1021-00008 · Client 1021 · Witness Interviews

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

MEMORANDUM OF INTERVIEW

TO: File — Investigation of Verimark Coastal Resorts LLC (Matter No. 1021-00008)

FROM: Liam Donahue, Calderwood & Harkness LLP

DATE: August 22, 2023

RE: Interview of Thomas Rhett Griffith, Chief Financial Officer, Verimark Hospitality Group Inc.

Note: This memorandum reflects the interviewers' summary of the substance of the interview and is not a verbatim transcript. Quotation marks are used to denote words and phrases that the interviewers believe to be close approximations of statements made by the witness but should not be treated as exact quotations.

I. Upjohn Warnings and Preliminary Matters

At the outset of the interview, Howard Quinn administered the standard Upjohn warning to Thomas Rhett Griffith. Specifically, Quinn advised Griffith of the following:

(a) Calderwood & Harkness LLP has been retained by, and represents, the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. in connection with this investigation. Calderwood & Harkness does not represent any individual officer, director, or employee of VHG or any of its subsidiaries, including Griffith individually.

(b) The attorney-client privilege with respect to this interview, and the communications occurring therein, belongs to VHG and the Audit Committee of the Board of Directors, and not to Griffith individually. Griffith does not hold any individual privilege with respect to this interview or any communications with Calderwood & Harkness in connection with this investigation.

(c) The Audit Committee may, in its sole discretion, choose to waive the attorney-client privilege and disclose the contents of this interview to third parties, including, without limitation, government agencies, regulators, or other parties as the Audit Committee deems appropriate.

(d) Griffith should keep the substance of this interview confidential and should not discuss the contents of the interview or the questions posed with other VHG employees, officers, directors, or any third parties without prior authorization from Calderwood & Harkness LLP.

Quinn asked Griffith whether he understood each of these points. Griffith confirmed that he understood each of the admonitions set forth above and stated that he agreed to proceed with the interview on that basis.

Griffith further confirmed that he was not represented by personal counsel in connection with this interview or the broader investigation. He stated that he had not consulted with or retained any personal attorney regarding the matters under investigation. Griffith confirmed that he was appearing voluntarily and that no one had coerced or pressured him to participate in the interview.

Quinn also asked Griffith whether he had reviewed any documents in preparation for this interview. Griffith stated that he had not reviewed any specific documents in advance, although he acknowledged that he was generally familiar with certain of the matters to be discussed given his role as CFO of VHG.

II. Background and Role

A. Personal and Professional Background

Griffith stated his full legal name as Thomas Rhett Griffith. He identified his current title as Chief Financial Officer of Verimark Hospitality Group Inc. Griffith stated that he has served as CFO of VHG since approximately March 2018, a tenure of roughly five years at the time of this interview. Prior to his appointment as CFO, Griffith held the position of Vice President of Corporate Finance at VHG, a role he occupied from approximately 2014 to 2018. Griffith stated that he joined VHG in 2012 in a senior financial analyst position and was promoted through several roles in the corporate finance organization before assuming the VP title and, subsequently, the CFO position.

B. Reporting Structure and Functional Responsibilities

Griffith stated that he reports directly to Margaret "Meg" Calder, the Chief Executive Officer of VHG. In his role as CFO, Griffith has functional oversight of all VHG financial reporting, including the preparation and filing of periodic reports with the Securities and Exchange Commission (Forms 10-K, 10-Q, and 8-K), as well as treasury operations, tax planning and compliance, and the company's internal audit function. Griffith stated that the VHG corporate finance team, based at the company's headquarters, consists of approximately 35 full-time employees across these functions. Griffith stated that the internal audit team, led by Vice President of Internal Audit Cynthia Park, reports administratively to Griffith and functionally to the Audit Committee.

C. VHG Corporate Overview

Griffith described VHG as a Delaware corporation that is publicly traded on the Nasdaq Stock Market under the ticker symbol VMRK. VHG is headquartered at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. Griffith stated that for the fiscal year ended December 31, 2022, VHG reported consolidated revenue of approximately $1.87 billion and consolidated net income of approximately $142.3 million. Griffith stated that as of approximately July 2023, VHG's market capitalization was roughly $3.4 billion, based on approximately 88.6 million shares of common stock outstanding. Griffith described VHG as a diversified hospitality company with operations spanning branded hotels, resort properties, timeshare-interest sales, property management, and food and beverage operations across the southeastern United States and the Caribbean.

D. Divisional Structure and VCR

Griffith explained that VHG operates through multiple operating divisions, each structured as a subsidiary or affiliated entity. The resort-development division is Verimark Coastal Resorts LLC ("VCR"), a wholly owned Florida limited liability company subsidiary of VHG. VCR's principal office is located at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541. Griffith stated that VCR is primarily engaged in the development, sale, and management of timeshare-interest units at premium coastal resort properties in Florida.

Griffith stated that for FY 2022, VCR reported revenue of approximately $438.7 million, representing approximately 23.5% of VHG's consolidated revenue. Griffith described VCR as one of VHG's most significant operating divisions, both in terms of revenue contribution and growth trajectory, and noted that VCR had experienced meaningful revenue growth in the three fiscal years preceding the matters at issue.

E. Relationship to VCR Division Management

Griffith stated that the VCR Division President, Garrett W. Daskine, reported operationally to CEO Calder. Griffith explained that while Daskine had direct operational authority over VCR, the VCR divisional finance team — specifically Nicole Prescott, Vice President of Finance, and Ryan Mateo Serrano, Controller — maintained a dotted-line reporting relationship to the corporate finance team under Griffith's supervision. Griffith described this dual-reporting structure as typical for VHG's operating divisions, explaining that the divisional finance leaders were expected to adhere to VHG's corporate accounting policies and internal control standards while also serving the operational needs of their respective division presidents.

Griffith acknowledged, however, that in practice, the day-to-day financial operations at VCR were managed by Prescott and Serrano with significant autonomy. Griffith stated that Daskine exercised substantial authority over VCR's budget, financial planning, and operational decision-making, and that the divisional finance team at VCR was more closely integrated into VCR's divisional management structure than into VHG's corporate finance function. Griffith stated that this level of autonomy was, in his view, consistent with VHG's decentralized operating model but acknowledged that it created risks related to financial reporting oversight.

III. VCR Revenue-Recognition Practices — Griffith's Understanding

A. General Revenue Recognition Framework

Griffith was asked to describe his understanding of VHG's revenue-recognition policies as they applied to VCR's timeshare-interest sales. Griffith described VHG's revenue-recognition policies as being governed by Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606"), as promulgated by the Financial Accounting Standards Board. Griffith stated that ASC 606 requires revenue to be recognized when control of a promised good or service is transferred to a customer in an amount that reflects the consideration to which the entity expects to be entitled.

Griffith explained that with specific application to timeshare-interest sales at VCR properties, the proper accounting treatment — as reflected in VHG's corporate accounting-policy manual, which Griffith stated was most recently updated in January 2022 — required that revenue from timeshare-interest purchase agreements not be recognized as completed-sale revenue until the applicable statutory rescission period had expired. Griffith identified the governing statute as Florida Statute § 721.10, which provides purchasers of timeshare interests a ten-calendar-day rescission period from the date of execution of the purchase agreement. During this rescission period, a purchaser may cancel the purchase agreement without penalty and is entitled to a full refund of any deposits or payments made.

Griffith stated that under VHG's policies and the requirements of ASC 606, until the ten-day rescission period had expired without the purchaser exercising the right of rescission, any deposits received from purchasers should be recorded as deferred revenue — specifically as contract liabilities on VHG's balance sheet — rather than as completed-sale revenue on the income statement. Griffith stated that this treatment was necessary because, during the rescission period, the purchaser retained a unilateral right to cancel the contract, and therefore, in Griffith's understanding, the performance obligation had not been satisfied and the revenue was not yet "earned" within the meaning of ASC 606.

Griffith stated that he was familiar with this accounting treatment and believed it to be well-established within VHG's finance organization. He stated that the treatment was consistent with guidance provided by HSA in prior audit periods and with the accounting-policy manual that had been distributed to divisional finance teams, including VCR.

B. Griffith's Awareness of VCR's Actual Practices

Griffith was asked directly when he first became aware that VCR had been recognizing timeshare-interest deposits as completed-sale revenue at the time of signing — rather than upon expiration of the ten-day rescission period — contrary to VHG's stated accounting policies and the requirements of ASC 606.

Griffith stated that he was not aware of this practice prior to HSA's June 19, 2023 communication, which is described in detail in Section IV below. Griffith stated that before that date, he had no reason to believe that VCR was not following VHG's revenue-recognition policies. Griffith stated that nothing in the quarterly financial data he reviewed for VCR suggested that revenue was being recognized prematurely, and that the aggregate revenue figures reported by VCR did not, in his view, present any conspicuous anomalies that would have prompted him to investigate the timing of individual revenue entries.

