1021-00008 · Client 1021 · Witness Interviews

interview-memo-prescott-session-1.docx DOCUMENT Litigation

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

This memorandum was prepared at the direction of counsel in connection with the provision of legal advice to the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. It is protected from disclosure by the attorney-client privilege and/or the work product doctrine. No portion of this memorandum may be disclosed to any person outside the investigation team without the prior written authorization of the Audit Committee or its designated counsel.

MEMORANDUM OF INTERVIEW

TO: File — Matter No. 1021-00008

FROM: Liam Donahue, Calderwood & Harkness LLP Steven Hollander, Calderwood & Harkness LLP

DATE: October 11, 2023

RE: Interview of Nicole Prescott, Vice President of Finance, Verimark Coastal Resorts LLC — Session 1

DATE OF INTERVIEW: October 11, 2023

LOCATION: Offices of Calderwood & Harkness LLP, 200 South Biscayne Boulevard, Suite 4400, Miami, FL 33131

TIME: 9:30 a.m. – 1:15 p.m. (approximately 3 hours and 45 minutes, with one 15-minute break)

I. Attendees

The following individuals were present for the interview:

Interviewee:

Nicole Prescott, Vice President of Finance, Verimark Coastal Resorts LLC ("VCR"), a wholly owned subsidiary of Verimark Hospitality Group Inc. ("VHG")

Counsel for Interviewee:

Candace O'Brien Langford, Langford Pace LLP, Tallahassee, Florida

For the Audit Committee of the Board of Directors of VHG / Calderwood & Harkness LLP:

Howard Quinn, Responsible Partner

Liam Donahue, Lead Associate (primary questioner)

Steven Hollander, Working Associate (note-taker)

No court reporter or other recording personnel were present. No audio or video recording was made of the interview. The substance of this memorandum reflects the notes of Steven Hollander, supplemented by the contemporaneous notes of Liam Donahue. This memorandum is not a verbatim transcript and does not purport to capture every question posed or every word spoken during the interview. It is intended to memorialize the substance of the information provided by Ms. Prescott in response to questioning.

II. Upjohn Warnings and Acknowledgments

At the outset of the interview, Howard Quinn administered the standard Upjohn warning to Ms. Prescott. Specifically, Mr. Quinn advised Ms. Prescott of the following:

1. Calderwood & Harkness LLP represents the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. in connection with an internal investigation. Calderwood & Harkness does not represent any individual employee or officer of VHG or any of its subsidiaries, including Ms. Prescott personally.

2. The attorney-client privilege for this interview belongs to VHG, acting through the Audit Committee. The Audit Committee may, in its sole discretion, choose to waive the privilege and disclose the contents of this interview to third parties, including government agencies, regulators, or other parties, at any time in the future. Ms. Prescott does not have the authority to assert or waive the privilege on her own behalf with respect to this interview.

3. The substance and content of the interview are confidential. Ms. Prescott was instructed not to discuss the substance of the interview, the questions asked, or the information she provided with any other employees, officers, or directors of VHG or its subsidiaries, or with any third parties, other than her personal counsel, Ms. Langford.

4. Ms. Prescott is expected to answer all questions truthfully and completely.

Mr. Quinn asked Ms. Prescott whether she understood each of the foregoing points. Ms. Prescott confirmed that she understood each point. Mr. Quinn then asked Ms. Langford whether she had any comments or questions regarding the Upjohn warnings. Ms. Langford confirmed on the record that she had independently advised Ms. Prescott regarding the Upjohn framework and its implications prior to the interview, and that Ms. Prescott understood the nature and scope of the warnings.

Ms. Prescott further acknowledged that she was appearing for the interview voluntarily. She confirmed that she is currently on administrative leave from VHG, effective August 7, 2023, and that her access to VHG and VCR systems, email, and facilities has been suspended during the pendency of the administrative leave. She stated that she continues to receive her base salary and benefits during the leave period.

III. Background and Employment History

Ms. Prescott was asked to provide background information regarding her employment history with VHG and her current role at VCR. She provided the following information.

Ms. Prescott stated that she has been employed by Verimark Hospitality Group Inc. for approximately nine years, having joined VHG in approximately 2014. She stated that she initially joined VHG's corporate finance team at VHG's headquarters in Jacksonville, Florida, where she served in progressively senior financial analysis and reporting roles. She stated that she was promoted to the position of Vice President of Finance at Verimark Coastal Resorts LLC in approximately 2019, at which time she relocated to the Florida Panhandle region.

Ms. Prescott stated that VCR is a wholly owned subsidiary of VHG, organized as a limited liability company under the laws of the State of Florida. VCR's principal office is located at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541. She explained that VCR operates timeshare resort properties and vacation club interests primarily along the Gulf Coast of Florida.

In her role as Vice President of Finance, Ms. Prescott stated that she reports directly to Division President Garrett W. Daskine. She also stated that she has a "dotted-line" reporting relationship to VHG's Chief Financial Officer, Thomas Rhett Griffith, who is based at VHG's corporate headquarters in Jacksonville. Ms. Prescott described this dotted-line relationship as primarily functional, involving periodic communication regarding quarterly and annual financial reporting, budget coordination, and compliance with VHG's corporate accounting policies.

Ms. Prescott stated that her principal responsibilities include oversight of VCR's financial reporting, budgeting and forecasting, revenue accounting, and coordination with VHG's corporate finance team in connection with the preparation of VHG's consolidated financial statements. She stated that she supervises a finance team of approximately twelve individuals at VCR. She identified Ryan Mateo Serrano, VCR's Controller, as her primary direct report. Ms. Prescott described Mr. Serrano's role as managing VCR's day-to-day accounting operations, including accounts payable, accounts receivable, general ledger maintenance, and the preparation of monthly financial close packages.

When asked about VCR's financial scale relative to VHG, Ms. Prescott stated that VCR's fiscal year 2022 revenue, as reported, was approximately $438.7 million. She stated that this figure represented approximately 23.5% of VHG's consolidated revenue of approximately $1.87 billion for the same fiscal year. Ms. Prescott noted that VCR is one of four operating divisions within the VHG corporate structure and is the second-largest division by revenue.

Ms. Prescott identified the primary VCR properties relevant to the matters under investigation. She stated that Coral Dune Resort & Residences is VCR's flagship property, located at 14200 Emerald Coast Parkway, Destin, Florida 32541. She described it as a large-scale timeshare resort complex that has been undergoing a multi-phase expansion, with Phase III construction and unit sales commencing in approximately 2022. She also identified Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228, as VCR's second-largest property. She stated that Palmetto Bluff Club commenced Phase II timeshare unit sales in approximately late 2022 or early 2023.

IV. Revenue-Recognition Practices at VCR

A. General Overview of Timeshare-Interest Sales Process

Ms. Prescott was asked to describe VCR's timeshare-interest sales process. She stated that VCR sells timeshare interests in its resort properties to individual purchasers, typically through on-site sales presentations and off-site marketing events. She explained that prospective purchasers enter into a written purchase agreement and remit a deposit, which typically ranges from approximately 10% to 20% of the total purchase price, depending on the property and the specific timeshare product being sold.

Ms. Prescott stated that under Florida Statute § 721.10, purchasers of timeshare interests in the State of Florida have a ten-calendar-day rescission period following execution of the purchase agreement, during which the purchaser may cancel the transaction without penalty and receive a full refund of the deposit. She stated that this rescission right is a mandatory statutory provision that cannot be waived by the purchaser and must be disclosed in the purchase agreement.

Ms. Prescott acknowledged that, under Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, and under VHG's stated accounting policies as described in VHG's public filings, revenue from timeshare-interest sales should not be recognized until the rescission period has expired and the transaction is no longer subject to cancellation by the purchaser. She stated that the expiration of the rescission period is the point at which the performance obligation is considered satisfied and the contract is no longer subject to a right of return or cancellation that would preclude revenue recognition.

