarter represents the net amount of revenue that was prematurely recognized — that is, the amount of revenue recognized before the rescission period expired that was either (i) subsequently rescinded by the purchaser (resulting in a revenue reversal that was deferred to the following quarter) or (ii) still within the rescission window at the quarter-end close date (meaning the sale had not yet become final as of the quarter-end).
It is important to note that the overstatement figures presented below represent the net impact on each quarter's financial results, not merely the gross amount of prematurely recognized revenue. The "rolling" nature of the scheme — in which reversals from the prior quarter's prematurely recognized sales were booked in the current quarter, while new premature recognitions were added — required a careful netting analysis to isolate the true overstatement attributable to each quarter.
B. Quarter-by-Quarter Analysis
Q3 FY 2022 (Quarter Ending September 30, 2022). Q3 FY 2022 is the first identified quarter in which the premature revenue-recognition practice was in effect. The overstatement amount for Q3 FY 2022 was $4.7 million.
This overstatement was primarily attributable to Phase III timeshare-interest sales at Coral Dune Resort & Residences in Destin, Florida. Crestline's transaction-level analysis determined that revenue was recorded for timeshare-interest purchase agreements signed during the final ten days of September 2022 — specifically, agreements executed between approximately September 20, 2022 and September 30, 2022 — with rescission periods that extended into October 2022. Because the rescission periods had not expired as of the September 30, 2022 quarter-end date, this revenue was prematurely recognized. A portion of these sales were subsequently rescinded by purchasers in early October 2022; the corresponding revenue reversals were not booked until Q4 FY 2022, further compounding the distortion of quarterly results.
The documentary evidence reviewed in connection with Q3 FY 2022 includes quarterly close checklists prepared by Serrano, which contain notations indicating "pending rescission" next to specific revenue entries — an acknowledgment by the Controller that the rescission periods had not yet expired at the time the entries were recorded. Despite this awareness, the entries were booked as completed-sale revenue at Prescott's direction.
Q4 FY 2022 (Quarter Ending December 31, 2022). The overstatement amount for Q4 FY 2022 was $6.1 million, reflecting increased sales volume during the holiday season at both Coral Dune Resort & Residences and Palmetto Bluff Club.
The Q4 overstatement follows the same pattern identified in Q3: revenue was recognized for purchase agreements signed in the final ten days of December 2022, with rescission periods extending into January 2023. The elevated sales volume during the holiday season — a period of peak timeshare sales activity across the industry — resulted in a larger absolute overstatement than in Q3, even though the underlying mechanism was identical.
Combined with the Q3 overstatement of $4.7 million, the total FY 2022 revenue overstatement was $10.8 million ($4.7 million + $6.1 million). This is the figure that directly affects VHG's FY 2022 Form 10-K and the associated CEO and CFO certifications under SOX Section 302.
Q1 FY 2023 (Quarter Ending March 31, 2023). The overstatement amount for Q1 FY 2023 was $9.8 million — the largest quarterly overstatement during the investigation period.
This quarter merits particular attention for several reasons. First, the $9.8 million overstatement was the specific amount identified by HSA during its interim review of VHG's Q1 2023 Form 10-Q filing (for the period ending March 31, 2023). On June 19, 2023, HSA's lead engagement partner, William Gentry, communicated to VHG CFO Thomas Rhett Griffith and Audit Committee Chair Diane Kowalski that HSA had identified $9.8 million in timeshare-interest deposits that had been recorded as completed-sale revenue in VCR's general ledger despite the applicable rescission periods not having expired before the March 31, 2023 quarter-end date. This communication was the catalyst for the Audit Committee's executive session on July 10, 2023, and its subsequent decision to retain independent counsel.
Second, the elevated overstatement in Q1 FY 2023 reflects an aggressive end-of-quarter sales push directed by Daskine. Internal emails recovered from custodian collections show that Daskine instructed VCR's sales teams at both Coral Dune and Palmetto Bluff to "accelerate closings" in the final days of March 2023 to meet or exceed quarterly revenue targets. This sales push resulted in a concentration of purchase agreements signed in the last week of March 2023 — agreements for which the ten-day rescission periods extended well into April 2023. Prescott's tracking spreadsheets confirm that she was aware that a significant volume of agreements signed in late March had rescission periods expiring in April, yet she directed Serrano to record the revenue in Q1 FY 2023.