Griffith acknowledged that he reviewed VCR's quarterly financial results at an aggregate level as part of the consolidation process for VHG's periodic SEC filings. However, Griffith stated that his review did not typically extend to examining individual timeshare transactions or the specific timing of revenue recognition for particular purchase agreements. Griffith explained that VCR processed thousands of timeshare-interest transactions per quarter across its portfolio of properties, and that his review was focused on summary-level metrics such as total divisional revenue, gross margin, operating expenses, and variance analyses as compared to budget and prior periods.

Griffith described his reliance on the divisional finance team at VCR — specifically Prescott, as VP of Finance, and Serrano, as Controller — to ensure that VCR's revenue recognition was in compliance with ASC 606 and VHG's internal accounting policies. Griffith stated that this reliance was consistent with VHG's decentralized operating model and with industry practice at comparable publicly traded hospitality companies. Griffith acknowledged, however, that this reliance placed significant trust in the competence and integrity of the divisional finance personnel and that the adequacy of this approach was a matter he now considered to be a serious concern.

Griffith was asked about VCR's timeshare rescission rate during the period under investigation. Griffith stated that VCR's rescission rate during the relevant period was approximately 14.3%, meaning that approximately 14.3% of timeshare-interest purchasers who signed purchase agreements exercised their right of rescission within the ten-day statutory period. Griffith noted that he understood the industry average rescission rate for comparable timeshare-interest products to be approximately 11%, and that VCR's rate was therefore somewhat elevated relative to that benchmark. However, Griffith stated that he had not flagged this higher rescission rate as a concern at the time because he attributed it to VCR's high overall sales volume, aggressive sales practices at the resort-level, and the typical buyer profile at VCR's premium coastal properties. Griffith stated he did not, at the time, consider the elevated rescission rate to be an indicator of potential revenue-recognition irregularities.

C. Key Properties

Griffith identified the two primary VCR properties involved in timeshare-interest sales during the period relevant to this investigation:

(1) Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, Florida 32541. Griffith stated that the timeshare-interest sales at issue at this property related primarily to Phase III timeshare units, which had been actively marketed and sold beginning in approximately late 2021.

(2) Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228. Griffith stated that the timeshare-interest sales at issue at this property related primarily to Phase II timeshare units, which had been actively marketed and sold beginning in approximately mid-2022.

Griffith stated that he had visited both properties on several occasions in connection with his CFO responsibilities, including attendance at periodic divisional review meetings and property tours. However, Griffith stated that he was not involved in the operational details of timeshare sales at either location, including sales processes, contract execution, or the booking of individual revenue entries associated with timeshare-interest purchase agreements.

IV. HSA's June 19, 2023 Communication

A. Nature and Substance of Communication

Griffith was asked to describe the circumstances of the June 19, 2023 communication from HSA that brought the VCR revenue-recognition issue to his attention.

Griffith confirmed that on June 19, 2023, William "Bill" Gentry, the lead engagement partner at Hargrove, Steen & Aldrich LLP ("HSA"), VHG's independent registered public accounting firm, communicated to both Griffith and Audit Committee Chair Diane Kowalski that HSA had identified a potential material weakness relating to VCR's revenue-recognition controls. This identification arose during the course of HSA's interim review procedures for Q1 2023 — the fiscal quarter ending March 31, 2023.

Griffith stated that the communication was made initially by telephone. Griffith recalled that Gentry telephoned him directly at approximately 10:00 a.m. on June 19, 2023, and that Gentry indicated he was simultaneously reaching out to Kowalski. Griffith stated that the telephone conversation lasted approximately 25 to 30 minutes. Griffith stated that the telephone communication was followed up in writing, though Griffith did not recall the precise form of the written communication (whether email or formal letter) during this interview. Griffith stated that the written follow-up was received within one or two business days of the telephone call.

Griffith recalled that during the June 19 telephone call, Gentry specifically identified approximately $9.8 million in timeshare-interest deposits that had been recorded by VCR as completed-sale revenue in Q1 2023. Gentry informed Griffith that HSA's review indicated these deposits were associated with timeshare-interest purchase agreements for which the applicable ten-day rescission periods under Florida Statute § 721.10 had not expired before the quarter closed on March 31, 2023. In other words, VCR had recognized revenue from these transactions as of the date the purchase agreements were signed, rather than waiting until the rescission period had lapsed, in contravention of VHG's stated accounting policies and the requirements of ASC 606.

Griffith stated that Gentry also indicated during the call that HSA's preliminary analysis suggested the issue might not be limited to Q1 2023 and that similar premature revenue recognition may have occurred in prior periods, specifically in Q3 and Q4 of FY 2022. Griffith stated that Gentry characterized the potential misstatement as material and indicated that it raised concerns about the effectiveness of VHG's internal control over financial reporting at the divisional level.

Griffith stated he was "surprised and concerned" by Gentry's communication. Griffith stated that this was the first indication he had received that VCR's revenue-recognition practices were not in compliance with VHG's policies. Griffith stated that he immediately discussed the matter with CEO Calder and General Counsel Patricia Navarro, both on the same day. Griffith recalled that the initial discussion with Calder and Navarro focused on understanding the scope and potential magnitude of the issue, the implications for VHG's previously filed financial statements, and the appropriate steps to take in response.

B. Griffith's Response

Following receipt of Gentry's June 19, 2023 communication, Griffith stated that he took several steps in response.

First, Griffith stated that he directed his corporate-level accounting team to begin a preliminary review of VCR's revenue-recognition entries for Q1 2023. Griffith stated that he assigned this review to the corporate controller and two senior accountants on the consolidation team, with instructions to pull VCR's Q1 2023 revenue entries and reconcile them against the underlying timeshare-interest purchase agreements and associated dates to determine the extent to which revenue had been recognized before expiration of the applicable rescission periods.

Second, Griffith stated that he contacted Nicole Prescott directly, by telephone, within a day or two of Gentry's communication. Griffith stated that he asked Prescott to explain the Q1 2023 revenue entries that HSA had identified. Griffith recalled that Prescott attributed the discrepancy to what she described as a "timing issue," and stated that the deposits in question would properly convert to earned revenue in Q2 2023, once the rescission periods had fully lapsed. Griffith stated that Prescott characterized the matter as an inadvertent timing error in the cutoff process rather than a systemic or intentional deviation from VHG's accounting policies.

Griffith stated that he was not satisfied with Prescott's explanation. Griffith stated that even if the characterization as a "timing issue" were accurate, the recognition of $9.8 million in revenue before the rescission periods had expired represented a clear departure from VHG's accounting policies and raised questions about the integrity of VCR's revenue-recognition controls. Griffith stated that he escalated the matter to CEO Calder and recommended that the issue be brought to the attention of the Audit Committee as promptly as possible.

Griffith stated that CEO Calder agreed with his recommendation and that the matter was placed on the agenda for a special session of the Audit Committee. Griffith stated that the Audit Committee convened an executive session on July 10, 2023, at which the committee resolved to engage independent outside counsel to conduct a formal investigation into VCR's revenue-recognition practices and related matters. Griffith stated that he supported the Audit Committee's decision to engage independent counsel and that he participated in the process of identifying and evaluating potential investigation counsel at General Counsel Navarro's request. Griffith stated that Calderwood & Harkness LLP was ultimately selected and retained by the Audit Committee in mid-July 2023.

V. Griffith's Oversight of VCR Financial Reporting

A. Quarterly Review Process

Griffith was asked to describe in detail the quarterly financial-reporting process as it pertained to VCR's results and their incorporation into VHG's consolidated financial statements.

Griffith described the process as follows: VCR's divisional finance team, led by VP of Finance Nicole Prescott and Controller Ryan Mateo Serrano, prepared divisional financial statements and supporting schedules for each fiscal quarter. These divisional financial statements included an income statement, balance sheet, and cash flow statement for VCR on a standalone basis, along with supporting schedules providing detail on revenue by product category, cost of sales, operating expenses, and capital expenditures. Griffith stated that the divisional financial packages were typically completed and submitted to VHG's corporate-level consolidation team within approximately 10 to 12 business days following the end of each fiscal quarter.

Upon receipt of VCR's divisional financial package, VHG's corporate consolidation team incorporated VCR's results into VHG's consolidated financial statements, along with the results from VHG's other operating divisions. Griffith stated that the consolidation team performed intercompany eliminations and other consolidation adjustments as necessary. Griffith stated that he reviewed the consolidated results and participated in meetings with the consolidation team to discuss significant variances, unusual items, and any matters requiring management judgment.

Griffith stated that his review of VCR's results was conducted at a summary level. He focused on revenue trends — both period-over-period growth and comparison to budget — margin analysis, and variance explanations provided by the divisional finance team. Griffith stated that he did not typically examine individual transaction-level entries within VCR's divisional financial statements, nor did he routinely request or review supporting documentation for specific timeshare-interest purchase agreements or revenue entries. Griffith stated that this level of review was consistent with his approach to all of VHG's operating divisions, given the volume of transactions across the consolidated entity.

