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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP Memorandum of Interview

To: Investigation File — Matter No. 1021-00008

From: Liam Donahue, Calderwood & Harkness LLP

Date: August 15, 2023

Re: Memorandum of Interview — William "Bill" Gentry, CPA, Lead Engagement Partner, Hargrove, Steen & Aldrich LLP

Subject Matter: Internal Investigation — Verimark Coastal Resorts LLC Revenue Recognition and Expense Irregularities

This memorandum was prepared by Liam Donahue and reviewed by Howard Quinn. It reflects counsel's summary of the interview and is not a verbatim transcript. This memorandum is protected by the attorney-client privilege and the work-product doctrine and is prepared in connection with the internal investigation being conducted at the direction of the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc.

I. Interview Logistics

Date and Time of Interview: August 15, 2023, 10:00 a.m. to approximately 12:45 p.m. EDT.

Location: Calderwood & Harkness LLP, 200 South Biscayne Boulevard, Suite 4400, Miami, Florida 33131, Conference Room 44-B.

Interviewee: William "Bill" Gentry, CPA, Lead Engagement Partner, Hargrove, Steen & Aldrich LLP ("HSA"), 101 East Kennedy Boulevard, Suite 3200, Tampa, Florida 33602.

Interviewers: Howard Quinn, Responsible Partner, Calderwood & Harkness LLP; Liam Donahue, Lead Associate, Calderwood & Harkness LLP.

Also Present: Steven Hollander, Working Associate, Calderwood & Harkness LLP (note-taker).

Nature of Interview: This was an informational interview conducted as part of the internal investigation directed by the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. ("VHG"). Mr. Gentry was not administered Upjohn warnings because Calderwood & Harkness LLP does not represent HSA or Mr. Gentry individually. At the outset of the interview, Mr. Quinn informed Mr. Gentry that Calderwood & Harkness LLP represents the Audit Committee of the Board of Directors of VHG, that the interview was voluntary, and that information shared during the interview may be reported to the Audit Committee. Mr. Gentry confirmed that he understood these parameters, that he participated voluntarily, and that he did so with the knowledge and consent of HSA. No individual counsel was present for Mr. Gentry during the interview, and Mr. Gentry did not request the presence of individual counsel.

II. Background on HSA's Engagement with VHG

Mr. Gentry provided background information regarding HSA's audit engagement with VHG and his own role within that engagement.

Mr. Gentry stated that he has served as the lead engagement partner for the VHG audit relationship since the 2020 audit year, a period of approximately three years. Prior to assuming the lead engagement partner role, Mr. Gentry served as the concurring review partner for the VHG engagement. In total, he has had significant involvement with the VHG audit for approximately five years.

Mr. Gentry explained that HSA has served as VHG's independent auditor for approximately seven years, having initially been appointed to that role following a competitive proposal process. The engagement has been continuous throughout that period, with the customary annual engagement letter renewals. Mr. Gentry indicated that HSA's engagement team for the VHG audit has included a core group of approximately eight to twelve professionals, supplemented by additional personnel during peak audit periods.

Mr. Gentry confirmed that VHG is a Delaware corporation that is publicly traded on the Nasdaq Stock Market under the ticker symbol VMRK. VHG's corporate headquarters are located at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. Mr. Gentry described VHG as a diversified hospitality company with operations across several segments, including resort management, timeshare development and sales, and ancillary hospitality services.

With respect to VHG's financial profile, Mr. Gentry stated that VHG's fiscal year 2022 consolidated revenue was approximately $1.87 billion, and its fiscal year 2022 net income was approximately $142.3 million, as reported in VHG's original Form 10-K filing with the Securities and Exchange Commission. Mr. Gentry noted that these figures were the subject of unqualified audit opinions issued by HSA at the time of the original filing, although, as discussed later in this memorandum, the reliability of certain of those figures is now under review.

Mr. Gentry described the structure of VHG's subsidiary, Verimark Coastal Resorts LLC ("VCR"). VCR is a wholly owned Florida limited liability company subsidiary of VHG. Its principal office is located at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541. VCR operates as VHG's dedicated timeshare development and sales division, with responsibility for the development, marketing, and sale of timeshare interests at several resort properties along the Gulf Coast of Florida. Mr. Gentry stated that VCR's fiscal year 2022 reported revenue was approximately $438.7 million, which represented approximately 23.5% of VHG's consolidated revenue. He described VCR as a significant subsidiary within VHG's corporate structure, both from a revenue standpoint and from an audit-risk perspective.

Mr. Gentry identified his primary contacts at VHG for audit purposes. At the parent-company level, Mr. Gentry's principal points of contact were Thomas Rhett Griffith, VHG's Chief Financial Officer, and Patricia Navarro, VHG's General Counsel. Mr. Gentry described Griffith as the primary management representative with whom HSA interacted on consolidated financial reporting matters, including the coordination of interim reviews and annual audits. Ms. Navarro served as HSA's primary contact on legal matters relevant to the audit, including the provision of legal representation letters and the identification of contingencies and litigation matters.

At the VCR division level, Mr. Gentry identified Nicole Prescott, VCR's Vice President of Finance, and Ryan Mateo Serrano, VCR's Controller, as his principal contacts for division-level financial data. Mr. Gentry explained that Prescott and Serrano were responsible for preparing the financial information that flowed from VCR into VHG's consolidated financial statements, and that HSA's audit team interacted directly with both individuals during field work at VCR's Destin office.

III. HSA's Q1 2023 Interim Review — Identification of Revenue-Recognition Issue

A. Scope of Interim Review

Mr. Gentry described the work performed by HSA in connection with its interim review of VHG's first-quarter 2023 financial statements, covering the quarter ending March 31, 2023. He stated that HSA conducted its interim review in accordance with applicable standards of the Public Company Accounting Oversight Board ("PCAOB"), including the performance of analytical procedures, inquiries of management, and other procedures designed to provide a basis for reporting whether any material modifications should be made to the interim financial information for it to conform with generally accepted accounting principles.

As part of this interim review, the HSA engagement team performed analytical procedures on VCR's segment revenue. Mr. Gentry explained that these procedures included a comparison of VCR's reported revenue for Q1 2023 against prior-period trends, budgeted figures, and available non-financial metrics, including unit-sales volume data. Mr. Gentry stated that the analytical procedures revealed an upward trend in VCR's reported revenue that appeared inconsistent with the unit-sales volume reported for the quarter. Specifically, VCR's revenue appeared to be growing at a rate that outpaced the number of timeshare interests reported as having been sold during the same period, which raised questions about the composition and timing of the revenue being recognized.

In light of this observation, the HSA engagement team focused particular attention on VCR's timeshare-interest sales at two key properties. The first was the Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, Florida 32541, specifically with respect to Phase III timeshare units. The second was the Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228, specifically with respect to Phase II timeshare units. Mr. Gentry explained that these two properties represented VCR's most significant recent development projects and were responsible for a substantial portion of VCR's timeshare-interest sales activity during the periods in question. Both properties had launched new inventory phases during 2022, and the sales of timeshare interests in those new phases constituted a material portion of VCR's revenue.

B. The $9.8 Million Finding

Mr. Gentry described the specific finding that emerged from HSA's focused review of VCR's timeshare-interest sales at Coral Dune Resort Phase III and Palmetto Bluff Club Phase II. Upon further examination, HSA identified that approximately $9.8 million in timeshare-interest purchase deposits had been recorded as completed-sale revenue in Q1 2023. Mr. Gentry explained the nature of the error in detail.