When asked about VCR's historical rescission rate, Ms. Prescott stated that during the period under investigation (approximately Q3 2022 through Q2 2023), VCR's rescission rate was approximately 14.3%. She acknowledged that this rate was above the industry average of approximately 11%, as reported by the American Resort Development Association ("ARDA"). She attributed the elevated rescission rate to the aggressive sales tactics employed by VCR's on-site sales teams, particularly during the Phase III launch at Coral Dune and the Phase II launch at Palmetto Bluff Club, when VCR was under pressure to meet sales volume targets established by Division President Daskine.

B. Departure from Proper Revenue-Recognition Timing

Ms. Prescott was then asked about VCR's actual revenue-recognition practices during the period under investigation, as distinguished from VHG's stated accounting policies.

Ms. Prescott stated that beginning approximately in the third quarter of fiscal year 2022 (the quarter ending September 30, 2022), VCR began recording timeshare-interest purchase deposits as completed-sale revenue at the time the purchase agreement was signed by the purchaser, rather than waiting for the ten-day statutory rescission period to expire. She stated that this departure from VHG's stated accounting policies was not a gradual evolution but rather a deliberate change in practice that was implemented at a specific point in time.

Ms. Prescott stated that this practice was directed by Division President Garrett W. Daskine. She stated that in approximately August or September 2022, Mr. Daskine instructed her to begin booking deposits as revenue upon contract execution in order to "smooth" VCR's quarterly revenue figures and ensure that VCR met internal performance targets that had been established for the division. Ms. Prescott stated that Mr. Daskine communicated this directive to her verbally, in a meeting in his office at VCR's principal office in Destin. She stated that she did not recall whether Mr. Serrano was present at that meeting but believed the directive was communicated to Mr. Serrano separately, either by Mr. Daskine directly or through her.

Ms. Prescott stated that she implemented Mr. Daskine's directive by instructing Controller Ryan Serrano to record timeshare-interest purchase deposits as revenue in VCR's general ledger at the time of contract execution, rather than holding the deposits in a deferred revenue or escrow account pending expiration of the rescission period. She further stated that she instructed Mr. Serrano to reverse any transactions that were subsequently rescinded by purchasers during the ten-day period. However, she stated that these rescission reversals were recorded in the following fiscal quarter, rather than within the same quarter in which the revenue had been prematurely recognized.

Ms. Prescott acknowledged that this practice created a persistent overstatement of VCR's quarterly revenue that "rolled forward" from one quarter to the next. She explained that because rescission reversals were always booked in the subsequent period, each quarter's revenue was inflated by the amount of deposits recognized before the rescission period expired, less the reversals from the prior quarter's rescissions. She acknowledged that the net effect was a consistent overstatement of VCR's revenue as reported in VHG's consolidated financial statements.

C. Quantification of Overstatement

Ms. Prescott was presented with a summary of preliminary forensic findings prepared by Crestline Forensic Advisory LLC ("Crestline"), which had been engaged by Calderwood & Harkness LLP on behalf of the Audit Committee to perform forensic accounting analysis in connection with the investigation. The summary reflected estimated overstatement amounts for each quarter during the period under investigation.

When confronted with these figures, Ms. Prescott acknowledged the following approximate overstatement amounts:

Ms. Prescott stated that the aggregate overstatement across the four quarters was approximately $26.4 million. She stated that these figures were "generally consistent" with her own understanding of the magnitude of the issue, although she noted she had not performed an independent calculation and was relying on Crestline's preliminary analysis.

Ms. Prescott stated that the Q1 2023 figure of approximately $9.8 million was the largest of the four quarters. She attributed this to a significant push on timeshare unit sales during that period, driven by the Phase III launch at Coral Dune Resort & Residences and the Phase II launch at Palmetto Bluff Club. She stated that Mr. Daskine had set aggressive sales targets for the January through March 2023 period and that VCR's sales teams were conducting an elevated volume of marketing events and on-site presentations, resulting in a higher-than-usual volume of new purchase agreements being executed during the quarter.

Ms. Prescott confirmed that it was specifically the $9.8 million Q1 2023 overstatement figure that drew the attention of VHG's independent auditor, Hartley Stanton & Associates LLP ("HSA"). She stated that HSA's engagement partner, William Gentry, identified the issue in a communication dated June 19, 2023, in which Mr. Gentry raised concerns about a potential material weakness in VHG's internal controls over financial reporting related to VCR's timeshare revenue-recognition practices. Ms. Prescott stated that she was aware of Mr. Gentry's communication at the time it was issued, although she stated she was not a direct recipient and learned of it through Mr. Daskine.

D. Prescott's Knowledge and Intent

Ms. Prescott was asked directly about her knowledge and state of mind regarding the revenue-recognition practice at the time it was implemented and during the period in which it continued.

Ms. Prescott stated that she understood at the time the practice was implemented that it deviated from ASC 606 and from VHG's stated accounting policies as set forth in VHG's public filings. She stated that she had sufficient accounting knowledge and training to recognize that recording purchase deposits as revenue before the expiration of the statutory rescission period was not in accordance with generally accepted accounting principles. She stated that she was aware that the practice resulted in an overstatement of VCR's reported revenue for each quarter in which it was applied.

Ms. Prescott stated that she raised concerns with Mr. Daskine about the practice on at least two occasions. She estimated that the first occasion was in approximately late 2022, likely in November or December 2022, after the close of Q3 2022 when the practice had been in effect for one full quarter. She estimated that the second occasion was in approximately early 2023, likely in January or February 2023, prior to the period in which the Q1 2023 overstatement was generated. She stated that on both occasions, she communicated her concerns to Mr. Daskine verbally, in one-on-one conversations in Mr. Daskine's office. She stated that she did not memorialize these conversations in writing, whether by email, memorandum, or otherwise.

Ms. Prescott stated that on both occasions, Mr. Daskine told her that the approach was a "timing difference" that would "wash out" over time and that the overstatements were not material in the context of VCR's overall revenue. She stated that Mr. Daskine emphasized that meeting quarterly performance targets was "critical" for VCR's standing within the VHG organization and for the compensation and bonus metrics applicable to VCR's management team. She stated that Mr. Daskine did not direct her to cease the practice in response to her concerns.

Ms. Prescott stated that she did not escalate her concerns beyond Mr. Daskine. Specifically, she stated that she did not raise the issue with VHG Chief Financial Officer Thomas Rhett Griffith, VHG Chief Executive Officer Calder (Ms. Prescott referred to the CEO by surname only), VHG General Counsel Patricia Navarro, or any member of the Audit Committee of the Board of Directors. When asked why she did not escalate, Ms. Prescott stated that she felt it was Mr. Daskine's decision as Division President and that going directly to corporate leadership or the Board would have been "going around him." She stated she was concerned about the professional consequences of bypassing her direct supervisor on a matter he had already addressed with her.

At this point in the interview, counsel Langford interjected to note for the record that Ms. Prescott was answering all questions voluntarily and cooperatively, and that Ms. Prescott reserved the right to assert any applicable privileges, including the Fifth Amendment privilege against self-incrimination, at any point during this or any subsequent interview. Mr. Quinn acknowledged Ms. Langford's statement and the interview continued.

E. Coordination with HSA and Corporate Finance

Ms. Prescott was asked about her interactions with VHG's independent auditor, Hartley Stanton & Associates LLP, and with VHG's corporate finance team in connection with VCR's revenue-recognition practices.

Ms. Prescott stated that she was aware that HSA's Q1 2023 interim review, conducted in connection with VHG's Form 10-Q for the quarterly period ending March 31, 2023, had surfaced questions about the approximately $9.8 million in prematurely recognized timeshare-interest deposits. She stated that she understood HSA had identified discrepancies between VCR's reported revenue and the underlying transactional data, including the timing of purchase agreement execution dates relative to revenue-recognition entries in VCR's general ledger.

Ms. Prescott stated that she did not directly communicate with HSA about these issues. She stated that her understanding was that Mr. Daskine handled communications with the auditors regarding VCR revenue matters and that Mr. Daskine had instructed her not to communicate directly with HSA personnel regarding revenue-recognition questions without his involvement. She stated she did not know the specific substance of Mr. Daskine's communications with HSA on this topic.