Third, the Q1 FY 2023 overstatement, combined with the Q3 and Q4 FY 2022 overstatements, demonstrates a pattern of escalation. The quarterly overstatement amounts increased from $4.7 million in Q3 FY 2022 to $6.1 million in Q4 FY 2022 to $9.8 million in Q1 FY 2023, suggesting that the practice was not a one-time deviation but rather a systematic and intensifying scheme to inflate VCR's quarterly revenue results.
Q2 FY 2023 (Quarter Ending June 30, 2023). The overstatement amount for Q2 FY 2023 was $5.8 million. This was the last quarter in which the premature revenue-recognition practice was in effect. The practice ceased upon the opening of the investigation on July 24, 2023, and the placement of Daskine, Prescott, and Serrano on administrative leave effective August 7, 2023.
The Q2 FY 2023 overstatement includes prematurely recognized revenue from purchase agreements signed at both Coral Dune Resort & Residences and Palmetto Bluff Club. The lower overstatement relative to Q1 FY 2023 appears to reflect the seasonal pattern of timeshare sales (Q1, encompassing the spring season, tends to be a higher-volume period than Q2) rather than any voluntary moderation of the improper practice by VCR management.
C. Aggregate Overstatement Summary
The aggregate revenue overstatement across the four-quarter investigation period is as follows:
The aggregate overstatement of $26.4 million represents the cumulative amount of revenue prematurely recognized across the four quarters. As noted above, the FY 2022 component of this total is $10.8 million (Q3 + Q4), and the FY 2023 year-to-date component through Q2 is $15.6 million (Q1 + Q2).
D. Percentage Analysis
To provide context for the magnitude of the overstatement, the following percentage analysis is presented:
• FY 2022 overstatement ($10.8 million) as a percentage of VCR FY 2022 reported revenue ($438.7 million): approximately 2.46%.
• FY 2022 overstatement ($10.8 million) as a percentage of VHG consolidated FY 2022 revenue ($1.87 billion): approximately 0.58%.
While the revenue overstatement as a percentage of VHG consolidated revenue is relatively modest, the income impact is significantly more material, as discussed in Section VI below. This is because the prematurely recognized revenue had minimal associated direct costs — the deposits had been received, but the performance obligations (transfer of timeshare interests) had not yet been rendered, and accordingly, the associated cost of sales had not been incurred. The revenue overstatement therefore fell almost entirely to the pre-tax income line, resulting in a disproportionately large impact on net income and earnings per share.
VI. Impact on VHG Consolidated Financial Statements
A. Revenue Impact
The impact of the premature revenue-recognition practice on VHG's consolidated revenue for FY 2022 is summarized as follows:
• VHG FY 2022 consolidated revenue (as originally reported in the Form 10-K): $1.87 billion
• VCR FY 2022 revenue (as originally reported, prior to intercompany eliminations): $438.7 million
• FY 2022 revenue overstatement attributable to the premature recognition practice: $10.8 million (Q3 FY 2022: $4.7 million + Q4 FY 2022: $6.1 million)
• Estimated restated VCR FY 2022 revenue: $438.7 million − $10.8 million = $427.9 million
• Estimated restated VHG FY 2022 consolidated revenue: $1.87 billion − $10.8 million ≈ $1,859.2 million
• VCR's restated share of VHG consolidated revenue: approximately 23.02% (compared to 23.46% as originally reported)
B. Net Income Impact
The net income impact of the overstatement is particularly significant because, as noted above, the prematurely recognized revenue had minimal associated direct costs. The deposits were received and recorded as revenue, but the underlying performance obligations had not been fulfilled, and accordingly, the costs associated with those obligations (e.g., construction costs, unit finishing, transfer costs) had not yet been incurred or recognized. The revenue overstatement therefore passed through almost entirely to pre-tax income.