Griffith signed off on VHG's quarterly 10-Q filings and the annual 10-K filing after completing his review and after consultation with HSA regarding any audit or review observations. Griffith acknowledged that, in hindsight, the quarterly review process lacked sufficient granularity to detect the premature revenue-recognition issue at VCR. Griffith stated that the aggregate revenue figures reported by VCR were consistent with the division's growth trajectory and did not, at the summary level, reveal the timing discrepancy identified by HSA.

B. SOX Section 302 and 404 Considerations

Griffith was asked about his responsibilities and certifications under the Sarbanes-Oxley Act of 2002.

Griffith confirmed that, as CFO, he signed the certifications required under Section 302 of the Sarbanes-Oxley Act for VHG's FY 2022 Annual Report on Form 10-K and for the Quarterly Report on Form 10-Q for Q1 2023 (the quarter ended March 31, 2023). By signing these certifications, Griffith certified, among other things, that he had reviewed the report, that the report did not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made not misleading, and that the financial statements and other financial information included in the report fairly presented in all material respects the financial condition, results of operations, and cash flows of VHG as of and for the periods presented.

Griffith further confirmed that, in connection with the Section 302 certifications, he certified that he and CEO Calder were responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting for VHG, and that such controls and procedures were effective as of the end of the respective reporting periods.

Griffith also confirmed that he had responsibility, together with CEO Calder, for management's report on internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, which was included in VHG's FY 2022 Form 10-K. Griffith stated that the management assessment concluded that VHG's internal control over financial reporting was effective as of December 31, 2022, and that HSA's attestation report, issued in connection with VHG's FY 2022 10-K, concurred with that assessment.

Griffith stated that at the time he signed these certifications and reports, he was not aware of the premature revenue-recognition practices at VCR and believed in good faith that the financial statements were materially accurate and that VHG's internal controls were effective. Griffith stated that his certifications were based on the information available to him at the time, including the representations of VCR's divisional finance team and the results of VHG's internal audit activities.

Griffith acknowledged the seriousness of the situation and the potential implications for the SOX certifications he had signed. Griffith stated that he understood that the discovery of a material weakness in internal controls relating to VCR's revenue recognition would likely require a reassessment of the effectiveness conclusions in the Section 404 management report and in the Section 302 certifications for the affected periods.

C. Internal Controls at VCR

Griffith was asked to describe the internal controls environment at VCR as he understood it prior to the matters giving rise to this investigation.

Griffith described the internal controls environment at VCR as having historically been considered adequate by VHG's corporate finance team and internal audit function. Griffith stated that VCR was subject to the same corporate-level internal control framework applicable to all VHG operating divisions, which was designed to be consistent with the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Griffith stated that VCR's divisional finance team was responsible for implementing and maintaining controls at the divisional level, consistent with VHG's corporate policies and procedures.

Griffith acknowledged, however, that VCR's divisional finance team had significant autonomy in recording revenue transactions and that the corporate-level controls over VCR's revenue entries were primarily limited to the summary-level review described above. Griffith stated that there was no corporate-level control that independently verified the timing of individual revenue entries at VCR against the underlying purchase-agreement dates and rescission-period expiration dates.

Griffith stated that VHG's internal audit function, led by VP of Internal Audit Cynthia Park, conducted periodic audits of VHG's operating divisions on a risk-based rotation schedule. Griffith stated that the internal audit team had not specifically tested VCR's timeshare-deposit revenue-recognition process in FY 2022 or Q1 2023. Griffith acknowledged this as a gap in the internal audit coverage and stated that, in his assessment, the internal audit team's risk-based prioritization had not identified VCR's revenue-recognition process as a high-risk area warranting focused testing during those periods. Griffith stated he could not recall the last time internal audit had conducted a focused review of VCR's timeshare revenue-recognition controls, but believed it may have been in FY 2020 or earlier.

Griffith stated that he was not aware of any prior complaints, whistleblower reports, ethics hotline submissions, or other communications from VHG employees or external parties regarding VCR's revenue-recognition practices. Griffith stated that VHG maintained an anonymous ethics hotline and that reports received through that channel were reviewed by the internal audit team and reported to the Audit Committee. Griffith stated he was not aware of any reports through that channel related to VCR's financial reporting or revenue recognition during the relevant period.

VI. Expense Reporting and Capital-Improvement Budgets

A. Griffith's Knowledge of VCR Expense Practices

The interviewers turned to questions regarding VCR's capital-improvement budgets and expenditure-approval processes. Griffith was asked to describe his understanding of how capital-improvement projects at VCR were budgeted, approved, and paid.

Griffith stated that capital-improvement budgets at VCR were prepared annually by VP of Finance Prescott and Controller Serrano in conjunction with VCR's property-operations and development teams. These budgets were presented to and approved by VCR Division President Daskine at the divisional level. Griffith stated that approved capital-improvement budgets for VCR were included in VHG's consolidated annual budget, which Griffith reviewed and which was presented to the Board of Directors for approval as part of the annual budgeting cycle.

Griffith stated that individual expenditures within approved capital-improvement budgets did not require additional corporate-level approval unless they exceeded a per-project threshold of $500,000. Expenditures below that threshold could be approved and processed at the divisional level by Daskine or his designees within the divisional finance team. Griffith stated that this delegation of authority was documented in VHG's corporate expenditure-approval policy and was applicable to all VHG operating divisions.

Griffith was asked whether he was aware of the fictitious vendor invoices or the shell entities that had been identified during the course of the investigation. Griffith stated that he was not aware, prior to being informed of the investigation, of any fictitious vendor invoices submitted in connection with VCR's capital-improvement projects. Griffith stated that he was not aware of the existence of the entities Gulf Standard Contracting LLC, Clearwater Design Collective Inc., or Suncoast Property Services LLC, or that any payments had been made to those entities from VCR's accounts.

Griffith stated that he had not reviewed individual purchase orders, vendor invoices, or payment records at VCR as part of his CFO responsibilities. Griffith explained that the volume of such transactions across VHG's consolidated operations made it impracticable for him to review individual vendor payments at the divisional level, and that he relied on the divisional finance teams and VHG's internal controls to ensure the integrity of the vendor-payment process.

B. Vendor Approval Process

Griffith described VHG's vendor-approval process at the corporate level. Griffith stated that VHG maintained a corporate procurement function that required new vendors above a certain dollar threshold — Griffith recalled the threshold as being $100,000 in aggregate annual payments — to undergo a vetting process. The vetting process included verification of the vendor's legal formation, tax identification number, insurance coverage, and references, and in some cases a review by the corporate legal department.

Griffith acknowledged uncertainty about whether VCR had followed this vendor-approval process for the specific vendors identified during the investigation. Griffith stated that the divisional finance team at VCR had latitude to approve vendors for capital-improvement work within budgeted amounts, and that his understanding was that vendors below the corporate threshold could be approved at the divisional level without involvement from the corporate procurement function. Griffith stated he did not know whether the payments to the entities in question — Gulf Standard Contracting LLC, Clearwater Design Collective Inc., and Suncoast Property Services LLC — individually or collectively exceeded the thresholds requiring corporate-level vetting.

The interviewers asked Griffith directly whether the names Gulf Standard Contracting LLC, Clearwater Design Collective Inc., or Suncoast Property Services LLC were familiar to him. Griffith stated that none of these names were familiar to him. He stated he had not encountered these entity names in any financial reports, budget documents, or other materials he had reviewed in his capacity as CFO.

VII. Interactions with VCR Division Management

A. Relationship with Garrett Daskine

Griffith was asked to describe his professional relationship with Garrett W. Daskine, the VCR Division President.

Griffith described Daskine as a long-tenured VHG employee, noting that Daskine had been with VHG for approximately 17 years at the time of the interview. Griffith stated that Daskine was well-regarded by senior management and the Board of Directors, and that Daskine was widely credited within VHG for growing VCR into one of the company's most profitable and strategically important divisions. Griffith stated that Daskine had a strong track record of meeting or exceeding revenue and profitability targets at VCR, and that he was viewed as a key operational leader within VHG.

Griffith stated that Daskine reported directly to CEO Calder and that Griffith's interactions with Daskine were primarily during quarterly business reviews, which were formal presentations of VCR's financial and operational results to VHG's senior leadership team, and annual budget presentations. Griffith stated that he did not have frequent informal interactions with Daskine outside of these scheduled meetings.

Griffith stated that he had no reason, prior to the commencement of this investigation, to suspect Daskine of financial misconduct. Griffith stated that Daskine had always presented himself as a capable and forthright division leader and that nothing in Griffith's interactions with Daskine had raised concerns about the integrity of VCR's financial reporting.