These deposits were booked as revenue by VCR upon the signing of purchase agreements by timeshare buyers, rather than upon the expiration of the statutory ten-day rescission period mandated by Florida Statute § 721.10. Under Section 721.10 of the Florida Vacation Plan and Timesharing Act, a purchaser of a timeshare interest has the right to cancel the purchase contract within ten calendar days after the date the purchaser executes the contract or receives the disclosure documents, whichever is later. During this ten-day window, the contract is, by operation of law, subject to cancellation at the purchaser's sole discretion, and the purchase deposit must be refunded in full if the purchaser exercises the right of rescission.

Mr. Gentry explained that under the applicable revenue-recognition standards — specifically Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606") — the existence of an unexercised rescission right creates a variable-consideration constraint. Because the purchaser retains the unilateral right to cancel the contract and receive a full refund of the deposit during the ten-day rescission period, the consideration associated with the transaction is variable and subject to significant uncertainty during that window. Under ASC 606, revenue should not be recognized until the rescission period has expired and the contract is no longer cancelable, because only at that point can the entity reasonably conclude that a significant reversal of the recognized revenue is not probable.

Mr. Gentry stated that HSA's team found that VCR had been recording revenue at the point of contract signing — that is, on "Day 1" of the ten-day rescission period — rather than waiting until the rescission period had expired. In many instances, purchasers subsequently exercised their rescission rights within the statutory ten-day window. However, the revenue that had been recognized at signing was not reversed until the following quarter, creating a persistent overstatement that rolled forward from one reporting period to the next. The effect was to inflate the quarter in which the contracts were signed by the amount of deposits attributable to contracts that were later rescinded, while understating the subsequent quarter in which the reversals were recorded. Because the practice was continuous and the volume of new sales was generally increasing, the net effect was a persistent inflation of reported revenue.

Mr. Gentry noted that VCR's rescission rate during the investigated period appeared to be approximately 14.3%, meaning that approximately 14.3% of timeshare purchasers who signed contracts during the relevant period exercised their right to cancel within the ten-day window. Mr. Gentry stated that this rate was elevated compared to what he understood to be an industry average rescission rate of approximately 11%, based on his experience auditing other timeshare companies and on publicly available industry data. He observed that the higher-than-average rescission rate had the effect of amplifying the revenue overstatement because a larger proportion of prematurely recognized revenue was subsequently reversed.

C. Concerns Regarding Internal Controls

Based on these findings, Mr. Gentry and the HSA engagement team identified a potential material weakness in VCR's internal controls over financial reporting. Specifically, the concern related to revenue-recognition controls for timeshare-interest sales at the VCR subsidiary level. Mr. Gentry described the concern as a failure in both the design and operating effectiveness of controls that should have ensured that revenue from timeshare deposits was recognized only after the expiration of the applicable statutory rescission period.

Mr. Gentry explained that, in a properly designed control environment, there should be a control point that prevents the recording of revenue from a timeshare-interest sale until evidence is obtained that the rescission period has expired without the purchaser exercising the right to cancel. This control might take the form of a manual or automated review that compares the contract date and the rescission-period expiration date to the date on which revenue is recorded. Mr. Gentry stated that it did not appear that VCR had a functioning control of this nature in place during the periods at issue.

Mr. Gentry further noted that VCR's accounting staff appeared to be applying a policy of recognizing revenue at the time of contract signing as though it were an established practice. He stated that this observation suggested a systemic rather than isolated issue — that is, the premature recognition of revenue did not appear to be the result of inadvertent errors by individual accounting personnel, but rather the application of a revenue-recognition methodology that was fundamentally inconsistent with ASC 606 as applied to timeshare-interest sales subject to statutory rescission rights. Mr. Gentry stated that this raised significant questions about whether VCR management had directed or sanctioned the practice and about the adequacy of VHG's oversight of VCR's accounting policies.

IV. June 19, 2023 Communication to VHG Management and Audit Committee

A. Nature and Recipients of the Communication

Mr. Gentry described the communication he made to VHG management and the Audit Committee on June 19, 2023. On that date, Mr. Gentry communicated his findings to both Thomas Rhett Griffith, VHG's Chief Financial Officer, and Diane Kowalski, Chair of the Audit Committee of VHG's Board of Directors. The communication was made initially by telephone conference call, which was followed by a written summary transmitted via email to both Griffith and Kowalski on the same day.

During the telephone conference call and in the follow-up email, Mr. Gentry informed Griffith and Kowalski of the potential material weakness relating to VCR's revenue-recognition controls that had been identified during HSA's interim review of VHG's Q1 2023 financial statements, covering the 10-Q period ending March 31, 2023. Mr. Gentry specifically flagged the approximately $9.8 million in timeshare-interest deposits that had been recorded as completed-sale revenue in Q1 2023 despite the fact that the applicable statutory rescission periods had not expired before the quarter closed. He communicated the nature and basis of his concern in sufficient detail to convey both the quantitative significance of the finding and the potential control implications.

B. Mr. Gentry's Recommendations

Mr. Gentry stated that during the June 19, 2023 communication, he made several recommendations to CFO Griffith and Audit Committee Chair Kowalski.

First, Mr. Gentry recommended that VHG's Audit Committee undertake an independent assessment of the scope and duration of the premature revenue-recognition practice. He emphasized that, while HSA had identified the issue in the context of the Q1 2023 interim review, a thorough investigation was needed to determine whether the practice extended to prior periods and to quantify the total magnitude of any overstatement.

Second, Mr. Gentry stated that HSA could not complete its interim review of the Q1 2023 10-Q without resolution of the revenue-recognition issue. He explained that the identified misstatement and the associated potential material weakness in internal controls created an impediment to HSA's ability to conclude that no material modifications were necessary to the interim financial information, which was a prerequisite to the completion of the interim review engagement.

Third, Mr. Gentry expressed concern that the premature revenue-recognition practice might extend beyond Q1 2023. He noted that HSA's analytical review suggested patterns in prior quarters that were similar to those observed in Q1 2023, although HSA had not yet performed a full retrospective analysis to confirm or quantify any prior-period misstatements. He communicated to Griffith and Kowalski that the potential for prior-period effects needed to be carefully assessed as part of any independent investigation.

C. Response from VHG Management

Mr. Gentry described the responses he received from CFO Griffith and Audit Committee Chair Kowalski during and following the June 19, 2023 communication.

Mr. Gentry stated that CFO Griffith expressed surprise at the finding. Griffith indicated that he had not been aware of the specific practice of recognizing timeshare-interest revenue at the time of contract signing rather than upon expiration of the rescission period, and he stated that he would consult with VCR division management to understand the basis for the practice and the circumstances under which it had been implemented. Mr. Gentry did not characterize the nature or extent of Griffith's surprise beyond stating that Griffith appeared not to have anticipated the finding.

Ms. Kowalski asked Mr. Gentry whether the issue could be indicative of intentional misstatement — that is, deliberate financial fraud — as opposed to an accounting-policy error or a good-faith misapplication of the applicable accounting standards. Mr. Gentry stated that he was not in a position to make that determination at that time. He explained that the distinction between intentional misstatement and error was a factual question that would require investigation beyond the scope of HSA's interim review procedures, and he reiterated his recommendation that the Audit Committee retain independent counsel and forensic accounting professionals to conduct a thorough investigation.

Mr. Gentry noted that, following the June 19, 2023 communication, he did not have further substantive discussions with VCR division personnel — specifically Garrett W. Daskine, Nicole Prescott, or Ryan Mateo Serrano — about the revenue-recognition matter. He stated that the Audit Committee took the lead on next steps after receiving HSA's communication, and it was Mr. Gentry's understanding that further inquiry at the division level was to be conducted under the direction of the Audit Committee and its advisors.