Ms. Prescott acknowledged that she prepared or reviewed the quarterly financial schedules that VCR submitted to VHG's corporate finance team for consolidation into VHG's Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. She stated that these schedules reflected the revenue figures as recorded in VCR's general ledger, including the prematurely recognized deposits. She acknowledged that she did not flag the revenue-recognition issue in her submissions to VHG corporate finance and did not include any notation or qualification indicating that VCR's reported revenue figures included deposits for which the rescission period had not yet expired.

V. Expense-Reimbursement Irregularities and Shell Entities

A. Prescott's Knowledge of the Fictitious Vendor Scheme

Ms. Prescott was asked about capital-improvement purchase orders processed through VCR's accounts payable system. She initially stated that purchase orders for capital improvements at VCR properties were prepared by Controller Ryan Serrano and submitted for review and approval in accordance with VCR's standard procurement procedures. She stated that Mr. Serrano was responsible for identifying and vetting vendors, preparing purchase order documentation, and processing vendor invoices for payment. She stated that Mr. Daskine, as Division President, provided final approval for capital-improvement expenditures exceeding certain dollar thresholds.

Ms. Prescott stated that she was aware of the following vendor names appearing in VCR's accounts payable records in connection with capital-improvement work at VCR properties: Gulf Standard Contracting LLC, Clearwater Design Collective Inc., and Suncoast Property Services LLC. She stated that these vendors were presented to her as legitimate contractors performing construction, renovation, design, and maintenance work at Coral Dune Resort & Residences and Palmetto Bluff Club.

B. Clearwater Design Collective Inc.

Ms. Prescott was specifically asked about Clearwater Design Collective Inc. She was informed that Clearwater Design Collective Inc. was formed on June 4, 2021, as a Florida corporation, with its principal address listed at a registered agent service location in Tallahassee, Florida.

Ms. Prescott was shown corporate filing records obtained from the Florida Division of Corporations reflecting that she, Nicole Prescott, is listed as the sole shareholder and sole director of Clearwater Design Collective Inc. Upon reviewing the documents, Ms. Prescott requested a brief pause in the interview to confer with her counsel, Ms. Langford. After conferring with Ms. Langford for approximately five minutes in a separate conference room, Ms. Prescott returned to the interview and acknowledged that she is the sole shareholder and sole director of Clearwater Design Collective Inc.

Ms. Prescott stated that Mr. Daskine approached her in approximately mid-2021 and proposed that she form a company to submit invoices for "design consulting" services related to VCR property improvements. She stated that Mr. Daskine described the arrangement as a way to supplement her compensation and that he told her the amounts invoiced would be treated as legitimate capital-improvement expenditures in VCR's books and records. She stated that Mr. Daskine told her that Controller Ryan Serrano would handle the paperwork, including preparation of purchase orders and processing of invoices for payment.

Ms. Prescott confirmed that Ryan Mateo Serrano served as the registered agent for Clearwater Design Collective Inc. with the Florida Division of Corporations. She stated that Mr. Serrano assisted her with the formation of the entity and with the preparation of invoices submitted by Clearwater Design Collective Inc. to VCR.

Ms. Prescott stated that Clearwater Design Collective Inc. submitted a total of sixteen (16) invoices to VCR over the period from approximately July 2021 through June 2023. She stated that the aggregate amount of these invoices was $587,600. She stated that the invoices were described as being for design consulting services, interior design consultation, and related services in connection with renovation and improvement projects at Coral Dune Resort & Residences and Palmetto Bluff Club.

When asked whether Clearwater Design Collective Inc. performed any actual design or consulting work for VCR, Ms. Prescott stated that she "provided some design input" on certain projects, including making suggestions regarding color palettes, furnishing selections, and layout configurations for renovated guest units. However, she acknowledged that the scope and value of the actual work she performed did not correspond to the amounts invoiced. She did not provide a specific estimate of the value of any work actually performed.

Ms. Prescott stated that the payments made by VCR to Clearwater Design Collective Inc. were deposited into a bank account held in the name of Clearwater Design Collective Inc. at a financial institution she did not identify during the interview. She stated that she used the funds deposited into that account for personal expenses. When asked to provide specifics regarding the personal expenditures funded by Clearwater Design Collective Inc. proceeds, Ms. Prescott declined to provide details at that time. Ms. Langford stated on the record that she and Ms. Prescott would confer regarding what additional detail, if any, would be provided on this topic in a subsequent interview or through other means.

C. Knowledge of Gulf Standard Contracting LLC and Suncoast Property Services LLC

Ms. Prescott was asked about her knowledge of the other two vendor entities identified in the investigation: Gulf Standard Contracting LLC and Suncoast Property Services LLC.

Ms. Prescott stated that she was aware that Gulf Standard Contracting LLC, which was formed on March 12, 2021, as a Florida limited liability company, was a vendor submitting invoices to VCR for construction and renovation services. She stated that she was similarly aware that Suncoast Property Services LLC, formed on November 18, 2021, as a Florida limited liability company, was a vendor submitting invoices to VCR for property maintenance and related services.

Ms. Prescott stated that she believed both entities were connected to Mr. Daskine but stated that she did not know the specifics of their ownership structure, including whether Mr. Daskine was a member, manager, or beneficial owner of either entity. She stated she did not have documentation reflecting Mr. Daskine's interest in those entities and had not reviewed their organizational documents or corporate filings.

Ms. Prescott stated that she was not involved in creating or preparing invoices for Gulf Standard Contracting LLC or Suncoast Property Services LLC. She stated that Mr. Serrano handled the purchase orders and invoice processing for those entities, and that Mr. Daskine approved the payments.

Ms. Prescott was informed that, according to Crestline's preliminary analysis, Gulf Standard Contracting LLC submitted a total of nineteen (19) invoices to VCR over the relevant period, totaling approximately $812,400, and that Suncoast Property Services LLC submitted a total of twelve (12) invoices to VCR over the relevant period, totaling approximately $430,000. Ms. Prescott stated that those figures were "consistent with what she would have expected to see in the AP records" based on her general familiarity with VCR's capital-improvement expenditures during the period.

Ms. Prescott stated that she was aware that the total amount invoiced across all three entities — Clearwater Design Collective Inc. ($587,600), Gulf Standard Contracting LLC ($812,400), and Suncoast Property Services LLC ($430,000) — was approximately $1.83 million. She stated, however, that she had not independently calculated that aggregate figure and was relying on the figures presented to her during the interview.

When asked about specific invoices, Ms. Prescott stated that she did not have specific knowledge of the details of individual invoices submitted by Gulf Standard Contracting LLC or Suncoast Property Services LLC. She was asked specifically about Invoice No. GSC-2023-007, dated February 14, 2023, in the amount of $94,500, attributed to Gulf Standard Contracting LLC for "lobby renovation materials — Coral Dune Phase III." Ms. Prescott stated she did not recall the specific details of that invoice but noted that invoices of that size — under $100,000 — were within Mr. Daskine's approval authority and would not have required any additional review or authorization beyond the standard approval chain.

D. Purchase Order Approval Process

Ms. Prescott was asked to explain VCR's purchase order approval process for capital improvements. She described a three-step process as follows:

1. Creation: Controller Ryan Serrano was responsible for creating the purchase order in VCR's procurement system, including identifying the vendor, specifying the goods or services to be provided, and entering the dollar amount.

2. Review and Approval — VP Finance: Ms. Prescott was responsible for reviewing the purchase order for accuracy, budget availability, and conformity with VCR's capital-improvement plan. She stated that her review was intended to serve as a financial control checkpoint.

3. Final Approval — Division President: For purchase orders exceeding $25,000, Division President Garrett Daskine was required to provide final approval before the purchase order could be issued and the corresponding invoice processed for payment.