B. Relationship with Nicole Prescott

Griffith described Nicole Prescott, VCR's VP of Finance, as a competent finance professional who had been with VHG for approximately nine years. Griffith stated that Prescott was the primary interface between VCR's finance function and VHG's corporate finance team. Griffith stated that Prescott was responsible for overseeing VCR's financial reporting, budgeting, and divisional financial operations, and that she reported to Daskine on an operational basis while maintaining a dotted-line reporting relationship to VHG's corporate finance organization under Griffith.

Griffith stated that his contact with Prescott was more frequent than his contact with Daskine. Griffith stated that he and Prescott participated in monthly reporting calls — typically held during the second week of each month — during which Prescott would provide updates on VCR's financial performance, revenue pipeline, and any significant operational or financial developments. Griffith also stated that he interacted with Prescott during the quarterly close process, when VCR's divisional financial package was submitted to the corporate consolidation team.

Griffith referenced his June 2023 telephone call with Prescott regarding HSA's findings, the substance of which is described in Section IV.B above. Griffith stated that in his June 2023 call with Prescott, Prescott did not acknowledge any intentional deviation from VHG's revenue-recognition policies and maintained that the matter was attributable to a timing error in the cutoff process.

C. Relationship with Ryan Serrano

Griffith stated that his interaction with Ryan Mateo Serrano, VCR's divisional Controller, was limited. Griffith described Serrano as the VCR divisional Controller who reported to Prescott and who had day-to-day responsibility for accounting entries, general ledger maintenance, purchase-order processing, accounts payable, and account reconciliation at the divisional level. Griffith stated that Serrano had been with VHG for approximately six years.

Griffith stated that he did not have regular direct communications with Serrano and that his interactions with Serrano were typically limited to occasional attendance by Serrano at quarterly close calls when Prescott was unavailable. Griffith stated that he had no independent communications with Serrano regarding revenue recognition, vendor payments, or any of the other matters at issue during the period relevant to this investigation.

VIII. Form 8-K Filing and Non-Reliance Disclosure

Griffith was asked about his involvement in the Form 8-K filing that VHG made on August 14, 2023 under Item 4.02 of Form 8-K (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review).

Griffith confirmed his involvement in the decision-making process leading to the August 14, 2023 Form 8-K filing. Griffith stated that the decision to file the 8-K was made following extensive discussions involving the Audit Committee, CEO Calder, General Counsel Navarro, HSA (principally lead engagement partner William Gentry), and outside securities counsel at Westlake Burris & Holt LLP (principally partner Irene Castellanos). Griffith stated that Calderwood & Harkness was also consulted with respect to the factual basis for the filing in light of the ongoing investigation.

Griffith stated that the Form 8-K disclosed that the Audit Committee, in consultation with management and HSA, had concluded that VHG's previously issued financial statements for the third and fourth quarters of FY 2022 and the first quarter of FY 2023 should no longer be relied upon due to the identification of errors relating to the recognition of timeshare-interest revenue at VCR. Griffith stated that the 8-K also disclosed the identification of a material weakness in internal control over financial reporting relating to VCR's revenue-recognition process.

Griffith stated that he understood a restatement of VHG's financial statements for the affected periods would likely be necessary. Griffith stated that he was actively working with HSA and Westlake Burris on determining the scope and timeline for the restatement, including the identification of all affected line items and the quantification of the necessary adjustments. Griffith stated that as of the date of this interview, the restatement had not yet been completed and the timeline was still being determined.

IX. Administrative Leave of Subjects

Griffith confirmed that he was informed on August 7, 2023 that VCR Division President Garrett W. Daskine, VP of Finance Nicole Prescott, and Controller Ryan Mateo Serrano were placed on administrative leave, effective immediately, pending the outcome of the investigation. Griffith stated that this decision was made by CEO Calder in consultation with General Counsel Navarro and the Audit Committee, and that Griffith was informed of the decision by Calder on August 7, 2023.

Griffith stated that interim management arrangements had been made to ensure continuity of VCR's operations and financial reporting during the administrative-leave period. Griffith identified that a senior director from VHG's corporate finance team — Griffith did not recall the individual's name during this interview — had been temporarily assigned to oversee VCR's finance function and to serve as the primary point of contact between VCR and VHG's corporate finance organization. Griffith stated that he had been closely involved in the transition of financial oversight responsibilities to the interim team and was monitoring VCR's financial operations on a more frequent basis than he had prior to the commencement of the investigation.

X. SEC Preliminary Inquiry

Griffith was asked whether he was aware of any communications from, or inquiries by, the Securities and Exchange Commission relating to VCR or the matters under investigation.

As of the date of this interview, August 22, 2023, Griffith stated that he was not aware of any formal SEC inquiry or enforcement action relating to VHG or VCR. However, Griffith stated that he understood from General Counsel Navarro and from outside securities counsel at Westlake Burris & Holt LLP that SEC interest in the matter was anticipated following the August 14, 2023 Form 8-K filing. Griffith stated that he expected that the SEC's Division of Enforcement might open a preliminary inquiry and that VHG should be prepared to respond to any such inquiry.

(Note: The SEC Division of Enforcement subsequently opened preliminary inquiry File No. HO-14237 in September 2023.)

XI. Griffith's Assessment and Concerns

Near the conclusion of the interview, Griffith was asked for his overall assessment of the situation and any concerns he wished to raise.

Griffith expressed significant concern about the adequacy of VHG's internal controls at the divisional level, particularly with respect to VCR. Griffith stated that he believed remediation of VHG's internal control environment would be necessary, including the implementation of additional corporate-level controls over divisional revenue-recognition processes, enhanced internal audit coverage of VCR and other divisions, and a review of the delegation-of-authority policies governing expenditure approvals at the divisional level. Griffith stated that he had already begun preliminary discussions with VP of Internal Audit Cynthia Park regarding the scope of potential remediation measures.

Griffith stated that he was committed to cooperating fully with the investigation being conducted by Calderwood & Harkness on behalf of the Audit Committee, and with any necessary restatement process. Griffith stated that he would make himself and his team available to provide information, documents, and analysis as needed to support the investigation and the restatement effort.

Griffith was asked whether he was aware of any other financial irregularities at VHG or any of its other operating divisions. Griffith stated that he was not aware of any other financial irregularities and that he had no reason to believe that similar revenue-recognition or expense-reporting issues existed at any of VHG's other divisions. Griffith stated, however, that he believed it would be prudent for the internal audit team to conduct targeted reviews of revenue-recognition and vendor-payment processes at VHG's other divisions as a precautionary measure.

Griffith confirmed that he had not retained personal counsel in connection with this investigation or the matters discussed during this interview. Griffith stated that he had not been advised by Calderwood & Harkness or by anyone else that he was a subject or target of the investigation.

XII. Conclusion and Next Steps

The interview concluded at approximately 12:35 p.m. on August 22, 2023.

At the conclusion of the interview, Howard Quinn reminded Griffith of his confidentiality obligations as set forth in the Upjohn warnings administered at the outset of the interview. Griffith was instructed not to discuss the substance of the interview — including the questions posed, the topics covered, and his responses — with other VHG employees, officers, or directors, or with any third parties. Quinn stated that an exception was made for communications with General Counsel Patricia Navarro as necessary for Griffith to fulfill his duties as CFO, provided that such communications were coordinated with Calderwood & Harkness in advance.

Griffith was advised that Calderwood & Harkness might request a follow-up interview if warranted by the progress of the investigation and the review of documents and other evidence. Griffith confirmed his willingness to make himself available for further interviews at a mutually convenient time and stated that he would cooperate fully with any additional requests from the investigation team.

No scheduling commitments for a follow-up interview were made at this time.

XIII. Attachments / Exhibits Referenced

None. No documents were shown to the witness during this interview, and no exhibits were marked or referenced.

DOCUMENT PREPARATION AND REVIEW

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

Date of Interview:	August 22, 2023
Location of Interview:	Calderwood & Harkness LLP, 200 South Biscayne Boulevard, Suite 4400, Miami, FL 33131 (Conference Room 44-B)
Duration:	Approximately 3 hours (9:30 a.m. – 12:35 p.m.)
Interviewers:	Howard Quinn, Partner, Calderwood & Harkness LLP

Liam Donahue, Senior Associate, Calderwood & Harkness LLP

Also Present:	Steven Hollander, Associate, Calderwood & Harkness LLP (note-taker)
Witness:	Thomas Rhett Griffith, Chief Financial Officer, Verimark Hospitality Group Inc.
Witness Counsel:	None present. Griffith appeared in his capacity as an officer of Verimark Hospitality Group Inc. ("VHG"). Company General Counsel Patricia Navarro was not in attendance at Griffith's request and with the approval of the Audit Committee of the Board of Directors of VHG.
Prepared by:	Steven Hollander, Associate, Calderwood & Harkness LLP
Reviewed by:	Liam Donahue, Senior Associate, Calderwood & Harkness LLP

Howard Quinn, Partner, Calderwood & Harkness LLP

Distribution:

Audit Committee of the Board of Directors, Verimark Hospitality Group Inc. (via privileged channels)