V. HSA's Prior Audit Work on VCR Revenue Recognition

A. FY 2022 Annual Audit

Mr. Gentry was asked about HSA's prior audit work on VCR's revenue recognition, with particular focus on whether the premature recognition of timeshare-interest deposits could have or should have been detected during earlier audit engagements.

Mr. Gentry stated that during the fiscal year 2022 annual audit, HSA's substantive testing of VCR revenue transactions did not specifically isolate the timing of rescission-period expirations as a separate test. He explained that HSA's revenue-testing procedures for VCR included sample-based testing of timeshare-interest sales transactions, which involved examining purchase agreements, evidence of payment, and related documentation to confirm that the recorded revenue was supported by valid sales transactions. However, the testing did not include a specific procedure designed to verify that each sampled transaction had been recorded as revenue only after the applicable rescission period had expired. HSA relied in part on VCR's representations regarding the timing of revenue recognition, including management's assertion that revenue was recognized in conformity with ASC 606.

Mr. Gentry acknowledged that, in retrospect, the fiscal year 2022 audit may not have been designed in a manner that would have detected the premature recognition of revenue attributable to the rescission-period timing issue. He explained that HSA's sample selections for revenue testing were based on completed-sale documentation provided by VCR. The documentation provided by VCR did not clearly distinguish between deposits that were within the rescission window and those for which the rescission period had already expired at the time of revenue recognition. As a result, the samples drawn by HSA's audit team may have included transactions for which revenue was prematurely recognized, but the premature recognition would not have been apparent from the documentation reviewed unless the auditors had independently tracked the rescission-period expiration dates and compared them to the dates on which revenue was recorded. Mr. Gentry stated that this comparison was not a specific step in HSA's audit program for VCR revenue during the fiscal year 2022 engagement.

Mr. Gentry confirmed that the primary VCR personnel who interacted with HSA's audit team during field work at VCR's Destin office were Division President Garrett W. Daskine, Vice President of Finance Nicole Prescott, and Controller Ryan Mateo Serrano. These individuals were responsible for providing HSA with access to VCR's books and records, responding to audit inquiries, and furnishing management representations in connection with the annual audit.

B. Prior-Year Observations

Mr. Gentry stated that he was not aware of any similar revenue-recognition concerns having been raised during the fiscal year 2021 or fiscal year 2020 audit cycles. He noted that, during those earlier periods, VCR's timeshare-sales volume was lower, and the development phases that generated the bulk of the revenue at issue — specifically, Phase III at Coral Dune Resort and Phase II at Palmetto Bluff Club — had not yet been launched.

Mr. Gentry observed that VCR's timeshare-sales volume had increased significantly beginning in the third quarter of 2022. This increase coincided with the launch of new timeshare inventory at Coral Dune Resort Phase III and Palmetto Bluff Club Phase II, both of which came online during that period. Mr. Gentry noted that the timing of this sales ramp-up coincided with the period of the apparent revenue overstatement. He stated that it was possible that the premature revenue-recognition practice had been in place during earlier periods but had not produced a material effect because the volume of transactions was lower. However, he emphasized that this was speculative and that the question of when the practice began would need to be determined through the investigation's forensic accounting work.

VI. HSA's Knowledge of Expense-Reporting Irregularities

Mr. Gentry was asked about HSA's knowledge of the expense-reporting irregularities involving fictitious vendor invoices that are also a subject of this investigation.

Mr. Gentry stated that HSA had not independently identified the expense-reporting irregularities involving fictitious vendor invoices prior to the commencement of the investigation. He confirmed that the first time he became aware of allegations relating to fictitious purchase orders and vendor invoices at VCR was through communications received in connection with this investigation. HSA's Q1 2023 interim review work, and the earlier annual audit work, had not surfaced evidence of fictitious vendor activity.

When asked whether HSA's audit testing of VCR's capital-improvement expenditures would have been expected to detect fictitious purchase orders, Mr. Gentry provided a nuanced response. He stated that HSA's testing of VCR's capital expenditures included a sample-based examination of capital-improvement expenditures and vendor invoices. The testing procedures involved selecting a sample of transactions, examining supporting documentation such as purchase orders, vendor invoices, evidence of receipt of goods or services, and payment records. However, Mr. Gentry noted that the sample size and selection methodology used by HSA may not have captured the specific fictitious invoices at issue, particularly given that — based on what he had been informed during this investigation — the amounts involved were distributed across multiple vendors and across multiple reporting periods. He stated that the distribution of the fictitious invoices across multiple vendors and periods would have made it more difficult for a sample-based testing approach to detect the irregularities, because the probability of any single fictitious transaction being captured in the sample was reduced by the dispersal of the scheme across multiple entities and timeframes.

Mr. Gentry specifically indicated that he was not familiar with the entities Gulf Standard Contracting LLC, Clearwater Design Collective Inc., or Suncoast Property Services LLC prior to being informed of their existence through this investigation. He stated that, to his knowledge, none of those entities had appeared in any of HSA's prior audit work papers or in any documentation reviewed by HSA during its audit or interim review engagements with VHG. He was unable to confirm whether those entities had been included in VCR's vendor master file or whether any invoices from those entities had been part of HSA's prior testing samples without first reviewing HSA's work papers, which were not available at the interview.

VII. Mr. Gentry's Assessment of VCR Internal Controls Environment

Mr. Gentry was asked to provide his overall assessment of the internal controls environment at VCR, based on his observations as lead engagement partner over the course of multiple audit cycles.

Mr. Gentry characterized VCR's finance team as relatively lean for the volume of transactions that the division processed, particularly during the ramp-up of timeshare sales at Coral Dune Resort Phase III and Palmetto Bluff Club Phase II. He stated that the growth in transaction volume beginning in Q3 2022 placed additional demands on VCR's accounting and finance personnel, and he observed that the staffing levels of VCR's finance function did not appear to have been augmented commensurately with the increase in transactional activity.

Mr. Gentry noted that Garrett W. Daskine, as Division President of VCR, appeared to exercise significant control over VCR's financial operations. He described Daskine as having substantial authority over the approval of expenditures and revenue-reporting decisions at the division level. Mr. Gentry stated that, in his experience, this degree of centralized control by a division president over financial operations was unusual and created an environment in which the effectiveness of internal controls was heavily dependent on the integrity and judgment of a single individual.

Mr. Gentry observed that the segregation of duties between the Vice President of Finance (Prescott) and the Controller (Serrano) appeared limited. He stated that both roles reported directly to Daskine, with neither Prescott nor Serrano appearing to exercise independent authority over financial reporting or expenditure approval decisions that was separate from Daskine's oversight. Mr. Gentry noted that Daskine was involved in detail-level decisions regarding financial operations and reporting that, in a more robust internal controls environment, would typically be delegated to the VP of Finance or the Controller and subject to independent review. The concentration of authority in Daskine, combined with the limited segregation of duties between Prescott and Serrano, created conditions that Mr. Gentry described as increasing the risk of errors or irregularities going undetected at the division level.

Mr. Gentry stated that he had raised general observations about the segregation of duties within VCR's finance function in HSA's management letter for fiscal year 2022, which was addressed to VHG's Audit Committee. However, he acknowledged that these observations were characterized as general comments and recommendations for improvement, and were not elevated to the level of a significant deficiency or a material weakness at that time. Mr. Gentry explained that, at the time the management letter was issued, HSA did not have information suggesting that the segregation-of-duties concerns had resulted in material misstatements or other adverse consequences. He acknowledged that, in light of the findings that have since emerged, the management-letter observations may take on greater significance in the investigation's assessment of VCR's control environment.