Ms. Prescott acknowledged that the forty-seven (47) purchase orders directed to the three shell entities — Clearwater Design Collective Inc., Gulf Standard Contracting LLC, and Suncoast Property Services LLC — passed through this three-step approval chain. She acknowledged that she reviewed and approved each of the purchase orders directed to Clearwater Design Collective Inc. and that she also reviewed and approved purchase orders directed to the other two entities.

When asked whether she identified any red flags in connection with her review of these purchase orders, Ms. Prescott stated that she relied on Mr. Serrano's representations that the work described in the purchase orders was being performed and that the vendors were legitimate contractors. She stated that she did not independently verify the legitimacy of the vendors, including by visiting job sites to confirm that work was being performed, contacting the vendors directly, or reviewing vendor qualifications, licensing, or insurance documentation. She acknowledged that, in hindsight, this constituted a failure of internal controls and that her review of the purchase orders was not sufficiently rigorous to detect the fraudulent nature of the invoices.

VI. Prescott's Understanding of Internal Controls and SOX Obligations

Ms. Prescott was asked about her understanding of VHG's internal controls over financial reporting and the company's obligations under the Sarbanes-Oxley Act of 2002 ("SOX").

Ms. Prescott confirmed that she was familiar with VHG's obligations under SOX Sections 302 and 404. She stated that she understood that Section 302 requires VHG's Chief Executive Officer and Chief Financial Officer to certify, in connection with each quarterly and annual filing with the SEC, that VHG's financial statements fairly present, in all material respects, the financial condition and results of operations of the company, and that they have evaluated the effectiveness of VHG's disclosure controls and procedures. She stated that she further understood that Section 404 requires management to assess and report on the effectiveness of VHG's internal controls over financial reporting, and that VHG's independent auditor, HSA, is required to attest to and report on management's assessment.

Ms. Prescott stated that she understood that VCR's financial reporting fed directly into VHG's consolidated financial statements and that the accuracy and integrity of VCR's reported financial data were essential to the CEO and CFO certifications under SOX Section 302. She acknowledged that the revenue overstatement and the fictitious vendor invoices she described during the interview had the potential to affect the accuracy of VHG's consolidated financial statements and, by extension, the CEO and CFO certifications.

Ms. Prescott stated that she did not raise any concerns about the revenue-recognition practice or the shell-entity invoicing scheme through VHG's anonymous whistleblower hotline, which she stated she was aware existed. She also stated that she did not raise concerns through any other internal reporting channel, including VHG's ethics office, its compliance department, or the office of VHG General Counsel Patricia Navarro.

Ms. Prescott stated that she received annual compliance training on VHG's code of conduct, including modules addressing financial-reporting integrity, conflicts of interest, related-party transactions, and the obligation to report suspected misconduct. She stated she understood these obligations at the time of the conduct described in this memorandum.

VII. Relationship with Other Subjects

Ms. Prescott was asked to describe her working relationships with the other individuals who have been identified as subjects of the investigation.

Ms. Prescott described her working relationship with Division President Garrett W. Daskine as "professional." She stated that Mr. Daskine was a "strong personality" who "expected results" and who did not welcome pushback on financial matters. She stated that Mr. Daskine was focused on VCR's performance metrics, including revenue growth, occupancy rates, and timeshare unit sales volume, and that he placed significant emphasis on meeting or exceeding the quarterly and annual targets established by VHG corporate. She stated that Mr. Daskine's management style was directive and that he expected his directives to be carried out without extensive debate or challenge.

Ms. Prescott described her relationship with Controller Ryan Mateo Serrano as that of a supervisor and direct report. She stated that Mr. Serrano was "diligent" in his work and that he carried out instructions without question. She did not characterize Mr. Serrano as having independently devised or promoted any of the practices described during the interview. She stated that, to her knowledge, Mr. Serrano performed the tasks assigned to him by her and by Mr. Daskine.

Ms. Prescott stated that she was not aware of any personal expenditures by Mr. Daskine that were funded through the shell entities, including Gulf Standard Contracting LLC and Suncoast Property Services LLC. Specifically, she was asked whether she was aware of any residential renovation costs, boat-slip or marina fees, luxury-goods purchases, travel expenditures, or other personal expenses incurred by Mr. Daskine that were paid for using proceeds from the shell entities. Ms. Prescott stated that she had no knowledge of any such expenditures. She stated that she only had knowledge of the funds she personally received through Clearwater Design Collective Inc. and that she did not know how the proceeds of the other two entities were used.

VIII. Document Preservation and Cooperation

Ms. Prescott was asked about her compliance with document preservation obligations in connection with the investigation.

Ms. Prescott confirmed that she received the document preservation notice issued by Calderwood & Harkness LLP on July 24, 2023. She identified this as the targeted preservation notice directed to VCR custodians in connection with the Audit Committee's investigation. She stated that she received the notice via email and via hard copy delivered to her home address following the commencement of her administrative leave.

Ms. Prescott stated that she has complied with all preservation obligations set forth in the notice. She stated that she has not destroyed, deleted, altered, concealed, or removed any documents, files, or electronically stored information ("ESI") relevant to the investigation since receiving the preservation notice. She stated that she has not wiped, reformatted, or disposed of any personal electronic devices, including mobile phones, laptops, tablets, or external storage media, since receiving the notice.

When asked about the use of personal devices and personal email accounts for VCR business, Ms. Prescott stated that she occasionally used a personal email account — the identity of which she did not disclose during this interview — for communications with Mr. Daskine regarding matters related to the shell entities described in Section V above. She stated that some of these communications may contain information relevant to the investigation. Ms. Langford stated on the record that she and Ms. Prescott would confer regarding the production of communications from Ms. Prescott's personal email account and that Ms. Langford would be in contact with Calderwood & Harkness regarding the scope and manner of any such production.

IX. Areas Identified for Follow-Up

Based on the substance of the interview, the following areas have been identified for follow-up in a subsequent interview of Ms. Prescott and/or through other investigative steps:

1. Ms. Prescott's personal email communications with Mr. Daskine and Mr. Serrano regarding the formation, operation, and invoicing activities of Clearwater Design Collective Inc., Gulf Standard Contracting LLC, and Suncoast Property Services LLC.

2. Specific personal expenditures funded through proceeds received by Ms. Prescott from payments made by VCR to Clearwater Design Collective Inc., including amounts, dates, and categories of expenditure.

3. Ms. Prescott's interactions, if any, with HSA personnel, including engagement partner William Gentry or other HSA team members, regarding Q1 2023 revenue-recognition questions or any other audit-related inquiries during the period under investigation.

4. Details of Ms. Prescott's communications with Mr. Daskine in which she purportedly raised concerns about the revenue-recognition practice, including approximate dates, the specific substance of those conversations, whether any other individuals were present, and whether the conversations were documented in any form (e.g., emails, text messages, calendar entries, or contemporaneous notes).

5. Any written communications between Ms. Prescott and VHG corporate finance personnel, including CFO Griffith's team, regarding VCR's quarterly financial schedules submitted for consolidation into VHG's SEC filings.

6. Additional detail on the purchase order approval process, including any documentation of Ms. Prescott's review of the forty-seven (47) fictitious purchase orders, the nature and extent of her review, and whether she retained copies of supporting documentation such as vendor proposals, scope-of-work descriptions, or proof-of-completion records.

X. Conclusion and Next Steps

The interview concluded at approximately 1:15 p.m. on October 11, 2023. The interview lasted approximately three hours and forty-five minutes, including one break of approximately fifteen minutes taken at approximately 11:30 a.m.

At the conclusion of the interview, counsel Langford stated on the record that Ms. Prescott was willing to participate in a follow-up interview to address the areas identified above, subject to scheduling and further consultation between Ms. Prescott and Ms. Langford.

Howard Quinn informed Ms. Langford that a second interview would likely be requested in the near term to address the follow-up areas identified during this session, and that Calderwood & Harkness would be in contact with Ms. Langford's office regarding scheduling. Mr. Quinn noted that the Audit Committee's investigation is ongoing and that additional interviews of other witnesses may be conducted in the interim.