• VHG FY 2022 reported net income: $142.3 million
• VHG effective tax rate (per the original FY 2022 Form 10-K): 24.3%
• Pre-tax income overstatement attributable to FY 2022: $10.8 million (assuming, conservatively, that the costs associated with the overstated revenue were not correspondingly inflated, which is appropriate given that performance had not yet been rendered)
• After-tax income overstatement: $10.8 million × (1 − 0.243) = approximately $8.17 million
• After-tax income overstatement as a percentage of reported FY 2022 net income: $8.17 million ÷ $142.3 million = approximately 5.74%
The 5.74% figure exceeds the commonly applied quantitative materiality threshold of 5% of pre-tax income from continuing operations, which has been widely recognized by the SEC and the auditing profession as a benchmark (though not a bright-line test) for quantitative materiality. Under the framework established by SAB 99, even overstatements that fall below the 5% threshold may be material when qualitative factors are considered. Here, the overstatement exceeds the quantitative threshold and is accompanied by significant qualitative factors (discussed in Section X below), leaving no reasonable doubt as to its materiality.
C. Earnings Per Share Impact
The impact of the revenue overstatement on VHG's earnings per share is calculated as follows:
• VHG shares outstanding (basic, approximate): 88.6 million
• FY 2022 reported EPS (basic, approximate): $142.3 million ÷ 88.6 million ≈ $1.61 per share
• Overstatement impact on EPS: $8.17 million ÷ 88.6 million ≈ $0.09 per share
• Estimated restated FY 2022 EPS (basic, approximate): $1.61 − $0.09 ≈ $1.52 per share
The $0.09 per share overstatement represents approximately 5.6% of the originally reported EPS of $1.61 per share. This magnitude of EPS misstatement is material to investors and is the type of information that a reasonable investor would consider important in making an investment decision, consistent with the standard articulated in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), and its progeny.
D. Market Capitalization Context
VHG's market capitalization as of July 2023, prior to the public disclosure of the investigation, was approximately $3.4 billion. VHG's common stock trades on the Nasdaq Global Select Market under the ticker symbol VMRK. The materiality of the revenue overstatement and the associated net income and EPS misstatements should be assessed in the context of VHG's market position, its Nasdaq listing, and the expectations of VHG's investor base. Public company investors in the hospitality and vacation ownership sector closely monitor revenue trends, earnings growth, and the operational performance of key subsidiaries. The premature revenue-recognition practice at VCR inflated these metrics in a manner that may have affected analyst estimates, institutional investment decisions, and the trading price of VHG's common stock.
E. Balance Sheet and Cash Flow Considerations
The premature revenue-recognition practice also affected VHG's balance sheet presentation. Specifically:
• Accounts Receivable. Revenue recognized before the rescission period expired resulted in the overstatement of accounts receivable on VHG's consolidated balance sheet. The receivables booked in connection with the prematurely recognized revenue represented amounts that were not yet due and owing because the underlying contracts had not yet become enforceable.
• Deferred Revenue / Customer Deposits. Correspondingly, the premature recognition of revenue resulted in an understatement of deferred revenue and customer deposit liabilities. Properly stated, the deposits received during the rescission window should have been classified as customer deposit liabilities (a liability account) rather than as revenue. By classifying the deposits as revenue rather than as liabilities, VCR understated its obligations to refund deposits to purchasers who exercised their rescission rights.
• Cash Flow. The premature revenue recognition did not itself generate a cash-flow impact — cash was received as deposits regardless of whether the revenue was recognized immediately or deferred until the rescission period expired. However, the financial statement presentation was misleading as to the nature and timing of cash receipts. The cash-flow statement would properly classify the deposits as operating cash receipts, but the income statement and balance sheet presentations were distorted by the premature recognition.
VII. Mechanism and Responsible Individuals
A. Description of the Scheme
The premature revenue-recognition practice at VCR was not the result of an innocent error, a difference of professional judgment, or a change in accounting estimates. Rather, it was a deliberate and systematic effort, directed by senior VCR division management, to inflate VCR's quarterly revenue results by recording timeshare-interest purchase deposits as completed-sale revenue before the statutory ten-day rescission period under Florida Statute § 721.10 had expired.