VIII. Post-June 19, 2023 Interactions

Mr. Gentry described his interactions with VHG and its representatives following his June 19, 2023 communication to CFO Griffith and Audit Committee Chair Kowalski.

Mr. Gentry confirmed that after his June 19, 2023 communication, his next substantive interaction regarding the revenue-recognition issue was with the Audit Committee and VHG General Counsel Patricia Navarro. Ms. Navarro informed Mr. Gentry in July 2023 that the Audit Committee had determined to retain outside counsel to conduct an independent investigation into the matters identified by HSA. Ms. Navarro subsequently informed Mr. Gentry that the Audit Committee had retained Calderwood & Harkness LLP for that purpose.

Mr. Gentry stated that he received a letter from Howard Quinn of Calderwood & Harkness LLP, dated August 9, 2023, establishing protocols for coordination between the investigation and HSA's ongoing audit activities. The coordination letter addressed, among other things, the procedures for the exchange of information between HSA and the investigation team, the handling of HSA's work papers, and the protocols for communications between HSA and VHG management during the pendency of the investigation. Mr. Gentry confirmed that he reviewed the coordination letter and that HSA was prepared to comply with its terms.

Mr. Gentry confirmed HSA's willingness to cooperate with the investigation within the bounds of HSA's professional obligations, including HSA's obligations under PCAOB rules and the professional standards governing auditor conduct. He stated that HSA understood the importance of the investigation and was committed to facilitating the Audit Committee's efforts to determine the scope and nature of the identified irregularities.

Mr. Gentry noted that, as of the date of the interview, HSA had not yet completed its assessment of whether the previously issued financial statements — specifically, the fiscal year 2022 Form 10-K and the Q1 2023 Form 10-Q — would require restatement. He stated that this determination was pending the outcome of the investigation and the forensic accounting work being conducted under the direction of Calderwood & Harkness LLP. Mr. Gentry explained that HSA would need to evaluate the findings of the investigation in order to determine whether the previously issued financial statements contained material misstatements that would necessitate restatement, and that HSA could not reach a final conclusion on this question until the investigation's quantification work was complete.

Mr. Gentry stated that he was aware that VHG had filed a Form 8-K with the Securities and Exchange Commission on August 14, 2023, the day prior to this interview. The Form 8-K was filed under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review) and disclosed that previously issued financial statements for fiscal year 2022 (third and fourth quarters) and Q1 2023 should no longer be relied upon. Mr. Gentry noted that this was a company determination made by VHG's management in consultation with the Audit Committee and HSA. He stated that HSA concurred with the determination that the previously issued financial statements for the identified periods should no longer be relied upon, pending the completion of the investigation and any necessary restatement.

IX. Potential Scope of Revenue Overstatement — Mr. Gentry's Preliminary View

Mr. Gentry was asked to provide his preliminary assessment of the potential scope and duration of the revenue overstatement identified by HSA.

Mr. Gentry stated that, based on HSA's preliminary analytical work, the revenue-recognition issue likely extended beyond Q1 2023. He indicated that the third quarter of 2022 (Q3 2022) appeared to be the earliest quarter potentially affected by the premature revenue-recognition practice. This timing coincided with the launch of new timeshare inventory at Coral Dune Resort Phase III, which became available for sale during Q3 2022. The launch of Phase II inventory at Palmetto Bluff Club followed shortly thereafter. Mr. Gentry stated that HSA's preliminary analytical review of VCR's revenue trends during Q3 2022 and subsequent quarters revealed patterns that were consistent with the premature recognition of timeshare-interest deposits, although HSA had not performed detailed transaction-level testing for periods prior to Q1 2023.

Mr. Gentry stated that he could not provide precise figures for the magnitude of the revenue overstatement in quarters beyond Q1 2023, where HSA had identified the $9.8 million finding. However, he noted that the methodology of premature recognition — recording revenue at the time of contract signing rather than upon expiration of the rescission period — appeared to have been applied consistently across quarters. Mr. Gentry characterized this consistency as suggesting a deliberate practice rather than a series of isolated errors. He stated that the uniform application of the premature recognition methodology across multiple quarters and across both key properties (Coral Dune Phase III and Palmetto Bluff Phase II) pointed to a systemic approach to revenue recognition that was embedded in VCR's standard operating procedures.

Mr. Gentry deferred to the forensic accounting work being conducted under the direction of Calderwood & Harkness LLP for the final quantification of the revenue overstatement across all affected periods. He stated that HSA's role in the quantification process would be determined through the coordination protocol established by the August 9, 2023 letter, and that HSA was prepared to provide access to its work papers and to assist the investigation team as needed.

X. Documents Referenced or Provided by Mr. Gentry

During the course of the interview, Mr. Gentry referenced the following documents:

1. HSA's Q1 2023 Interim Review Work Papers. Mr. Gentry referenced the work papers prepared by HSA's engagement team in connection with its interim review of VHG's Q1 2023 financial statements. These work papers are retained by HSA at its Tampa office. The work papers were not produced at the interview but are subject to potential request through the coordination protocol established by the August 9, 2023 letter from Howard Quinn.

2. June 19, 2023 Written Summary Email. Mr. Gentry referenced the written summary that he transmitted via email to CFO Thomas Rhett Griffith and Audit Committee Chair Diane Kowalski on June 19, 2023, following the telephone conference call on the same date. This email set forth the substance of HSA's findings regarding the $9.8 million in prematurely recognized timeshare-interest revenue and the associated potential material weakness in VCR's internal controls over financial reporting.

3. HSA's FY 2022 Management Letter. Mr. Gentry referenced the management letter issued by HSA to VHG's Audit Committee in connection with the fiscal year 2022 annual audit. The management letter included observations on the segregation of duties within VCR's finance function, among other matters.

No documents were produced by Mr. Gentry at the interview. Document production from HSA to the investigation team is to be coordinated through the protocol established by the August 9, 2023 coordination letter from Howard Quinn.

XI. Conclusion and Follow-Up Items

The interview concluded at approximately 12:45 p.m. EDT. Mr. Gentry indicated his willingness to make himself available for follow-up questions as the investigation progresses, subject to the scheduling requirements of his professional obligations.

The following follow-up items were identified during or as a result of the interview:

1. Request HSA's Q1 2023 interim review work papers related to VCR revenue recognition through the coordination protocol established by the August 9, 2023 letter.

2. Request a copy of the June 19, 2023 email from Mr. Gentry to CFO Thomas Rhett Griffith and Audit Committee Chair Diane Kowalski, together with any attachments transmitted with that email.

3. Request HSA's fiscal year 2022 management letter addressed to VHG's Audit Committee, and any prior management letters (fiscal years 2020 and 2021) that include observations or recommendations referencing VCR's internal-control environment, segregation of duties, or revenue-recognition practices.

4. Consider whether additional members of HSA's VHG engagement team should be interviewed, including members of the audit team who performed field work at VCR's Destin office and who were directly involved in the substantive testing of VCR revenue transactions during the fiscal year 2022 annual audit and the Q1 2023 interim review.

This memorandum is to be filed in the investigation matter file under Matter No. 1021-00008. Copies are to be distributed to Howard Quinn and Conrad Ashby.