Before the interview concluded, Mr. Quinn reminded Ms. Prescott of her continuing obligation to maintain the confidentiality of the substance of the interview and not to discuss the questions asked, the information she provided, or any other aspect of the interview with any VHG or VCR employees, officers, directors, or third parties, other than her personal counsel, Ms. Langford. Mr. Quinn also reminded Ms. Prescott of her continuing obligation to comply with the document preservation notice dated July 24, 2023, including the obligation to preserve all potentially relevant documents and ESI in her possession, custody, or control.

Ms. Prescott and Ms. Langford acknowledged these reminders and departed the offices of Calderwood & Harkness LLP at approximately 1:20 p.m.

Prepared by: Liam Donahue and Steven Hollander, Calderwood & Harkness LLP

Reviewed by: Howard Quinn, Calderwood & Harkness LLP

Distribution: Investigation file only; to be provided to the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. upon request.

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

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

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
This memorandum was prepared at the direction of counsel in connection with the provision of legal advice to the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. It is protected from disclosure by the attorney-client privilege and/or the work product doctrine. No portion of this memorandum may be disclosed to any person outside the investigation team without the prior written authorization of the Audit Committee or its designated counsel.
MEMORANDUM OF INTERVIEW
TO: File — Matter No. 1021-00008
FROM: Liam Donahue, Calderwood & Harkness LLP Steven Hollander, Calderwood & Harkness LLP
DATE: October 11, 2023
RE: Interview of Nicole Prescott, Vice President of Finance, Verimark Coastal Resorts LLC — Session 1
DATE OF INTERVIEW: October 11, 2023
LOCATION: Offices of Calderwood & Harkness LLP, 200 South Biscayne Boulevard, Suite 4400, Miami, FL 33131
TIME: 9:30 a.m. – 1:15 p.m. (approximately 3 hours and 45 minutes, with one 15-minute break)
I. Attendees
The following individuals were present for the interview:
Interviewee:
Nicole Prescott, Vice President of Finance, Verimark Coastal Resorts LLC ("VCR"), a wholly owned subsidiary of Verimark Hospitality Group Inc. ("VHG")
Counsel for Interviewee:
Candace O'Brien Langford, Langford Pace LLP, Tallahassee, Florida
For the Audit Committee of the Board of Directors of VHG / Calderwood & Harkness LLP:
Howard Quinn, Responsible Partner
Liam Donahue, Lead Associate (primary questioner)
Steven Hollander, Working Associate (note-taker)
No court reporter or other recording personnel were present. No audio or video recording was made of the interview. The substance of this memorandum reflects the notes of Steven Hollander, supplemented by the contemporaneous notes of Liam Donahue. This memorandum is not a verbatim transcript and does not purport to capture every question posed or every word spoken during the interview. It is intended to memorialize the substance of the information provided by Ms. Prescott in response to questioning.
II. Upjohn Warnings and Acknowledgments
At the outset of the interview, Howard Quinn administered the standard Upjohn warning to Ms. Prescott. Specifically, Mr. Quinn advised Ms. Prescott of the following:
1. Calderwood & Harkness LLP represents the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. in connection with an internal investigation. Calderwood & Harkness does not represent any individual employee or officer of VHG or any of its subsidiaries, including Ms. Prescott personally.
2. The attorney-client privilege for this interview belongs to VHG, acting through the Audit Committee. The Audit Committee may, in its sole discretion, choose to waive the privilege and disclose the contents of this interview to third parties, including government agencies, regulators, or other parties, at any time in the future. Ms. Prescott does not have the authority to assert or waive the privilege on her own behalf with respect to this interview.
3. The substance and content of the interview are confidential. Ms. Prescott was instructed not to discuss the substance of the interview, the questions asked, or the information she provided with any other employees, officers, or directors of VHG or its subsidiaries, or with any third parties, other than her personal counsel, Ms. Langford.
4. Ms. Prescott is expected to answer all questions truthfully and completely.
Mr. Quinn asked Ms. Prescott whether she understood each of the foregoing points. Ms. Prescott confirmed that she understood each point. Mr. Quinn then asked Ms. Langford whether she had any comments or questions regarding the Upjohn warnings. Ms. Langford confirmed on the record that she had independently advised Ms. Prescott regarding the Upjohn framework and its implications prior to the interview, and that Ms. Prescott understood the nature and scope of the warnings.
Ms. Prescott further acknowledged that she was appearing for the interview voluntarily. She confirmed that she is currently on administrative leave from VHG, effective August 7, 2023, and that her access to VHG and VCR systems, email, and facilities has been suspended during the pendency of the administrative leave. She stated that she continues to receive her base salary and benefits during the leave period.
III. Background and Employment History
Ms. Prescott was asked to provide background information regarding her employment history with VHG and her current role at VCR. She provided the following information.
Ms. Prescott stated that she has been employed by Verimark Hospitality Group Inc. for approximately nine years, having joined VHG in approximately 2014. She stated that she initially joined VHG's corporate finance team at VHG's headquarters in Jacksonville, Florida, where she served in progressively senior financial analysis and reporting roles. She stated that she was promoted to the position of Vice President of Finance at Verimark Coastal Resorts LLC in approximately 2019, at which time she relocated to the Florida Panhandle region.
Ms. Prescott stated that VCR is a wholly owned subsidiary of VHG, organized as a limited liability company under the laws of the State of Florida. VCR's principal office is located at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541. She explained that VCR operates timeshare resort properties and vacation club interests primarily along the Gulf Coast of Florida.
In her role as Vice President of Finance, Ms. Prescott stated that she reports directly to Division President Garrett W. Daskine. She also stated that she has a "dotted-line" reporting relationship to VHG's Chief Financial Officer, Thomas Rhett Griffith, who is based at VHG's corporate headquarters in Jacksonville. Ms. Prescott described this dotted-line relationship as primarily functional, involving periodic communication regarding quarterly and annual financial reporting, budget coordination, and compliance with VHG's corporate accounting policies.
Ms. Prescott stated that her principal responsibilities include oversight of VCR's financial reporting, budgeting and forecasting, revenue accounting, and coordination with VHG's corporate finance team in connection with the preparation of VHG's consolidated financial statements. She stated that she supervises a finance team of approximately twelve individuals at VCR. She identified Ryan Mateo Serrano, VCR's Controller, as her primary direct report. Ms. Prescott described Mr. Serrano's role as managing VCR's day-to-day accounting operations, including accounts payable, accounts receivable, general ledger maintenance, and the preparation of monthly financial close packages.
When asked about VCR's financial scale relative to VHG, Ms. Prescott stated that VCR's fiscal year 2022 revenue, as reported, was approximately $438.7 million. She stated that this figure represented approximately 23.5% of VHG's consolidated revenue of approximately $1.87 billion for the same fiscal year. Ms. Prescott noted that VCR is one of four operating divisions within the VHG corporate structure and is the second-largest division by revenue.
Ms. Prescott identified the primary VCR properties relevant to the matters under investigation. She stated that Coral Dune Resort & Residences is VCR's flagship property, located at 14200 Emerald Coast Parkway, Destin, Florida 32541. She described it as a large-scale timeshare resort complex that has been undergoing a multi-phase expansion, with Phase III construction and unit sales commencing in approximately 2022. She also identified Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228, as VCR's second-largest property. She stated that Palmetto Bluff Club commenced Phase II timeshare unit sales in approximately late 2022 or early 2023.
IV. Revenue-Recognition Practices at VCR
A. General Overview of Timeshare-Interest Sales Process
Ms. Prescott was asked to describe VCR's timeshare-interest sales process. She stated that VCR sells timeshare interests in its resort properties to individual purchasers, typically through on-site sales presentations and off-site marketing events. She explained that prospective purchasers enter into a written purchase agreement and remit a deposit, which typically ranges from approximately 10% to 20% of the total purchase price, depending on the property and the specific timeshare product being sold.
Ms. Prescott stated that under Florida Statute § 721.10, purchasers of timeshare interests in the State of Florida have a ten-calendar-day rescission period following execution of the purchase agreement, during which the purchaser may cancel the transaction without penalty and receive a full refund of the deposit. She stated that this rescission right is a mandatory statutory provision that cannot be waived by the purchaser and must be disclosed in the purchase agreement.