The three individuals principally responsible for the scheme were:
Garrett W. Daskine, Division President, VCR. Daskine, a seventeen-year VHG veteran, was the most senior executive at the VCR division level during the investigation period. As Division President, Daskine had overall responsibility for VCR's operations, including sales, finance, and property development. The investigation determined that Daskine directed the premature revenue-recognition practice. Internal emails recovered from custodian collections, spanning the four-quarter investigation period, show Daskine instructing Prescott to "book everything we've closed this quarter" and to "get the numbers in before the quarter closes," without regard to whether the rescission periods had expired. Daskine's motivation appears to have been driven by a desire to meet or exceed quarterly revenue targets at the VCR division level, which directly affected his performance-based compensation. Under VHG's executive compensation structure, Daskine's annual bonus was tied, in part, to VCR's achievement of quarterly and annual revenue targets as approved by the VHG Compensation Committee.
Nicole Prescott, Vice President of Finance, VCR. Prescott, a nine-year VHG veteran, was the senior finance executive at the VCR division level during the investigation period. As VP of Finance, Prescott was responsible for VCR's financial reporting, budgeting, and accounting operations. The investigation determined that Prescott implemented Daskine's directive by instructing the VCR accounting staff — specifically, Controller Ryan Mateo Serrano — to book timeshare-interest purchase deposits as completed-sale revenue upon receipt of executed purchase agreements, without waiting for the expiration of the ten-day rescission period. Prescott's implementation of the scheme involved an explicit override of VHG's Accounting Policy Manual, Section 4.2, which she was aware required revenue recognition only upon expiration of the rescission period. Prescott maintained spreadsheets that tracked deposit amounts, purchase agreement execution dates, and rescission-period expiration dates for each transaction, demonstrating that she was fully aware that revenue was being recorded before the rescission window had closed. During her interviews (October 11 and November 8, 2023), Prescott acknowledged awareness that the rescission periods had not expired at the time revenue was recorded but characterized the practice as "industry standard" — a characterization that is unsupported by the accounting standards and, based on our review, is factually inaccurate. Prescott's performance-based compensation was also affected by VCR's quarterly revenue results, providing a personal financial motivation for the practice.
Ryan Mateo Serrano, Controller, VCR. Serrano, a five-year VHG veteran, served as VCR's Controller during the investigation period. In this capacity, Serrano was responsible for recording journal entries in VCR's accounting system (Hollowell & Co.) and preparing the quarterly close checklists used by the VCR accounting department. The investigation determined that Serrano executed the journal entries recording the prematurely recognized revenue at the direction of Prescott. Serrano's quarterly close checklists contain notations indicating "pending rescission" next to specific revenue entries, confirming that Serrano was aware that the rescission periods had not expired at the time the entries were recorded. Serrano cooperated with the investigation, executing a cooperation agreement on November 15, 2023, and providing detailed testimony in two interview sessions (September 27 and December 5, 2023) regarding the instructions he received from Daskine and Prescott, the specific journal entries he recorded, and the internal procedures (or lack thereof) that allowed the practice to continue undetected.
Mechanics of the "Rolling" Overstatement. The scheme operated as follows. At the end of each quarter, Prescott and Serrano would record as completed-sale revenue the full contractual amounts from all timeshare-interest purchase agreements executed during the final days of the quarter, regardless of whether the ten-day rescission periods had expired. When purchasers subsequently exercised their rescission rights — at a rate of approximately 14.3% during the investigation period — the revenue reversals were not booked until the following quarter. This created a persistent "rolling" overstatement that carried forward from quarter to quarter: each quarter's financial results included (a) revenue from the current quarter's prematurely recognized sales, partially offset by (b) reversals of the prior quarter's prematurely recognized sales that were rescinded. Because new premature recognitions exceeded reversals in each quarter (due to growing sales volumes), the net overstatement increased over time.
B. Evidence Supporting Findings
The findings described above are supported by three categories of evidence, each of which independently corroborates the others:
Interview Testimony.