Prepared by:

________________________________________

Liam Donahue Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131

Reviewed by:

________________________________________

Howard Quinn Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131

Distribution: Investigation File (Matter No. 1021-00008); Howard Quinn; Conrad Ashby

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Memorandum of Interview
To: Investigation File — Matter No. 1021-00008
From: Liam Donahue, Calderwood & Harkness LLP
Date: August 15, 2023
Re: Memorandum of Interview — William "Bill" Gentry, CPA, Lead Engagement Partner, Hargrove, Steen & Aldrich LLP
Subject Matter: Internal Investigation — Verimark Coastal Resorts LLC Revenue Recognition and Expense Irregularities
This memorandum was prepared by Liam Donahue and reviewed by Howard Quinn. It reflects counsel's summary of the interview and is not a verbatim transcript. This memorandum is protected by the attorney-client privilege and the work-product doctrine and is prepared in connection with the internal investigation being conducted at the direction of the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc.
I. Interview Logistics
Date and Time of Interview: August 15, 2023, 10:00 a.m. to approximately 12:45 p.m. EDT.
Location: Calderwood & Harkness LLP, 200 South Biscayne Boulevard, Suite 4400, Miami, Florida 33131, Conference Room 44-B.
Interviewee: William "Bill" Gentry, CPA, Lead Engagement Partner, Hargrove, Steen & Aldrich LLP ("HSA"), 101 East Kennedy Boulevard, Suite 3200, Tampa, Florida 33602.
Interviewers: Howard Quinn, Responsible Partner, Calderwood & Harkness LLP; Liam Donahue, Lead Associate, Calderwood & Harkness LLP.
Also Present: Steven Hollander, Working Associate, Calderwood & Harkness LLP (note-taker).
Nature of Interview: This was an informational interview conducted as part of the internal investigation directed by the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. ("VHG"). Mr. Gentry was not administered Upjohn warnings because Calderwood & Harkness LLP does not represent HSA or Mr. Gentry individually. At the outset of the interview, Mr. Quinn informed Mr. Gentry that Calderwood & Harkness LLP represents the Audit Committee of the Board of Directors of VHG, that the interview was voluntary, and that information shared during the interview may be reported to the Audit Committee. Mr. Gentry confirmed that he understood these parameters, that he participated voluntarily, and that he did so with the knowledge and consent of HSA. No individual counsel was present for Mr. Gentry during the interview, and Mr. Gentry did not request the presence of individual counsel.
II. Background on HSA's Engagement with VHG
Mr. Gentry provided background information regarding HSA's audit engagement with VHG and his own role within that engagement.
Mr. Gentry stated that he has served as the lead engagement partner for the VHG audit relationship since the 2020 audit year, a period of approximately three years. Prior to assuming the lead engagement partner role, Mr. Gentry served as the concurring review partner for the VHG engagement. In total, he has had significant involvement with the VHG audit for approximately five years.
Mr. Gentry explained that HSA has served as VHG's independent auditor for approximately seven years, having initially been appointed to that role following a competitive proposal process. The engagement has been continuous throughout that period, with the customary annual engagement letter renewals. Mr. Gentry indicated that HSA's engagement team for the VHG audit has included a core group of approximately eight to twelve professionals, supplemented by additional personnel during peak audit periods.
Mr. Gentry confirmed that VHG is a Delaware corporation that is publicly traded on the Nasdaq Stock Market under the ticker symbol VMRK. VHG's corporate headquarters are located at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. Mr. Gentry described VHG as a diversified hospitality company with operations across several segments, including resort management, timeshare development and sales, and ancillary hospitality services.
With respect to VHG's financial profile, Mr. Gentry stated that VHG's fiscal year 2022 consolidated revenue was approximately $1.87 billion, and its fiscal year 2022 net income was approximately $142.3 million, as reported in VHG's original Form 10-K filing with the Securities and Exchange Commission. Mr. Gentry noted that these figures were the subject of unqualified audit opinions issued by HSA at the time of the original filing, although, as discussed later in this memorandum, the reliability of certain of those figures is now under review.
Mr. Gentry described the structure of VHG's subsidiary, Verimark Coastal Resorts LLC ("VCR"). VCR is a wholly owned Florida limited liability company subsidiary of VHG. Its principal office is located at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541. VCR operates as VHG's dedicated timeshare development and sales division, with responsibility for the development, marketing, and sale of timeshare interests at several resort properties along the Gulf Coast of Florida. Mr. Gentry stated that VCR's fiscal year 2022 reported revenue was approximately $438.7 million, which represented approximately 23.5% of VHG's consolidated revenue. He described VCR as a significant subsidiary within VHG's corporate structure, both from a revenue standpoint and from an audit-risk perspective.
Mr. Gentry identified his primary contacts at VHG for audit purposes. At the parent-company level, Mr. Gentry's principal points of contact were Thomas Rhett Griffith, VHG's Chief Financial Officer, and Patricia Navarro, VHG's General Counsel. Mr. Gentry described Griffith as the primary management representative with whom HSA interacted on consolidated financial reporting matters, including the coordination of interim reviews and annual audits. Ms. Navarro served as HSA's primary contact on legal matters relevant to the audit, including the provision of legal representation letters and the identification of contingencies and litigation matters.
At the VCR division level, Mr. Gentry identified Nicole Prescott, VCR's Vice President of Finance, and Ryan Mateo Serrano, VCR's Controller, as his principal contacts for division-level financial data. Mr. Gentry explained that Prescott and Serrano were responsible for preparing the financial information that flowed from VCR into VHG's consolidated financial statements, and that HSA's audit team interacted directly with both individuals during field work at VCR's Destin office.
III. HSA's Q1 2023 Interim Review — Identification of Revenue-Recognition Issue
A. Scope of Interim Review
Mr. Gentry described the work performed by HSA in connection with its interim review of VHG's first-quarter 2023 financial statements, covering the quarter ending March 31, 2023. He stated that HSA conducted its interim review in accordance with applicable standards of the Public Company Accounting Oversight Board ("PCAOB"), including the performance of analytical procedures, inquiries of management, and other procedures designed to provide a basis for reporting whether any material modifications should be made to the interim financial information for it to conform with generally accepted accounting principles.
As part of this interim review, the HSA engagement team performed analytical procedures on VCR's segment revenue. Mr. Gentry explained that these procedures included a comparison of VCR's reported revenue for Q1 2023 against prior-period trends, budgeted figures, and available non-financial metrics, including unit-sales volume data. Mr. Gentry stated that the analytical procedures revealed an upward trend in VCR's reported revenue that appeared inconsistent with the unit-sales volume reported for the quarter. Specifically, VCR's revenue appeared to be growing at a rate that outpaced the number of timeshare interests reported as having been sold during the same period, which raised questions about the composition and timing of the revenue being recognized.
In light of this observation, the HSA engagement team focused particular attention on VCR's timeshare-interest sales at two key properties. The first was the Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, Florida 32541, specifically with respect to Phase III timeshare units. The second was the Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228, specifically with respect to Phase II timeshare units. Mr. Gentry explained that these two properties represented VCR's most significant recent development projects and were responsible for a substantial portion of VCR's timeshare-interest sales activity during the periods in question. Both properties had launched new inventory phases during 2022, and the sales of timeshare interests in those new phases constituted a material portion of VCR's revenue.
B. The $9.8 Million Finding
Mr. Gentry described the specific finding that emerged from HSA's focused review of VCR's timeshare-interest sales at Coral Dune Resort Phase III and Palmetto Bluff Club Phase II. Upon further examination, HSA identified that approximately $9.8 million in timeshare-interest purchase deposits had been recorded as completed-sale revenue in Q1 2023. Mr. Gentry explained the nature of the error in detail.