Ms. Prescott acknowledged that, under Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, and under VHG's stated accounting policies as described in VHG's public filings, revenue from timeshare-interest sales should not be recognized until the rescission period has expired and the transaction is no longer subject to cancellation by the purchaser. She stated that the expiration of the rescission period is the point at which the performance obligation is considered satisfied and the contract is no longer subject to a right of return or cancellation that would preclude revenue recognition.
When asked about VCR's historical rescission rate, Ms. Prescott stated that during the period under investigation (approximately Q3 2022 through Q2 2023), VCR's rescission rate was approximately 14.3%. She acknowledged that this rate was above the industry average of approximately 11%, as reported by the American Resort Development Association ("ARDA"). She attributed the elevated rescission rate to the aggressive sales tactics employed by VCR's on-site sales teams, particularly during the Phase III launch at Coral Dune and the Phase II launch at Palmetto Bluff Club, when VCR was under pressure to meet sales volume targets established by Division President Daskine.
B. Departure from Proper Revenue-Recognition Timing
Ms. Prescott was then asked about VCR's actual revenue-recognition practices during the period under investigation, as distinguished from VHG's stated accounting policies.
Ms. Prescott stated that beginning approximately in the third quarter of fiscal year 2022 (the quarter ending September 30, 2022), VCR began recording timeshare-interest purchase deposits as completed-sale revenue at the time the purchase agreement was signed by the purchaser, rather than waiting for the ten-day statutory rescission period to expire. She stated that this departure from VHG's stated accounting policies was not a gradual evolution but rather a deliberate change in practice that was implemented at a specific point in time.
Ms. Prescott stated that this practice was directed by Division President Garrett W. Daskine. She stated that in approximately August or September 2022, Mr. Daskine instructed her to begin booking deposits as revenue upon contract execution in order to "smooth" VCR's quarterly revenue figures and ensure that VCR met internal performance targets that had been established for the division. Ms. Prescott stated that Mr. Daskine communicated this directive to her verbally, in a meeting in his office at VCR's principal office in Destin. She stated that she did not recall whether Mr. Serrano was present at that meeting but believed the directive was communicated to Mr. Serrano separately, either by Mr. Daskine directly or through her.
Ms. Prescott stated that she implemented Mr. Daskine's directive by instructing Controller Ryan Serrano to record timeshare-interest purchase deposits as revenue in VCR's general ledger at the time of contract execution, rather than holding the deposits in a deferred revenue or escrow account pending expiration of the rescission period. She further stated that she instructed Mr. Serrano to reverse any transactions that were subsequently rescinded by purchasers during the ten-day period. However, she stated that these rescission reversals were recorded in the following fiscal quarter, rather than within the same quarter in which the revenue had been prematurely recognized.
Ms. Prescott acknowledged that this practice created a persistent overstatement of VCR's quarterly revenue that "rolled forward" from one quarter to the next. She explained that because rescission reversals were always booked in the subsequent period, each quarter's revenue was inflated by the amount of deposits recognized before the rescission period expired, less the reversals from the prior quarter's rescissions. She acknowledged that the net effect was a consistent overstatement of VCR's revenue as reported in VHG's consolidated financial statements.
C. Quantification of Overstatement
Ms. Prescott was presented with a summary of preliminary forensic findings prepared by Crestline Forensic Advisory LLC ("Crestline"), which had been engaged by Calderwood & Harkness LLP on behalf of the Audit Committee to perform forensic accounting analysis in connection with the investigation. The summary reflected estimated overstatement amounts for each quarter during the period under investigation.
When confronted with these figures, Ms. Prescott acknowledged the following approximate overstatement amounts:
Ms. Prescott stated that the aggregate overstatement across the four quarters was approximately $26.4 million. She stated that these figures were "generally consistent" with her own understanding of the magnitude of the issue, although she noted she had not performed an independent calculation and was relying on Crestline's preliminary analysis.
Ms. Prescott stated that the Q1 2023 figure of approximately $9.8 million was the largest of the four quarters. She attributed this to a significant push on timeshare unit sales during that period, driven by the Phase III launch at Coral Dune Resort & Residences and the Phase II launch at Palmetto Bluff Club. She stated that Mr. Daskine had set aggressive sales targets for the January through March 2023 period and that VCR's sales teams were conducting an elevated volume of marketing events and on-site presentations, resulting in a higher-than-usual volume of new purchase agreements being executed during the quarter.
Ms. Prescott confirmed that it was specifically the $9.8 million Q1 2023 overstatement figure that drew the attention of VHG's independent auditor, Hartley Stanton & Associates LLP ("HSA"). She stated that HSA's engagement partner, William Gentry, identified the issue in a communication dated June 19, 2023, in which Mr. Gentry raised concerns about a potential material weakness in VHG's internal controls over financial reporting related to VCR's timeshare revenue-recognition practices. Ms. Prescott stated that she was aware of Mr. Gentry's communication at the time it was issued, although she stated she was not a direct recipient and learned of it through Mr. Daskine.
D. Prescott's Knowledge and Intent
Ms. Prescott was asked directly about her knowledge and state of mind regarding the revenue-recognition practice at the time it was implemented and during the period in which it continued.
Ms. Prescott stated that she understood at the time the practice was implemented that it deviated from ASC 606 and from VHG's stated accounting policies as set forth in VHG's public filings. She stated that she had sufficient accounting knowledge and training to recognize that recording purchase deposits as revenue before the expiration of the statutory rescission period was not in accordance with generally accepted accounting principles. She stated that she was aware that the practice resulted in an overstatement of VCR's reported revenue for each quarter in which it was applied.
Ms. Prescott stated that she raised concerns with Mr. Daskine about the practice on at least two occasions. She estimated that the first occasion was in approximately late 2022, likely in November or December 2022, after the close of Q3 2022 when the practice had been in effect for one full quarter. She estimated that the second occasion was in approximately early 2023, likely in January or February 2023, prior to the period in which the Q1 2023 overstatement was generated. She stated that on both occasions, she communicated her concerns to Mr. Daskine verbally, in one-on-one conversations in Mr. Daskine's office. She stated that she did not memorialize these conversations in writing, whether by email, memorandum, or otherwise.
Ms. Prescott stated that on both occasions, Mr. Daskine told her that the approach was a "timing difference" that would "wash out" over time and that the overstatements were not material in the context of VCR's overall revenue. She stated that Mr. Daskine emphasized that meeting quarterly performance targets was "critical" for VCR's standing within the VHG organization and for the compensation and bonus metrics applicable to VCR's management team. She stated that Mr. Daskine did not direct her to cease the practice in response to her concerns.
Ms. Prescott stated that she did not escalate her concerns beyond Mr. Daskine. Specifically, she stated that she did not raise the issue with VHG Chief Financial Officer Thomas Rhett Griffith, VHG Chief Executive Officer Calder (Ms. Prescott referred to the CEO by surname only), VHG General Counsel Patricia Navarro, or any member of the Audit Committee of the Board of Directors. When asked why she did not escalate, Ms. Prescott stated that she felt it was Mr. Daskine's decision as Division President and that going directly to corporate leadership or the Board would have been "going around him." She stated she was concerned about the professional consequences of bypassing her direct supervisor on a matter he had already addressed with her.
At this point in the interview, counsel Langford interjected to note for the record that Ms. Prescott was answering all questions voluntarily and cooperatively, and that Ms. Prescott reserved the right to assert any applicable privileges, including the Fifth Amendment privilege against self-incrimination, at any point during this or any subsequent interview. Mr. Quinn acknowledged Ms. Langford's statement and the interview continued.
E. Coordination with HSA and Corporate Finance
Ms. Prescott was asked about her interactions with VHG's independent auditor, Hartley Stanton & Associates LLP, and with VHG's corporate finance team in connection with VCR's revenue-recognition practices.