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM OF INTERVIEW
TO: File — Investigation of Verimark Coastal Resorts LLC (Matter No. 1021-00008)
FROM: Liam Donahue, Calderwood & Harkness LLP
DATE: August 22, 2023
RE: Interview of Thomas Rhett Griffith, Chief Financial Officer, Verimark Hospitality Group Inc.
Note: This memorandum reflects the interviewers' summary of the substance of the interview and is not a verbatim transcript. Quotation marks are used to denote words and phrases that the interviewers believe to be close approximations of statements made by the witness but should not be treated as exact quotations.
I. Upjohn Warnings and Preliminary Matters
At the outset of the interview, Howard Quinn administered the standard Upjohn warning to Thomas Rhett Griffith. Specifically, Quinn advised Griffith of the following:
(a) Calderwood & Harkness LLP has been retained by, and represents, the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. in connection with this investigation. Calderwood & Harkness does not represent any individual officer, director, or employee of VHG or any of its subsidiaries, including Griffith individually.
(b) The attorney-client privilege with respect to this interview, and the communications occurring therein, belongs to VHG and the Audit Committee of the Board of Directors, and not to Griffith individually. Griffith does not hold any individual privilege with respect to this interview or any communications with Calderwood & Harkness in connection with this investigation.
(c) The Audit Committee may, in its sole discretion, choose to waive the attorney-client privilege and disclose the contents of this interview to third parties, including, without limitation, government agencies, regulators, or other parties as the Audit Committee deems appropriate.
(d) Griffith should keep the substance of this interview confidential and should not discuss the contents of the interview or the questions posed with other VHG employees, officers, directors, or any third parties without prior authorization from Calderwood & Harkness LLP.
Quinn asked Griffith whether he understood each of these points. Griffith confirmed that he understood each of the admonitions set forth above and stated that he agreed to proceed with the interview on that basis.
Griffith further confirmed that he was not represented by personal counsel in connection with this interview or the broader investigation. He stated that he had not consulted with or retained any personal attorney regarding the matters under investigation. Griffith confirmed that he was appearing voluntarily and that no one had coerced or pressured him to participate in the interview.
Quinn also asked Griffith whether he had reviewed any documents in preparation for this interview. Griffith stated that he had not reviewed any specific documents in advance, although he acknowledged that he was generally familiar with certain of the matters to be discussed given his role as CFO of VHG.
II. Background and Role
A. Personal and Professional Background
Griffith stated his full legal name as Thomas Rhett Griffith. He identified his current title as Chief Financial Officer of Verimark Hospitality Group Inc. Griffith stated that he has served as CFO of VHG since approximately March 2018, a tenure of roughly five years at the time of this interview. Prior to his appointment as CFO, Griffith held the position of Vice President of Corporate Finance at VHG, a role he occupied from approximately 2014 to 2018. Griffith stated that he joined VHG in 2012 in a senior financial analyst position and was promoted through several roles in the corporate finance organization before assuming the VP title and, subsequently, the CFO position.
B. Reporting Structure and Functional Responsibilities
Griffith stated that he reports directly to Margaret "Meg" Calder, the Chief Executive Officer of VHG. In his role as CFO, Griffith has functional oversight of all VHG financial reporting, including the preparation and filing of periodic reports with the Securities and Exchange Commission (Forms 10-K, 10-Q, and 8-K), as well as treasury operations, tax planning and compliance, and the company's internal audit function. Griffith stated that the VHG corporate finance team, based at the company's headquarters, consists of approximately 35 full-time employees across these functions. Griffith stated that the internal audit team, led by Vice President of Internal Audit Cynthia Park, reports administratively to Griffith and functionally to the Audit Committee.
C. VHG Corporate Overview
Griffith described VHG as a Delaware corporation that is publicly traded on the Nasdaq Stock Market under the ticker symbol VMRK. VHG is headquartered at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. Griffith stated that for the fiscal year ended December 31, 2022, VHG reported consolidated revenue of approximately $1.87 billion and consolidated net income of approximately $142.3 million. Griffith stated that as of approximately July 2023, VHG's market capitalization was roughly $3.4 billion, based on approximately 88.6 million shares of common stock outstanding. Griffith described VHG as a diversified hospitality company with operations spanning branded hotels, resort properties, timeshare-interest sales, property management, and food and beverage operations across the southeastern United States and the Caribbean.
D. Divisional Structure and VCR
Griffith explained that VHG operates through multiple operating divisions, each structured as a subsidiary or affiliated entity. The resort-development division is Verimark Coastal Resorts LLC ("VCR"), a wholly owned Florida limited liability company subsidiary of VHG. VCR's principal office is located at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541. Griffith stated that VCR is primarily engaged in the development, sale, and management of timeshare-interest units at premium coastal resort properties in Florida.
Griffith stated that for FY 2022, VCR reported revenue of approximately $438.7 million, representing approximately 23.5% of VHG's consolidated revenue. Griffith described VCR as one of VHG's most significant operating divisions, both in terms of revenue contribution and growth trajectory, and noted that VCR had experienced meaningful revenue growth in the three fiscal years preceding the matters at issue.
E. Relationship to VCR Division Management
Griffith stated that the VCR Division President, Garrett W. Daskine, reported operationally to CEO Calder. Griffith explained that while Daskine had direct operational authority over VCR, the VCR divisional finance team — specifically Nicole Prescott, Vice President of Finance, and Ryan Mateo Serrano, Controller — maintained a dotted-line reporting relationship to the corporate finance team under Griffith's supervision. Griffith described this dual-reporting structure as typical for VHG's operating divisions, explaining that the divisional finance leaders were expected to adhere to VHG's corporate accounting policies and internal control standards while also serving the operational needs of their respective division presidents.
Griffith acknowledged, however, that in practice, the day-to-day financial operations at VCR were managed by Prescott and Serrano with significant autonomy. Griffith stated that Daskine exercised substantial authority over VCR's budget, financial planning, and operational decision-making, and that the divisional finance team at VCR was more closely integrated into VCR's divisional management structure than into VHG's corporate finance function. Griffith stated that this level of autonomy was, in his view, consistent with VHG's decentralized operating model but acknowledged that it created risks related to financial reporting oversight.
III. VCR Revenue-Recognition Practices — Griffith's Understanding
A. General Revenue Recognition Framework
Griffith was asked to describe his understanding of VHG's revenue-recognition policies as they applied to VCR's timeshare-interest sales. Griffith described VHG's revenue-recognition policies as being governed by Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606"), as promulgated by the Financial Accounting Standards Board. Griffith stated that ASC 606 requires revenue to be recognized when control of a promised good or service is transferred to a customer in an amount that reflects the consideration to which the entity expects to be entitled.
Griffith explained that with specific application to timeshare-interest sales at VCR properties, the proper accounting treatment — as reflected in VHG's corporate accounting-policy manual, which Griffith stated was most recently updated in January 2022 — required that revenue from timeshare-interest purchase agreements not be recognized as completed-sale revenue until the applicable statutory rescission period had expired. Griffith identified the governing statute as Florida Statute § 721.10, which provides purchasers of timeshare interests a ten-calendar-day rescission period from the date of execution of the purchase agreement. During this rescission period, a purchaser may cancel the purchase agreement without penalty and is entitled to a full refund of any deposits or payments made.
Griffith stated that under VHG's policies and the requirements of ASC 606, until the ten-day rescission period had expired without the purchaser exercising the right of rescission, any deposits received from purchasers should be recorded as deferred revenue — specifically as contract liabilities on VHG's balance sheet — rather than as completed-sale revenue on the income statement. Griffith stated that this treatment was necessary because, during the rescission period, the purchaser retained a unilateral right to cancel the contract, and therefore, in Griffith's understanding, the performance obligation had not been satisfied and the revenue was not yet "earned" within the meaning of ASC 606.
Griffith stated that he was familiar with this accounting treatment and believed it to be well-established within VHG's finance organization. He stated that the treatment was consistent with guidance provided by HSA in prior audit periods and with the accounting-policy manual that had been distributed to divisional finance teams, including VCR.
B. Griffith's Awareness of VCR's Actual Practices
Griffith was asked directly when he first became aware that VCR had been recognizing timeshare-interest deposits as completed-sale revenue at the time of signing — rather than upon expiration of the ten-day rescission period — contrary to VHG's stated accounting policies and the requirements of ASC 606.
Griffith stated that he was not aware of this practice prior to HSA's June 19, 2023 communication, which is described in detail in Section IV below. Griffith stated that before that date, he had no reason to believe that VCR was not following VHG's revenue-recognition policies. Griffith stated that nothing in the quarterly financial data he reviewed for VCR suggested that revenue was being recognized prematurely, and that the aggregate revenue figures reported by VCR did not, in his view, present any conspicuous anomalies that would have prompted him to investigate the timing of individual revenue entries.