These deposits were booked as revenue by VCR upon the signing of purchase agreements by timeshare buyers, rather than upon the expiration of the statutory ten-day rescission period mandated by Florida Statute § 721.10. Under Section 721.10 of the Florida Vacation Plan and Timesharing Act, a purchaser of a timeshare interest has the right to cancel the purchase contract within ten calendar days after the date the purchaser executes the contract or receives the disclosure documents, whichever is later. During this ten-day window, the contract is, by operation of law, subject to cancellation at the purchaser's sole discretion, and the purchase deposit must be refunded in full if the purchaser exercises the right of rescission.
Mr. Gentry explained that under the applicable revenue-recognition standards — specifically Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606") — the existence of an unexercised rescission right creates a variable-consideration constraint. Because the purchaser retains the unilateral right to cancel the contract and receive a full refund of the deposit during the ten-day rescission period, the consideration associated with the transaction is variable and subject to significant uncertainty during that window. Under ASC 606, revenue should not be recognized until the rescission period has expired and the contract is no longer cancelable, because only at that point can the entity reasonably conclude that a significant reversal of the recognized revenue is not probable.
Mr. Gentry stated that HSA's team found that VCR had been recording revenue at the point of contract signing — that is, on "Day 1" of the ten-day rescission period — rather than waiting until the rescission period had expired. In many instances, purchasers subsequently exercised their rescission rights within the statutory ten-day window. However, the revenue that had been recognized at signing was not reversed until the following quarter, creating a persistent overstatement that rolled forward from one reporting period to the next. The effect was to inflate the quarter in which the contracts were signed by the amount of deposits attributable to contracts that were later rescinded, while understating the subsequent quarter in which the reversals were recorded. Because the practice was continuous and the volume of new sales was generally increasing, the net effect was a persistent inflation of reported revenue.
Mr. Gentry noted that VCR's rescission rate during the investigated period appeared to be approximately 14.3%, meaning that approximately 14.3% of timeshare purchasers who signed contracts during the relevant period exercised their right to cancel within the ten-day window. Mr. Gentry stated that this rate was elevated compared to what he understood to be an industry average rescission rate of approximately 11%, based on his experience auditing other timeshare companies and on publicly available industry data. He observed that the higher-than-average rescission rate had the effect of amplifying the revenue overstatement because a larger proportion of prematurely recognized revenue was subsequently reversed.
C. Concerns Regarding Internal Controls
Based on these findings, Mr. Gentry and the HSA engagement team identified a potential material weakness in VCR's internal controls over financial reporting. Specifically, the concern related to revenue-recognition controls for timeshare-interest sales at the VCR subsidiary level. Mr. Gentry described the concern as a failure in both the design and operating effectiveness of controls that should have ensured that revenue from timeshare deposits was recognized only after the expiration of the applicable statutory rescission period.
Mr. Gentry explained that, in a properly designed control environment, there should be a control point that prevents the recording of revenue from a timeshare-interest sale until evidence is obtained that the rescission period has expired without the purchaser exercising the right to cancel. This control might take the form of a manual or automated review that compares the contract date and the rescission-period expiration date to the date on which revenue is recorded. Mr. Gentry stated that it did not appear that VCR had a functioning control of this nature in place during the periods at issue.
Mr. Gentry further noted that VCR's accounting staff appeared to be applying a policy of recognizing revenue at the time of contract signing as though it were an established practice. He stated that this observation suggested a systemic rather than isolated issue — that is, the premature recognition of revenue did not appear to be the result of inadvertent errors by individual accounting personnel, but rather the application of a revenue-recognition methodology that was fundamentally inconsistent with ASC 606 as applied to timeshare-interest sales subject to statutory rescission rights. Mr. Gentry stated that this raised significant questions about whether VCR management had directed or sanctioned the practice and about the adequacy of VHG's oversight of VCR's accounting policies.
IV. June 19, 2023 Communication to VHG Management and Audit Committee
A. Nature and Recipients of the Communication
Mr. Gentry described the communication he made to VHG management and the Audit Committee on June 19, 2023. On that date, Mr. Gentry communicated his findings to both Thomas Rhett Griffith, VHG's Chief Financial Officer, and Diane Kowalski, Chair of the Audit Committee of VHG's Board of Directors. The communication was made initially by telephone conference call, which was followed by a written summary transmitted via email to both Griffith and Kowalski on the same day.
During the telephone conference call and in the follow-up email, Mr. Gentry informed Griffith and Kowalski of the potential material weakness relating to VCR's revenue-recognition controls that had been identified during HSA's interim review of VHG's Q1 2023 financial statements, covering the 10-Q period ending March 31, 2023. Mr. Gentry specifically flagged the approximately $9.8 million in timeshare-interest deposits that had been recorded as completed-sale revenue in Q1 2023 despite the fact that the applicable statutory rescission periods had not expired before the quarter closed. He communicated the nature and basis of his concern in sufficient detail to convey both the quantitative significance of the finding and the potential control implications.
B. Mr. Gentry's Recommendations
Mr. Gentry stated that during the June 19, 2023 communication, he made several recommendations to CFO Griffith and Audit Committee Chair Kowalski.
First, Mr. Gentry recommended that VHG's Audit Committee undertake an independent assessment of the scope and duration of the premature revenue-recognition practice. He emphasized that, while HSA had identified the issue in the context of the Q1 2023 interim review, a thorough investigation was needed to determine whether the practice extended to prior periods and to quantify the total magnitude of any overstatement.
Second, Mr. Gentry stated that HSA could not complete its interim review of the Q1 2023 10-Q without resolution of the revenue-recognition issue. He explained that the identified misstatement and the associated potential material weakness in internal controls created an impediment to HSA's ability to conclude that no material modifications were necessary to the interim financial information, which was a prerequisite to the completion of the interim review engagement.
Third, Mr. Gentry expressed concern that the premature revenue-recognition practice might extend beyond Q1 2023. He noted that HSA's analytical review suggested patterns in prior quarters that were similar to those observed in Q1 2023, although HSA had not yet performed a full retrospective analysis to confirm or quantify any prior-period misstatements. He communicated to Griffith and Kowalski that the potential for prior-period effects needed to be carefully assessed as part of any independent investigation.
C. Response from VHG Management
Mr. Gentry described the responses he received from CFO Griffith and Audit Committee Chair Kowalski during and following the June 19, 2023 communication.
Mr. Gentry stated that CFO Griffith expressed surprise at the finding. Griffith indicated that he had not been aware of the specific practice of recognizing timeshare-interest revenue at the time of contract signing rather than upon expiration of the rescission period, and he stated that he would consult with VCR division management to understand the basis for the practice and the circumstances under which it had been implemented. Mr. Gentry did not characterize the nature or extent of Griffith's surprise beyond stating that Griffith appeared not to have anticipated the finding.
Ms. Kowalski asked Mr. Gentry whether the issue could be indicative of intentional misstatement — that is, deliberate financial fraud — as opposed to an accounting-policy error or a good-faith misapplication of the applicable accounting standards. Mr. Gentry stated that he was not in a position to make that determination at that time. He explained that the distinction between intentional misstatement and error was a factual question that would require investigation beyond the scope of HSA's interim review procedures, and he reiterated his recommendation that the Audit Committee retain independent counsel and forensic accounting professionals to conduct a thorough investigation.
Mr. Gentry noted that, following the June 19, 2023 communication, he did not have further substantive discussions with VCR division personnel — specifically Garrett W. Daskine, Nicole Prescott, or Ryan Mateo Serrano — about the revenue-recognition matter. He stated that the Audit Committee took the lead on next steps after receiving HSA's communication, and it was Mr. Gentry's understanding that further inquiry at the division level was to be conducted under the direction of the Audit Committee and its advisors.