Ms. Prescott stated that she was aware that HSA's Q1 2023 interim review, conducted in connection with VHG's Form 10-Q for the quarterly period ending March 31, 2023, had surfaced questions about the approximately $9.8 million in prematurely recognized timeshare-interest deposits. She stated that she understood HSA had identified discrepancies between VCR's reported revenue and the underlying transactional data, including the timing of purchase agreement execution dates relative to revenue-recognition entries in VCR's general ledger.
Ms. Prescott stated that she did not directly communicate with HSA about these issues. She stated that her understanding was that Mr. Daskine handled communications with the auditors regarding VCR revenue matters and that Mr. Daskine had instructed her not to communicate directly with HSA personnel regarding revenue-recognition questions without his involvement. She stated she did not know the specific substance of Mr. Daskine's communications with HSA on this topic.
Ms. Prescott acknowledged that she prepared or reviewed the quarterly financial schedules that VCR submitted to VHG's corporate finance team for consolidation into VHG's Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. She stated that these schedules reflected the revenue figures as recorded in VCR's general ledger, including the prematurely recognized deposits. She acknowledged that she did not flag the revenue-recognition issue in her submissions to VHG corporate finance and did not include any notation or qualification indicating that VCR's reported revenue figures included deposits for which the rescission period had not yet expired.
V. Expense-Reimbursement Irregularities and Shell Entities
A. Prescott's Knowledge of the Fictitious Vendor Scheme
Ms. Prescott was asked about capital-improvement purchase orders processed through VCR's accounts payable system. She initially stated that purchase orders for capital improvements at VCR properties were prepared by Controller Ryan Serrano and submitted for review and approval in accordance with VCR's standard procurement procedures. She stated that Mr. Serrano was responsible for identifying and vetting vendors, preparing purchase order documentation, and processing vendor invoices for payment. She stated that Mr. Daskine, as Division President, provided final approval for capital-improvement expenditures exceeding certain dollar thresholds.
Ms. Prescott stated that she was aware of the following vendor names appearing in VCR's accounts payable records in connection with capital-improvement work at VCR properties: Gulf Standard Contracting LLC, Clearwater Design Collective Inc., and Suncoast Property Services LLC. She stated that these vendors were presented to her as legitimate contractors performing construction, renovation, design, and maintenance work at Coral Dune Resort & Residences and Palmetto Bluff Club.
B. Clearwater Design Collective Inc.
Ms. Prescott was specifically asked about Clearwater Design Collective Inc. She was informed that Clearwater Design Collective Inc. was formed on June 4, 2021, as a Florida corporation, with its principal address listed at a registered agent service location in Tallahassee, Florida.
Ms. Prescott was shown corporate filing records obtained from the Florida Division of Corporations reflecting that she, Nicole Prescott, is listed as the sole shareholder and sole director of Clearwater Design Collective Inc. Upon reviewing the documents, Ms. Prescott requested a brief pause in the interview to confer with her counsel, Ms. Langford. After conferring with Ms. Langford for approximately five minutes in a separate conference room, Ms. Prescott returned to the interview and acknowledged that she is the sole shareholder and sole director of Clearwater Design Collective Inc.
Ms. Prescott stated that Mr. Daskine approached her in approximately mid-2021 and proposed that she form a company to submit invoices for "design consulting" services related to VCR property improvements. She stated that Mr. Daskine described the arrangement as a way to supplement her compensation and that he told her the amounts invoiced would be treated as legitimate capital-improvement expenditures in VCR's books and records. She stated that Mr. Daskine told her that Controller Ryan Serrano would handle the paperwork, including preparation of purchase orders and processing of invoices for payment.
Ms. Prescott confirmed that Ryan Mateo Serrano served as the registered agent for Clearwater Design Collective Inc. with the Florida Division of Corporations. She stated that Mr. Serrano assisted her with the formation of the entity and with the preparation of invoices submitted by Clearwater Design Collective Inc. to VCR.
Ms. Prescott stated that Clearwater Design Collective Inc. submitted a total of sixteen (16) invoices to VCR over the period from approximately July 2021 through June 2023. She stated that the aggregate amount of these invoices was $587,600. She stated that the invoices were described as being for design consulting services, interior design consultation, and related services in connection with renovation and improvement projects at Coral Dune Resort & Residences and Palmetto Bluff Club.
When asked whether Clearwater Design Collective Inc. performed any actual design or consulting work for VCR, Ms. Prescott stated that she "provided some design input" on certain projects, including making suggestions regarding color palettes, furnishing selections, and layout configurations for renovated guest units. However, she acknowledged that the scope and value of the actual work she performed did not correspond to the amounts invoiced. She did not provide a specific estimate of the value of any work actually performed.
Ms. Prescott stated that the payments made by VCR to Clearwater Design Collective Inc. were deposited into a bank account held in the name of Clearwater Design Collective Inc. at a financial institution she did not identify during the interview. She stated that she used the funds deposited into that account for personal expenses. When asked to provide specifics regarding the personal expenditures funded by Clearwater Design Collective Inc. proceeds, Ms. Prescott declined to provide details at that time. Ms. Langford stated on the record that she and Ms. Prescott would confer regarding what additional detail, if any, would be provided on this topic in a subsequent interview or through other means.
C. Knowledge of Gulf Standard Contracting LLC and Suncoast Property Services LLC
Ms. Prescott was asked about her knowledge of the other two vendor entities identified in the investigation: Gulf Standard Contracting LLC and Suncoast Property Services LLC.
Ms. Prescott stated that she was aware that Gulf Standard Contracting LLC, which was formed on March 12, 2021, as a Florida limited liability company, was a vendor submitting invoices to VCR for construction and renovation services. She stated that she was similarly aware that Suncoast Property Services LLC, formed on November 18, 2021, as a Florida limited liability company, was a vendor submitting invoices to VCR for property maintenance and related services.
Ms. Prescott stated that she believed both entities were connected to Mr. Daskine but stated that she did not know the specifics of their ownership structure, including whether Mr. Daskine was a member, manager, or beneficial owner of either entity. She stated she did not have documentation reflecting Mr. Daskine's interest in those entities and had not reviewed their organizational documents or corporate filings.
Ms. Prescott stated that she was not involved in creating or preparing invoices for Gulf Standard Contracting LLC or Suncoast Property Services LLC. She stated that Mr. Serrano handled the purchase orders and invoice processing for those entities, and that Mr. Daskine approved the payments.
Ms. Prescott was informed that, according to Crestline's preliminary analysis, Gulf Standard Contracting LLC submitted a total of nineteen (19) invoices to VCR over the relevant period, totaling approximately $812,400, and that Suncoast Property Services LLC submitted a total of twelve (12) invoices to VCR over the relevant period, totaling approximately $430,000. Ms. Prescott stated that those figures were "consistent with what she would have expected to see in the AP records" based on her general familiarity with VCR's capital-improvement expenditures during the period.
Ms. Prescott stated that she was aware that the total amount invoiced across all three entities — Clearwater Design Collective Inc. ($587,600), Gulf Standard Contracting LLC ($812,400), and Suncoast Property Services LLC ($430,000) — was approximately $1.83 million. She stated, however, that she had not independently calculated that aggregate figure and was relying on the figures presented to her during the interview.
When asked about specific invoices, Ms. Prescott stated that she did not have specific knowledge of the details of individual invoices submitted by Gulf Standard Contracting LLC or Suncoast Property Services LLC. She was asked specifically about Invoice No. GSC-2023-007, dated February 14, 2023, in the amount of $94,500, attributed to Gulf Standard Contracting LLC for "lobby renovation materials — Coral Dune Phase III." Ms. Prescott stated she did not recall the specific details of that invoice but noted that invoices of that size — under $100,000 — were within Mr. Daskine's approval authority and would not have required any additional review or authorization beyond the standard approval chain.
D. Purchase Order Approval Process
Ms. Prescott was asked to explain VCR's purchase order approval process for capital improvements. She described a three-step process as follows:
1. Creation: Controller Ryan Serrano was responsible for creating the purchase order in VCR's procurement system, including identifying the vendor, specifying the goods or services to be provided, and entering the dollar amount.
2. Review and Approval — VP Finance: Ms. Prescott was responsible for reviewing the purchase order for accuracy, budget availability, and conformity with VCR's capital-improvement plan. She stated that her review was intended to serve as a financial control checkpoint.