Serrano's Testimony. Ryan Mateo Serrano provided the most detailed account of the scheme's operation. In his first interview session (September 27, 2023), Serrano described receiving direct verbal instructions from Prescott to book deposits as revenue "as soon as the signed contracts come in" and stated that Daskine had separately told him during a quarterly close meeting that "we need to recognize everything we've sold — don't hold anything back." In his second interview session (December 5, 2023, conducted pursuant to his November 15, 2023 cooperation agreement), Serrano provided additional detail, including descriptions of specific quarter-end conversations in which Prescott identified the exact agreements that needed to be booked before the quarter closed, using her tracking spreadsheets to identify the relevant transactions. Serrano's personal counsel, Marco A. Ruiz of Coletti & Ruiz PA, was present at both sessions.
Prescott's Testimony. Nicole Prescott, in her two interview sessions (October 11 and November 8, 2023), acknowledged that she was aware that the rescission periods had not expired for certain purchase agreements at the time revenue was recorded. However, she characterized the practice as "industry standard" and stated that she believed the rescission rate was low enough that the premature recognition was immaterial. This characterization is unsupported by the accounting standards. ASC 606 does not permit an entity to recognize revenue before an enforceable contract exists, regardless of the expected rescission rate. Moreover, VCR's actual rescission rate of 14.3% was materially higher than the 11% industry average, further undermining Prescott's purported justification. Prescott's personal counsel, Candace O'Brien Langford of Langford Pace LLP, was present at both sessions.
Daskine's Testimony. Garrett W. Daskine, in his single interview session (October 4, 2023), denied that he directed the premature revenue-recognition practice. However, he admitted to being aware of the practice and stated that he "trusted Nicole [Prescott] and her team to handle the accounting." This admission of awareness, combined with the documentary evidence described below, supports the conclusion that Daskine directed the scheme. Daskine declined a follow-up interview request. His personal counsel, James Corwin Merritt of Merritt & Dunleavy LLP, was present at the October 4, 2023 session.
Documentary Evidence.
The documentary evidence supporting our findings includes the following key categories:
Internal Emails from Daskine to Prescott. Emails recovered from custodian collections include multiple communications from Daskine to Prescott directing the acceleration of revenue recognition at quarter-end. For example, an email dated September 28, 2022 (two days before the Q3 FY 2022 quarter close) states: "Nicole — make sure we book everything we've closed this quarter. I don't want any slippage into October." A similar email dated March 28, 2023 (three days before the Q1 FY 2023 quarter close) states: "We need to get the numbers in before the quarter closes. Everything that's signed goes on the books." These emails, read in context, demonstrate that Daskine was directing Prescott to record revenue from signed purchase agreements without regard to whether the rescission periods had expired.
Prescott's Tracking Spreadsheets. Prescott maintained detailed spreadsheets tracking deposit amounts, purchase agreement execution dates, and rescission-period expiration dates for each timeshare-interest sale. These spreadsheets demonstrate that Prescott was aware of the specific rescission-period expiration date for each agreement and was therefore aware that revenue was being recorded before the rescission window closed. The spreadsheets were used by Prescott to identify the specific transactions to be booked at quarter-end and to calculate the total revenue amounts to be recognized.
Serrano's Quarterly Close Checklists. The quarterly close checklists prepared by Serrano contain handwritten notations indicating "pending rescission" next to specific revenue entries. These notations confirm that Serrano knew, at the time he recorded the journal entries, that the rescission periods had not yet expired. Despite this awareness, Serrano recorded the entries at Prescott's direction.
Forensic Accounting Analysis by Crestline.
Crestline's transaction-level analysis provided the quantitative foundation for the findings in this memorandum. For each timeshare-interest purchase agreement executed during the four-quarter investigation period, Crestline matched the purchase agreement date, the revenue-recognition date (as recorded in VCR's general ledger), the rescission-period expiration date (calculated under Florida Statute § 721.10), and the cancellation date (if applicable). This matching exercise confirmed that revenue was systematically recognized before the rescission period expired, quantified the overstatement for each quarter, and traced the subsequent reversals when purchasers exercised their rescission rights.
C. CFO and CEO Awareness
The investigation also examined whether VHG's Chief Financial Officer or Chief Executive Officer were aware of the premature revenue-recognition practice at VCR.
CFO Thomas Rhett Griffith. Griffith was interviewed on August 22, 2023. He stated that he was not aware of the specific practice of premature revenue recognition at VCR. Griffith acknowledged that VCR's revenue growth had outpaced internal expectations during the investigation period and that

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