Griffith acknowledged that he reviewed VCR's quarterly financial results at an aggregate level as part of the consolidation process for VHG's periodic SEC filings. However, Griffith stated that his review did not typically extend to examining individual timeshare transactions or the specific timing of revenue recognition for particular purchase agreements. Griffith explained that VCR processed thousands of timeshare-interest transactions per quarter across its portfolio of properties, and that his review was focused on summary-level metrics such as total divisional revenue, gross margin, operating expenses, and variance analyses as compared to budget and prior periods.
Griffith described his reliance on the divisional finance team at VCR — specifically Prescott, as VP of Finance, and Serrano, as Controller — to ensure that VCR's revenue recognition was in compliance with ASC 606 and VHG's internal accounting policies. Griffith stated that this reliance was consistent with VHG's decentralized operating model and with industry practice at comparable publicly traded hospitality companies. Griffith acknowledged, however, that this reliance placed significant trust in the competence and integrity of the divisional finance personnel and that the adequacy of this approach was a matter he now considered to be a serious concern.
Griffith was asked about VCR's timeshare rescission rate during the period under investigation. Griffith stated that VCR's rescission rate during the relevant period was approximately 14.3%, meaning that approximately 14.3% of timeshare-interest purchasers who signed purchase agreements exercised their right of rescission within the ten-day statutory period. Griffith noted that he understood the industry average rescission rate for comparable timeshare-interest products to be approximately 11%, and that VCR's rate was therefore somewhat elevated relative to that benchmark. However, Griffith stated that he had not flagged this higher rescission rate as a concern at the time because he attributed it to VCR's high overall sales volume, aggressive sales practices at the resort-level, and the typical buyer profile at VCR's premium coastal properties. Griffith stated he did not, at the time, consider the elevated rescission rate to be an indicator of potential revenue-recognition irregularities.
C. Key Properties
Griffith identified the two primary VCR properties involved in timeshare-interest sales during the period relevant to this investigation:
(1) Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, Florida 32541. Griffith stated that the timeshare-interest sales at issue at this property related primarily to Phase III timeshare units, which had been actively marketed and sold beginning in approximately late 2021.
(2) Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228. Griffith stated that the timeshare-interest sales at issue at this property related primarily to Phase II timeshare units, which had been actively marketed and sold beginning in approximately mid-2022.
Griffith stated that he had visited both properties on several occasions in connection with his CFO responsibilities, including attendance at periodic divisional review meetings and property tours. However, Griffith stated that he was not involved in the operational details of timeshare sales at either location, including sales processes, contract execution, or the booking of individual revenue entries associated with timeshare-interest purchase agreements.
IV. HSA's June 19, 2023 Communication
A. Nature and Substance of Communication
Griffith was asked to describe the circumstances of the June 19, 2023 communication from HSA that brought the VCR revenue-recognition issue to his attention.
Griffith confirmed that on June 19, 2023, William "Bill" Gentry, the lead engagement partner at Hargrove, Steen & Aldrich LLP ("HSA"), VHG's independent registered public accounting firm, communicated to both Griffith and Audit Committee Chair Diane Kowalski that HSA had identified a potential material weakness relating to VCR's revenue-recognition controls. This identification arose during the course of HSA's interim review procedures for Q1 2023 — the fiscal quarter ending March 31, 2023.
Griffith stated that the communication was made initially by telephone. Griffith recalled that Gentry telephoned him directly at approximately 10:00 a.m. on June 19, 2023, and that Gentry indicated he was simultaneously reaching out to Kowalski. Griffith stated that the telephone conversation lasted approximately 25 to 30 minutes. Griffith stated that the telephone communication was followed up in writing, though Griffith did not recall the precise form of the written communication (whether email or formal letter) during this interview. Griffith stated that the written follow-up was received within one or two business days of the telephone call.
Griffith recalled that during the June 19 telephone call, Gentry specifically identified approximately $9.8 million in timeshare-interest deposits that had been recorded by VCR as completed-sale revenue in Q1 2023. Gentry informed Griffith that HSA's review indicated these deposits were associated with timeshare-interest purchase agreements for which the applicable ten-day rescission periods under Florida Statute § 721.10 had not expired before the quarter closed on March 31, 2023. In other words, VCR had recognized revenue from these transactions as of the date the purchase agreements were signed, rather than waiting until the rescission period had lapsed, in contravention of VHG's stated accounting policies and the requirements of ASC 606.
Griffith stated that Gentry also indicated during the call that HSA's preliminary analysis suggested the issue might not be limited to Q1 2023 and that similar premature revenue recognition may have occurred in prior periods, specifically in Q3 and Q4 of FY 2022. Griffith stated that Gentry characterized the potential misstatement as material and indicated that it raised concerns about the effectiveness of VHG's internal control over financial reporting at the divisional level.
Griffith stated he was "surprised and concerned" by Gentry's communication. Griffith stated that this was the first indication he had received that VCR's revenue-recognition practices were not in compliance with VHG's policies. Griffith stated that he immediately discussed the matter with CEO Calder and General Counsel Patricia Navarro, both on the same day. Griffith recalled that the initial discussion with Calder and Navarro focused on understanding the scope and potential magnitude of the issue, the implications for VHG's previously filed financial statements, and the appropriate steps to take in response.
B. Griffith's Response
Following receipt of Gentry's June 19, 2023 communication, Griffith stated that he took several steps in response.
First, Griffith stated that he directed his corporate-level accounting team to begin a preliminary review of VCR's revenue-recognition entries for Q1 2023. Griffith stated that he assigned this review to the corporate controller and two senior accountants on the consolidation team, with instructions to pull VCR's Q1 2023 revenue entries and reconcile them against the underlying timeshare-interest purchase agreements and associated dates to determine the extent to which revenue had been recognized before expiration of the applicable rescission periods.
Second, Griffith stated that he contacted Nicole Prescott directly, by telephone, within a day or two of Gentry's communication. Griffith stated that he asked Prescott to explain the Q1 2023 revenue entries that HSA had identified. Griffith recalled that Prescott attributed the discrepancy to what she described as a "timing issue," and stated that the deposits in question would properly convert to earned revenue in Q2 2023, once the rescission periods had fully lapsed. Griffith stated that Prescott characterized the matter as an inadvertent timing error in the cutoff process rather than a systemic or intentional deviation from VHG's accounting policies.
Griffith stated that he was not satisfied with Prescott's explanation. Griffith stated that even if the characterization as a "timing issue" were accurate, the recognition of $9.8 million in revenue before the rescission periods had expired represented a clear departure from VHG's accounting policies and raised questions about the integrity of VCR's revenue-recognition controls. Griffith stated that he escalated the matter to CEO Calder and recommended that the issue be brought to the attention of the Audit Committee as promptly as possible.
Griffith stated that CEO Calder agreed with his recommendation and that the matter was placed on the agenda for a special session of the Audit Committee. Griffith stated that the Audit Committee convened an executive session on July 10, 2023, at which the committee resolved to engage independent outside counsel to conduct a formal investigation into VCR's revenue-recognition practices and related matters. Griffith stated that he supported the Audit Committee's decision to engage independent counsel and that he participated in the process of identifying and evaluating potential investigation counsel at General Counsel Navarro's request. Griffith stated that Calderwood & Harkness LLP was ultimately selected and retained by the Audit Committee in mid-July 2023.
V. Griffith's Oversight of VCR Financial Reporting
A. Quarterly Review Process
Griffith was asked to describe in detail the quarterly financial-reporting process as it pertained to VCR's results and their incorporation into VHG's consolidated financial statements.
Griffith described the process as follows: VCR's divisional finance team, led by VP of Finance Nicole Prescott and Controller Ryan Mateo Serrano, prepared divisional financial statements and supporting schedules for each fiscal quarter. These divisional financial statements included an income statement, balance sheet, and cash flow statement for VCR on a standalone basis, along with supporting schedules providing detail on revenue by product category, cost of sales, operating expenses, and capital expenditures. Griffith stated that the divisional financial packages were typically completed and submitted to VHG's corporate-level consolidation team within approximately 10 to 12 business days following the end of each fiscal quarter.
Upon receipt of VCR's divisional financial package, VHG's corporate consolidation team incorporated VCR's results into VHG's consolidated financial statements, along with the results from VHG's other operating divisions. Griffith stated that the consolidation team performed intercompany eliminations and other consolidation adjustments as necessary. Griffith stated that he reviewed the consolidated results and participated in meetings with the consolidation team to discuss significant variances, unusual items, and any matters requiring management judgment.
Griffith stated that his review of VCR's results was conducted at a summary level. He focused on revenue trends — both period-over-period growth and comparison to budget — margin analysis, and variance explanations provided by the divisional finance team. Griffith stated that he did not typically examine individual transaction-level entries within VCR's divisional financial statements, nor did he routinely request or review supporting documentation for specific timeshare-interest purchase agreements or revenue entries. Griffith stated that this level of review was consistent with his approach to all of VHG's operating divisions, given the volume of transactions across the consolidated entity.