V. HSA's Prior Audit Work on VCR Revenue Recognition
A. FY 2022 Annual Audit
Mr. Gentry was asked about HSA's prior audit work on VCR's revenue recognition, with particular focus on whether the premature recognition of timeshare-interest deposits could have or should have been detected during earlier audit engagements.
Mr. Gentry stated that during the fiscal year 2022 annual audit, HSA's substantive testing of VCR revenue transactions did not specifically isolate the timing of rescission-period expirations as a separate test. He explained that HSA's revenue-testing procedures for VCR included sample-based testing of timeshare-interest sales transactions, which involved examining purchase agreements, evidence of payment, and related documentation to confirm that the recorded revenue was supported by valid sales transactions. However, the testing did not include a specific procedure designed to verify that each sampled transaction had been recorded as revenue only after the applicable rescission period had expired. HSA relied in part on VCR's representations regarding the timing of revenue recognition, including management's assertion that revenue was recognized in conformity with ASC 606.
Mr. Gentry acknowledged that, in retrospect, the fiscal year 2022 audit may not have been designed in a manner that would have detected the premature recognition of revenue attributable to the rescission-period timing issue. He explained that HSA's sample selections for revenue testing were based on completed-sale documentation provided by VCR. The documentation provided by VCR did not clearly distinguish between deposits that were within the rescission window and those for which the rescission period had already expired at the time of revenue recognition. As a result, the samples drawn by HSA's audit team may have included transactions for which revenue was prematurely recognized, but the premature recognition would not have been apparent from the documentation reviewed unless the auditors had independently tracked the rescission-period expiration dates and compared them to the dates on which revenue was recorded. Mr. Gentry stated that this comparison was not a specific step in HSA's audit program for VCR revenue during the fiscal year 2022 engagement.
Mr. Gentry confirmed that the primary VCR personnel who interacted with HSA's audit team during field work at VCR's Destin office were Division President Garrett W. Daskine, Vice President of Finance Nicole Prescott, and Controller Ryan Mateo Serrano. These individuals were responsible for providing HSA with access to VCR's books and records, responding to audit inquiries, and furnishing management representations in connection with the annual audit.
B. Prior-Year Observations
Mr. Gentry stated that he was not aware of any similar revenue-recognition concerns having been raised during the fiscal year 2021 or fiscal year 2020 audit cycles. He noted that, during those earlier periods, VCR's timeshare-sales volume was lower, and the development phases that generated the bulk of the revenue at issue — specifically, Phase III at Coral Dune Resort and Phase II at Palmetto Bluff Club — had not yet been launched.
Mr. Gentry observed that VCR's timeshare-sales volume had increased significantly beginning in the third quarter of 2022. This increase coincided with the launch of new timeshare inventory at Coral Dune Resort Phase III and Palmetto Bluff Club Phase II, both of which came online during that period. Mr. Gentry noted that the timing of this sales ramp-up coincided with the period of the apparent revenue overstatement. He stated that it was possible that the premature revenue-recognition practice had been in place during earlier periods but had not produced a material effect because the volume of transactions was lower. However, he emphasized that this was speculative and that the question of when the practice began would need to be determined through the investigation's forensic accounting work.
VI. HSA's Knowledge of Expense-Reporting Irregularities
Mr. Gentry was asked about HSA's knowledge of the expense-reporting irregularities involving fictitious vendor invoices that are also a subject of this investigation.
Mr. Gentry stated that HSA had not independently identified the expense-reporting irregularities involving fictitious vendor invoices prior to the commencement of the investigation. He confirmed that the first time he became aware of allegations relating to fictitious purchase orders and vendor invoices at VCR was through communications received in connection with this investigation. HSA's Q1 2023 interim review work, and the earlier annual audit work, had not surfaced evidence of fictitious vendor activity.
When asked whether HSA's audit testing of VCR's capital-improvement expenditures would have been expected to detect fictitious purchase orders, Mr. Gentry provided a nuanced response. He stated that HSA's testing of VCR's capital expenditures included a sample-based examination of capital-improvement expenditures and vendor invoices. The testing procedures involved selecting a sample of transactions, examining supporting documentation such as purchase orders, vendor invoices, evidence of receipt of goods or services, and payment records. However, Mr. Gentry noted that the sample size and selection methodology used by HSA may not have captured the specific fictitious invoices at issue, particularly given that — based on what he had been informed during this investigation — the amounts involved were distributed across multiple vendors and across multiple reporting periods. He stated that the distribution of the fictitious invoices across multiple vendors and periods would have made it more difficult for a sample-based testing approach to detect the irregularities, because the probability of any single fictitious transaction being captured in the sample was reduced by the dispersal of the scheme across multiple entities and timeframes.
Mr. Gentry specifically indicated that he was not familiar with the entities Gulf Standard Contracting LLC, Clearwater Design Collective Inc., or Suncoast Property Services LLC prior to being informed of their existence through this investigation. He stated that, to his knowledge, none of those entities had appeared in any of HSA's prior audit work papers or in any documentation reviewed by HSA during its audit or interim review engagements with VHG. He was unable to confirm whether those entities had been included in VCR's vendor master file or whether any invoices from those entities had been part of HSA's prior testing samples without first reviewing HSA's work papers, which were not available at the interview.
VII. Mr. Gentry's Assessment of VCR Internal Controls Environment
Mr. Gentry was asked to provide his overall assessment of the internal controls environment at VCR, based on his observations as lead engagement partner over the course of multiple audit cycles.
Mr. Gentry characterized VCR's finance team as relatively lean for the volume of transactions that the division processed, particularly during the ramp-up of timeshare sales at Coral Dune Resort Phase III and Palmetto Bluff Club Phase II. He stated that the growth in transaction volume beginning in Q3 2022 placed additional demands on VCR's accounting and finance personnel, and he observed that the staffing levels of VCR's finance function did not appear to have been augmented commensurately with the increase in transactional activity.
Mr. Gentry noted that Garrett W. Daskine, as Division President of VCR, appeared to exercise significant control over VCR's financial operations. He described Daskine as having substantial authority over the approval of expenditures and revenue-reporting decisions at the division level. Mr. Gentry stated that, in his experience, this degree of centralized control by a division president over financial operations was unusual and created an environment in which the effectiveness of internal controls was heavily dependent on the integrity and judgment of a single individual.
Mr. Gentry observed that the segregation of duties between the Vice President of Finance (Prescott) and the Controller (Serrano) appeared limited. He stated that both roles reported directly to Daskine, with neither Prescott nor Serrano appearing to exercise independent authority over financial reporting or expenditure approval decisions that was separate from Daskine's oversight. Mr. Gentry noted that Daskine was involved in detail-level decisions regarding financial operations and reporting that, in a more robust internal controls environment, would typically be delegated to the VP of Finance or the Controller and subject to independent review. The concentration of authority in Daskine, combined with the limited segregation of duties between Prescott and Serrano, created conditions that Mr. Gentry described as increasing the risk of errors or irregularities going undetected at the division level.
Mr. Gentry stated that he had raised general observations about the segregation of duties within VCR's finance function in HSA's management letter for fiscal year 2022, which was addressed to VHG's Audit Committee. However, he acknowledged that these observations were characterized as general comments and recommendations for improvement, and were not elevated to the level of a significant deficiency or a material weakness at that time. Mr. Gentry explained that, at the time the management letter was issued, HSA did not have information suggesting that the segregation-of-duties concerns had resulted in material misstatements or other adverse consequences. He acknowledged that, in light of the findings that have since emerged, the management-letter observations may take on greater significance in the investigation's assessment of VCR's control environment.