Griffith signed off on VHG's quarterly 10-Q filings and the annual 10-K filing after completing his review and after consultation with HSA regarding any audit or review observations. Griffith acknowledged that, in hindsight, the quarterly review process lacked sufficient granularity to detect the premature revenue-recognition issue at VCR. Griffith stated that the aggregate revenue figures reported by VCR were consistent with the division's growth trajectory and did not, at the summary level, reveal the timing discrepancy identified by HSA.
B. SOX Section 302 and 404 Considerations
Griffith was asked about his responsibilities and certifications under the Sarbanes-Oxley Act of 2002.
Griffith confirmed that, as CFO, he signed the certifications required under Section 302 of the Sarbanes-Oxley Act for VHG's FY 2022 Annual Report on Form 10-K and for the Quarterly Report on Form 10-Q for Q1 2023 (the quarter ended March 31, 2023). By signing these certifications, Griffith certified, among other things, that he had reviewed the report, that the report did not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made not misleading, and that the financial statements and other financial information included in the report fairly presented in all material respects the financial condition, results of operations, and cash flows of VHG as of and for the periods presented.
Griffith further confirmed that, in connection with the Section 302 certifications, he certified that he and CEO Calder were responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting for VHG, and that such controls and procedures were effective as of the end of the respective reporting periods.
Griffith also confirmed that he had responsibility, together with CEO Calder, for management's report on internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, which was included in VHG's FY 2022 Form 10-K. Griffith stated that the management assessment concluded that VHG's internal control over financial reporting was effective as of December 31, 2022, and that HSA's attestation report, issued in connection with VHG's FY 2022 10-K, concurred with that assessment.
Griffith stated that at the time he signed these certifications and reports, he was not aware of the premature revenue-recognition practices at VCR and believed in good faith that the financial statements were materially accurate and that VHG's internal controls were effective. Griffith stated that his certifications were based on the information available to him at the time, including the representations of VCR's divisional finance team and the results of VHG's internal audit activities.
Griffith acknowledged the seriousness of the situation and the potential implications for the SOX certifications he had signed. Griffith stated that he understood that the discovery of a material weakness in internal controls relating to VCR's revenue recognition would likely require a reassessment of the effectiveness conclusions in the Section 404 management report and in the Section 302 certifications for the affected periods.
C. Internal Controls at VCR
Griffith was asked to describe the internal controls environment at VCR as he understood it prior to the matters giving rise to this investigation.
Griffith described the internal controls environment at VCR as having historically been considered adequate by VHG's corporate finance team and internal audit function. Griffith stated that VCR was subject to the same corporate-level internal control framework applicable to all VHG operating divisions, which was designed to be consistent with the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Griffith stated that VCR's divisional finance team was responsible for implementing and maintaining controls at the divisional level, consistent with VHG's corporate policies and procedures.
Griffith acknowledged, however, that VCR's divisional finance team had significant autonomy in recording revenue transactions and that the corporate-level controls over VCR's revenue entries were primarily limited to the summary-level review described above. Griffith stated that there was no corporate-level control that independently verified the timing of individual revenue entries at VCR against the underlying purchase-agreement dates and rescission-period expiration dates.
Griffith stated that VHG's internal audit function, led by VP of Internal Audit Cynthia Park, conducted periodic audits of VHG's operating divisions on a risk-based rotation schedule. Griffith stated that the internal audit team had not specifically tested VCR's timeshare-deposit revenue-recognition process in FY 2022 or Q1 2023. Griffith acknowledged this as a gap in the internal audit coverage and stated that, in his assessment, the internal audit team's risk-based prioritization had not identified VCR's revenue-recognition process as a high-risk area warranting focused testing during those periods. Griffith stated he could not recall the last time internal audit had conducted a focused review of VCR's timeshare revenue-recognition controls, but believed it may have been in FY 2020 or earlier.
Griffith stated that he was not aware of any prior complaints, whistleblower reports, ethics hotline submissions, or other communications from VHG employees or external parties regarding VCR's revenue-recognition practices. Griffith stated that VHG maintained an anonymous ethics hotline and that reports received through that channel were reviewed by the internal audit team and reported to the Audit Committee. Griffith stated he was not aware of any reports through that channel related to VCR's financial reporting or revenue recognition during the relevant period.
VI. Expense Reporting and Capital-Improvement Budgets
A. Griffith's Knowledge of VCR Expense Practices
The interviewers turned to questions regarding VCR's capital-improvement budgets and expenditure-approval processes. Griffith was asked to describe his understanding of how capital-improvement projects at VCR were budgeted, approved, and paid.
Griffith stated that capital-improvement budgets at VCR were prepared annually by VP of Finance Prescott and Controller Serrano in conjunction with VCR's property-operations and development teams. These budgets were presented to and approved by VCR Division President Daskine at the divisional level. Griffith stated that approved capital-improvement budgets for VCR were included in VHG's consolidated annual budget, which Griffith reviewed and which was presented to the Board of Directors for approval as part of the annual budgeting cycle.
Griffith stated that individual expenditures within approved capital-improvement budgets did not require additional corporate-level approval unless they exceeded a per-project threshold of $500,000. Expenditures below that threshold could be approved and processed at the divisional level by Daskine or his designees within the divisional finance team. Griffith stated that this delegation of authority was documented in VHG's corporate expenditure-approval policy and was applicable to all VHG operating divisions.
Griffith was asked whether he was aware of the fictitious vendor invoices or the shell entities that had been identified during the course of the investigation. Griffith stated that he was not aware, prior to being informed of the investigation, of any fictitious vendor invoices submitted in connection with VCR's capital-improvement projects. Griffith stated that he was not aware of the existence of the entities Gulf Standard Contracting LLC, Clearwater Design Collective Inc., or Suncoast Property Services LLC, or that any payments had been made to those entities from VCR's accounts.
Griffith stated that he had not reviewed individual purchase orders, vendor invoices, or payment records at VCR as part of his CFO responsibilities. Griffith explained that the volume of such transactions across VHG's consolidated operations made it impracticable for him to review individual vendor payments at the divisional level, and that he relied on the divisional finance teams and VHG's internal controls to ensure the integrity of the vendor-payment process.
B. Vendor Approval Process
Griffith described VHG's vendor-approval process at the corporate level. Griffith stated that VHG maintained a corporate procurement function that required new vendors above a certain dollar threshold — Griffith recalled the threshold as being $100,000 in aggregate annual payments — to undergo a vetting process. The vetting process included verification of the vendor's legal formation, tax identification number, insurance coverage, and references, and in some cases a review by the corporate legal department.
Griffith acknowledged uncertainty about whether VCR had followed this vendor-approval process for the specific vendors identified during the investigation. Griffith stated that the divisional finance team at VCR had latitude to approve vendors for capital-improvement work within budgeted amounts, and that his understanding was that vendors below the corporate threshold could be approved at the divisional level without involvement from the corporate procurement function. Griffith stated he did not know whether the payments to the entities in question — Gulf Standard Contracting LLC, Clearwater Design Collective Inc., and Suncoast Property Services LLC — individually or collectively exceeded the thresholds requiring corporate-level vetting.
The interviewers asked Griffith directly whether the names Gulf Standard Contracting LLC, Clearwater Design Collective Inc., or Suncoast Property Services LLC were familiar to him. Griffith stated that none of these names were familiar to him. He stated he had not encountered these entity names in any financial reports, budget documents, or other materials he had reviewed in his capacity as CFO.
VII. Interactions with VCR Division Management
A. Relationship with Garrett Daskine
Griffith was asked to describe his professional relationship with Garrett W. Daskine, the VCR Division President.
Griffith described Daskine as a long-tenured VHG employee, noting that Daskine had been with VHG for approximately 17 years at the time of the interview. Griffith stated that Daskine was well-regarded by senior management and the Board of Directors, and that Daskine was widely credited within VHG for growing VCR into one of the company's most profitable and strategically important divisions. Griffith stated that Daskine had a strong track record of meeting or exceeding revenue and profitability targets at VCR, and that he was viewed as a key operational leader within VHG.
Griffith stated that Daskine reported directly to CEO Calder and that Griffith's interactions with Daskine were primarily during quarterly business reviews, which were formal presentations of VCR's financial and operational results to VHG's senior leadership team, and annual budget presentations. Griffith stated that he did not have frequent informal interactions with Daskine outside of these scheduled meetings.
Griffith stated that he had no reason, prior to the commencement of this investigation, to suspect Daskine of financial misconduct. Griffith stated that Daskine had always presented himself as a capable and forthright division leader and that nothing in Griffith's interactions with Daskine had raised concerns about the integrity of VCR's financial reporting.