VIII. Post-June 19, 2023 Interactions
Mr. Gentry described his interactions with VHG and its representatives following his June 19, 2023 communication to CFO Griffith and Audit Committee Chair Kowalski.
Mr. Gentry confirmed that after his June 19, 2023 communication, his next substantive interaction regarding the revenue-recognition issue was with the Audit Committee and VHG General Counsel Patricia Navarro. Ms. Navarro informed Mr. Gentry in July 2023 that the Audit Committee had determined to retain outside counsel to conduct an independent investigation into the matters identified by HSA. Ms. Navarro subsequently informed Mr. Gentry that the Audit Committee had retained Calderwood & Harkness LLP for that purpose.
Mr. Gentry stated that he received a letter from Howard Quinn of Calderwood & Harkness LLP, dated August 9, 2023, establishing protocols for coordination between the investigation and HSA's ongoing audit activities. The coordination letter addressed, among other things, the procedures for the exchange of information between HSA and the investigation team, the handling of HSA's work papers, and the protocols for communications between HSA and VHG management during the pendency of the investigation. Mr. Gentry confirmed that he reviewed the coordination letter and that HSA was prepared to comply with its terms.
Mr. Gentry confirmed HSA's willingness to cooperate with the investigation within the bounds of HSA's professional obligations, including HSA's obligations under PCAOB rules and the professional standards governing auditor conduct. He stated that HSA understood the importance of the investigation and was committed to facilitating the Audit Committee's efforts to determine the scope and nature of the identified irregularities.
Mr. Gentry noted that, as of the date of the interview, HSA had not yet completed its assessment of whether the previously issued financial statements — specifically, the fiscal year 2022 Form 10-K and the Q1 2023 Form 10-Q — would require restatement. He stated that this determination was pending the outcome of the investigation and the forensic accounting work being conducted under the direction of Calderwood & Harkness LLP. Mr. Gentry explained that HSA would need to evaluate the findings of the investigation in order to determine whether the previously issued financial statements contained material misstatements that would necessitate restatement, and that HSA could not reach a final conclusion on this question until the investigation's quantification work was complete.
Mr. Gentry stated that he was aware that VHG had filed a Form 8-K with the Securities and Exchange Commission on August 14, 2023, the day prior to this interview. The Form 8-K was filed under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review) and disclosed that previously issued financial statements for fiscal year 2022 (third and fourth quarters) and Q1 2023 should no longer be relied upon. Mr. Gentry noted that this was a company determination made by VHG's management in consultation with the Audit Committee and HSA. He stated that HSA concurred with the determination that the previously issued financial statements for the identified periods should no longer be relied upon, pending the completion of the investigation and any necessary restatement.
IX. Potential Scope of Revenue Overstatement — Mr. Gentry's Preliminary View
Mr. Gentry was asked to provide his preliminary assessment of the potential scope and duration of the revenue overstatement identified by HSA.
Mr. Gentry stated that, based on HSA's preliminary analytical work, the revenue-recognition issue likely extended beyond Q1 2023. He indicated that the third quarter of 2022 (Q3 2022) appeared to be the earliest quarter potentially affected by the premature revenue-recognition practice. This timing coincided with the launch of new timeshare inventory at Coral Dune Resort Phase III, which became available for sale during Q3 2022. The launch of Phase II inventory at Palmetto Bluff Club followed shortly thereafter. Mr. Gentry stated that HSA's preliminary analytical review of VCR's revenue trends during Q3 2022 and subsequent quarters revealed patterns that were consistent with the premature recognition of timeshare-interest deposits, although HSA had not performed detailed transaction-level testing for periods prior to Q1 2023.
Mr. Gentry stated that he could not provide precise figures for the magnitude of the revenue overstatement in quarters beyond Q1 2023, where HSA had identified the $9.8 million finding. However, he noted that the methodology of premature recognition — recording revenue at the time of contract signing rather than upon expiration of the rescission period — appeared to have been applied consistently across quarters. Mr. Gentry characterized this consistency as suggesting a deliberate practice rather than a series of isolated errors. He stated that the uniform application of the premature recognition methodology across multiple quarters and across both key properties (Coral Dune Phase III and Palmetto Bluff Phase II) pointed to a systemic approach to revenue recognition that was embedded in VCR's standard operating procedures.
Mr. Gentry deferred to the forensic accounting work being conducted under the direction of Calderwood & Harkness LLP for the final quantification of the revenue overstatement across all affected periods. He stated that HSA's role in the quantification process would be determined through the coordination protocol established by the August 9, 2023 letter, and that HSA was prepared to provide access to its work papers and to assist the investigation team as needed.
X. Documents Referenced or Provided by Mr. Gentry
During the course of the interview, Mr. Gentry referenced the following documents:
1.  HSA's Q1 2023 Interim Review Work Papers. Mr. Gentry referenced the work papers prepared by HSA's engagement team in connection with its interim review of VHG's Q1 2023 financial statements. These work papers are retained by HSA at its Tampa office. The work papers were not produced at the interview but are subject to potential request through the coordination protocol established by the August 9, 2023 letter from Howard Quinn.
2.  June 19, 2023 Written Summary Email. Mr. Gentry referenced the written summary that he transmitted via email to CFO Thomas Rhett Griffith and Audit Committee Chair Diane Kowalski on June 19, 2023, following the telephone conference call on the same date. This email set forth the substance of HSA's findings regarding the $9.8 million in prematurely recognized timeshare-interest revenue and the associated potential material weakness in VCR's internal controls over financial reporting.
3.  HSA's FY 2022 Management Letter. Mr. Gentry referenced the management letter issued by HSA to VHG's Audit Committee in connection with the fiscal year 2022 annual audit. The management letter included observations on the segregation of duties within VCR's finance function, among other matters.
No documents were produced by Mr. Gentry at the interview. Document production from HSA to the investigation team is to be coordinated through the protocol established by the August 9, 2023 coordination letter from Howard Quinn.
XI. Conclusion and Follow-Up Items
The interview concluded at approximately 12:45 p.m. EDT. Mr. Gentry indicated his willingness to make himself available for follow-up questions as the investigation progresses, subject to the scheduling requirements of his professional obligations.
The following follow-up items were identified during or as a result of the interview:
1.  Request HSA's Q1 2023 interim review work papers related to VCR revenue recognition through the coordination protocol established by the August 9, 2023 letter.
2.  Request a copy of the June 19, 2023 email from Mr. Gentry to CFO Thomas Rhett Griffith and Audit Committee Chair Diane Kowalski, together with any attachments transmitted with that email.
3.  Request HSA's fiscal year 2022 management letter addressed to VHG's Audit Committee, and any prior management letters (fiscal years 2020 and 2021) that include observations or recommendations referencing VCR's internal-control environment, segregation of duties, or revenue-recognition practices.
4.  Consider whether additional members of HSA's VHG engagement team should be interviewed, including members of the audit team who performed field work at VCR's Destin office and who were directly involved in the substantive testing of VCR revenue transactions during the fiscal year 2022 annual audit and the Q1 2023 interim review.
This memorandum is to be filed in the investigation matter file under Matter No. 1021-00008. Copies are to be distributed to Howard Quinn and Conrad Ashby.
Prepared by:
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Liam Donahue Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131
Reviewed by:
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Howard Quinn Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131
Distribution: Investigation File (Matter No. 1021-00008); Howard Quinn; Conrad Ashby
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