B. Relationship with Nicole Prescott
Griffith described Nicole Prescott, VCR's VP of Finance, as a competent finance professional who had been with VHG for approximately nine years. Griffith stated that Prescott was the primary interface between VCR's finance function and VHG's corporate finance team. Griffith stated that Prescott was responsible for overseeing VCR's financial reporting, budgeting, and divisional financial operations, and that she reported to Daskine on an operational basis while maintaining a dotted-line reporting relationship to VHG's corporate finance organization under Griffith.
Griffith stated that his contact with Prescott was more frequent than his contact with Daskine. Griffith stated that he and Prescott participated in monthly reporting calls — typically held during the second week of each month — during which Prescott would provide updates on VCR's financial performance, revenue pipeline, and any significant operational or financial developments. Griffith also stated that he interacted with Prescott during the quarterly close process, when VCR's divisional financial package was submitted to the corporate consolidation team.
Griffith referenced his June 2023 telephone call with Prescott regarding HSA's findings, the substance of which is described in Section IV.B above. Griffith stated that in his June 2023 call with Prescott, Prescott did not acknowledge any intentional deviation from VHG's revenue-recognition policies and maintained that the matter was attributable to a timing error in the cutoff process.
C. Relationship with Ryan Serrano
Griffith stated that his interaction with Ryan Mateo Serrano, VCR's divisional Controller, was limited. Griffith described Serrano as the VCR divisional Controller who reported to Prescott and who had day-to-day responsibility for accounting entries, general ledger maintenance, purchase-order processing, accounts payable, and account reconciliation at the divisional level. Griffith stated that Serrano had been with VHG for approximately six years.
Griffith stated that he did not have regular direct communications with Serrano and that his interactions with Serrano were typically limited to occasional attendance by Serrano at quarterly close calls when Prescott was unavailable. Griffith stated that he had no independent communications with Serrano regarding revenue recognition, vendor payments, or any of the other matters at issue during the period relevant to this investigation.
VIII. Form 8-K Filing and Non-Reliance Disclosure
Griffith was asked about his involvement in the Form 8-K filing that VHG made on August 14, 2023 under Item 4.02 of Form 8-K (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review).
Griffith confirmed his involvement in the decision-making process leading to the August 14, 2023 Form 8-K filing. Griffith stated that the decision to file the 8-K was made following extensive discussions involving the Audit Committee, CEO Calder, General Counsel Navarro, HSA (principally lead engagement partner William Gentry), and outside securities counsel at Westlake Burris & Holt LLP (principally partner Irene Castellanos). Griffith stated that Calderwood & Harkness was also consulted with respect to the factual basis for the filing in light of the ongoing investigation.
Griffith stated that the Form 8-K disclosed that the Audit Committee, in consultation with management and HSA, had concluded that VHG's previously issued financial statements for the third and fourth quarters of FY 2022 and the first quarter of FY 2023 should no longer be relied upon due to the identification of errors relating to the recognition of timeshare-interest revenue at VCR. Griffith stated that the 8-K also disclosed the identification of a material weakness in internal control over financial reporting relating to VCR's revenue-recognition process.
Griffith stated that he understood a restatement of VHG's financial statements for the affected periods would likely be necessary. Griffith stated that he was actively working with HSA and Westlake Burris on determining the scope and timeline for the restatement, including the identification of all affected line items and the quantification of the necessary adjustments. Griffith stated that as of the date of this interview, the restatement had not yet been completed and the timeline was still being determined.
IX. Administrative Leave of Subjects
Griffith confirmed that he was informed on August 7, 2023 that VCR Division President Garrett W. Daskine, VP of Finance Nicole Prescott, and Controller Ryan Mateo Serrano were placed on administrative leave, effective immediately, pending the outcome of the investigation. Griffith stated that this decision was made by CEO Calder in consultation with General Counsel Navarro and the Audit Committee, and that Griffith was informed of the decision by Calder on August 7, 2023.
Griffith stated that interim management arrangements had been made to ensure continuity of VCR's operations and financial reporting during the administrative-leave period. Griffith identified that a senior director from VHG's corporate finance team — Griffith did not recall the individual's name during this interview — had been temporarily assigned to oversee VCR's finance function and to serve as the primary point of contact between VCR and VHG's corporate finance organization. Griffith stated that he had been closely involved in the transition of financial oversight responsibilities to the interim team and was monitoring VCR's financial operations on a more frequent basis than he had prior to the commencement of the investigation.
X. SEC Preliminary Inquiry
Griffith was asked whether he was aware of any communications from, or inquiries by, the Securities and Exchange Commission relating to VCR or the matters under investigation.
As of the date of this interview, August 22, 2023, Griffith stated that he was not aware of any formal SEC inquiry or enforcement action relating to VHG or VCR. However, Griffith stated that he understood from General Counsel Navarro and from outside securities counsel at Westlake Burris & Holt LLP that SEC interest in the matter was anticipated following the August 14, 2023 Form 8-K filing. Griffith stated that he expected that the SEC's Division of Enforcement might open a preliminary inquiry and that VHG should be prepared to respond to any such inquiry.
(Note: The SEC Division of Enforcement subsequently opened preliminary inquiry File No. HO-14237 in September 2023.)
XI. Griffith's Assessment and Concerns
Near the conclusion of the interview, Griffith was asked for his overall assessment of the situation and any concerns he wished to raise.
Griffith expressed significant concern about the adequacy of VHG's internal controls at the divisional level, particularly with respect to VCR. Griffith stated that he believed remediation of VHG's internal control environment would be necessary, including the implementation of additional corporate-level controls over divisional revenue-recognition processes, enhanced internal audit coverage of VCR and other divisions, and a review of the delegation-of-authority policies governing expenditure approvals at the divisional level. Griffith stated that he had already begun preliminary discussions with VP of Internal Audit Cynthia Park regarding the scope of potential remediation measures.
Griffith stated that he was committed to cooperating fully with the investigation being conducted by Calderwood & Harkness on behalf of the Audit Committee, and with any necessary restatement process. Griffith stated that he would make himself and his team available to provide information, documents, and analysis as needed to support the investigation and the restatement effort.
Griffith was asked whether he was aware of any other financial irregularities at VHG or any of its other operating divisions. Griffith stated that he was not aware of any other financial irregularities and that he had no reason to believe that similar revenue-recognition or expense-reporting issues existed at any of VHG's other divisions. Griffith stated, however, that he believed it would be prudent for the internal audit team to conduct targeted reviews of revenue-recognition and vendor-payment processes at VHG's other divisions as a precautionary measure.
Griffith confirmed that he had not retained personal counsel in connection with this investigation or the matters discussed during this interview. Griffith stated that he had not been advised by Calderwood & Harkness or by anyone else that he was a subject or target of the investigation.
XII. Conclusion and Next Steps
The interview concluded at approximately 12:35 p.m. on August 22, 2023.
At the conclusion of the interview, Howard Quinn reminded Griffith of his confidentiality obligations as set forth in the Upjohn warnings administered at the outset of the interview. Griffith was instructed not to discuss the substance of the interview — including the questions posed, the topics covered, and his responses — with other VHG employees, officers, or directors, or with any third parties. Quinn stated that an exception was made for communications with General Counsel Patricia Navarro as necessary for Griffith to fulfill his duties as CFO, provided that such communications were coordinated with Calderwood & Harkness in advance.
Griffith was advised that Calderwood & Harkness might request a follow-up interview if warranted by the progress of the investigation and the review of documents and other evidence. Griffith confirmed his willingness to make himself available for further interviews at a mutually convenient time and stated that he would cooperate fully with any additional requests from the investigation team.
No scheduling commitments for a follow-up interview were made at this time.
XIII. Attachments / Exhibits Referenced
None. No documents were shown to the witness during this interview, and no exhibits were marked or referenced.
DOCUMENT PREPARATION AND REVIEW
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
Date of Interview: | August 22, 2023
Location of Interview: | Calderwood & Harkness LLP, 200 South Biscayne Boulevard, Suite 4400, Miami, FL 33131 (Conference Room 44-B)
Duration: | Approximately 3 hours (9:30 a.m. – 12:35 p.m.)
Interviewers: | Howard Quinn, Partner, Calderwood & Harkness LLP
Liam Donahue, Senior Associate, Calderwood & Harkness LLP
Also Present: | Steven Hollander, Associate, Calderwood & Harkness LLP (note-taker)
Witness: | Thomas Rhett Griffith, Chief Financial Officer, Verimark Hospitality Group Inc.
Witness Counsel: | None present. Griffith appeared in his capacity as an officer of Verimark Hospitality Group Inc. ("VHG"). Company General Counsel Patricia Navarro was not in attendance at Griffith's request and with the approval of the Audit Committee of the Board of Directors of VHG.
Prepared by: | Steven Hollander, Associate, Calderwood & Harkness LLP
Reviewed by: | Liam Donahue, Senior Associate, Calderwood & Harkness LLP
Howard Quinn, Partner, Calderwood & Harkness LLP
Distribution: | File (Matter No. 1021-00008)
Audit Committee of the Board of Directors, Verimark Hospitality Group Inc. (via privileged channels)

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

MEMORANDUM OF INTERVIEW

DOCUMENT PREPARATION AND REVIEW

Record

Parties

Dates

Amounts