3. Final Approval — Division President: For purchase orders exceeding $25,000, Division President Garrett Daskine was required to provide final approval before the purchase order could be issued and the corresponding invoice processed for payment.
Ms. Prescott acknowledged that the forty-seven (47) purchase orders directed to the three shell entities — Clearwater Design Collective Inc., Gulf Standard Contracting LLC, and Suncoast Property Services LLC — passed through this three-step approval chain. She acknowledged that she reviewed and approved each of the purchase orders directed to Clearwater Design Collective Inc. and that she also reviewed and approved purchase orders directed to the other two entities.
When asked whether she identified any red flags in connection with her review of these purchase orders, Ms. Prescott stated that she relied on Mr. Serrano's representations that the work described in the purchase orders was being performed and that the vendors were legitimate contractors. She stated that she did not independently verify the legitimacy of the vendors, including by visiting job sites to confirm that work was being performed, contacting the vendors directly, or reviewing vendor qualifications, licensing, or insurance documentation. She acknowledged that, in hindsight, this constituted a failure of internal controls and that her review of the purchase orders was not sufficiently rigorous to detect the fraudulent nature of the invoices.
VI. Prescott's Understanding of Internal Controls and SOX Obligations
Ms. Prescott was asked about her understanding of VHG's internal controls over financial reporting and the company's obligations under the Sarbanes-Oxley Act of 2002 ("SOX").
Ms. Prescott confirmed that she was familiar with VHG's obligations under SOX Sections 302 and 404. She stated that she understood that Section 302 requires VHG's Chief Executive Officer and Chief Financial Officer to certify, in connection with each quarterly and annual filing with the SEC, that VHG's financial statements fairly present, in all material respects, the financial condition and results of operations of the company, and that they have evaluated the effectiveness of VHG's disclosure controls and procedures. She stated that she further understood that Section 404 requires management to assess and report on the effectiveness of VHG's internal controls over financial reporting, and that VHG's independent auditor, HSA, is required to attest to and report on management's assessment.
Ms. Prescott stated that she understood that VCR's financial reporting fed directly into VHG's consolidated financial statements and that the accuracy and integrity of VCR's reported financial data were essential to the CEO and CFO certifications under SOX Section 302. She acknowledged that the revenue overstatement and the fictitious vendor invoices she described during the interview had the potential to affect the accuracy of VHG's consolidated financial statements and, by extension, the CEO and CFO certifications.
Ms. Prescott stated that she did not raise any concerns about the revenue-recognition practice or the shell-entity invoicing scheme through VHG's anonymous whistleblower hotline, which she stated she was aware existed. She also stated that she did not raise concerns through any other internal reporting channel, including VHG's ethics office, its compliance department, or the office of VHG General Counsel Patricia Navarro.
Ms. Prescott stated that she received annual compliance training on VHG's code of conduct, including modules addressing financial-reporting integrity, conflicts of interest, related-party transactions, and the obligation to report suspected misconduct. She stated she understood these obligations at the time of the conduct described in this memorandum.
VII. Relationship with Other Subjects
Ms. Prescott was asked to describe her working relationships with the other individuals who have been identified as subjects of the investigation.
Ms. Prescott described her working relationship with Division President Garrett W. Daskine as "professional." She stated that Mr. Daskine was a "strong personality" who "expected results" and who did not welcome pushback on financial matters. She stated that Mr. Daskine was focused on VCR's performance metrics, including revenue growth, occupancy rates, and timeshare unit sales volume, and that he placed significant emphasis on meeting or exceeding the quarterly and annual targets established by VHG corporate. She stated that Mr. Daskine's management style was directive and that he expected his directives to be carried out without extensive debate or challenge.
Ms. Prescott described her relationship with Controller Ryan Mateo Serrano as that of a supervisor and direct report. She stated that Mr. Serrano was "diligent" in his work and that he carried out instructions without question. She did not characterize Mr. Serrano as having independently devised or promoted any of the practices described during the interview. She stated that, to her knowledge, Mr. Serrano performed the tasks assigned to him by her and by Mr. Daskine.
Ms. Prescott stated that she was not aware of any personal expenditures by Mr. Daskine that were funded through the shell entities, including Gulf Standard Contracting LLC and Suncoast Property Services LLC. Specifically, she was asked whether she was aware of any residential renovation costs, boat-slip or marina fees, luxury-goods purchases, travel expenditures, or other personal expenses incurred by Mr. Daskine that were paid for using proceeds from the shell entities. Ms. Prescott stated that she had no knowledge of any such expenditures. She stated that she only had knowledge of the funds she personally received through Clearwater Design Collective Inc. and that she did not know how the proceeds of the other two entities were used.
VIII. Document Preservation and Cooperation
Ms. Prescott was asked about her compliance with document preservation obligations in connection with the investigation.
Ms. Prescott confirmed that she received the document preservation notice issued by Calderwood & Harkness LLP on July 24, 2023. She identified this as the targeted preservation notice directed to VCR custodians in connection with the Audit Committee's investigation. She stated that she received the notice via email and via hard copy delivered to her home address following the commencement of her administrative leave.
Ms. Prescott stated that she has complied with all preservation obligations set forth in the notice. She stated that she has not destroyed, deleted, altered, concealed, or removed any documents, files, or electronically stored information ("ESI") relevant to the investigation since receiving the preservation notice. She stated that she has not wiped, reformatted, or disposed of any personal electronic devices, including mobile phones, laptops, tablets, or external storage media, since receiving the notice.
When asked about the use of personal devices and personal email accounts for VCR business, Ms. Prescott stated that she occasionally used a personal email account — the identity of which she did not disclose during this interview — for communications with Mr. Daskine regarding matters related to the shell entities described in Section V above. She stated that some of these communications may contain information relevant to the investigation. Ms. Langford stated on the record that she and Ms. Prescott would confer regarding the production of communications from Ms. Prescott's personal email account and that Ms. Langford would be in contact with Calderwood & Harkness regarding the scope and manner of any such production.
IX. Areas Identified for Follow-Up
Based on the substance of the interview, the following areas have been identified for follow-up in a subsequent interview of Ms. Prescott and/or through other investigative steps:
1. Ms. Prescott's personal email communications with Mr. Daskine and Mr. Serrano regarding the formation, operation, and invoicing activities of Clearwater Design Collective Inc., Gulf Standard Contracting LLC, and Suncoast Property Services LLC.
2. Specific personal expenditures funded through proceeds received by Ms. Prescott from payments made by VCR to Clearwater Design Collective Inc., including amounts, dates, and categories of expenditure.
3. Ms. Prescott's interactions, if any, with HSA personnel, including engagement partner William Gentry or other HSA team members, regarding Q1 2023 revenue-recognition questions or any other audit-related inquiries during the period under investigation.
4. Details of Ms. Prescott's communications with Mr. Daskine in which she purportedly raised concerns about the revenue-recognition practice, including approximate dates, the specific substance of those conversations, whether any other individuals were present, and whether the conversations were documented in any form (e.g., emails, text messages, calendar entries, or contemporaneous notes).
5. Any written communications between Ms. Prescott and VHG corporate finance personnel, including CFO Griffith's team, regarding VCR's quarterly financial schedules submitted for consolidation into VHG's SEC filings.
6. Additional detail on the purchase order approval process, including any documentation of Ms. Prescott's review of the forty-seven (47) fictitious purchase orders, the nature and extent of her review, and whether she retained copies of supporting documentation such as vendor proposals, scope-of-work descriptions, or proof-of-completion records.
X. Conclusion and Next Steps
The interview concluded at approximately 1:15 p.m. on October 11, 2023. The interview lasted approximately three hours and forty-five minutes, including one break of approximately fifteen minutes taken at approximately 11:30 a.m.
At the conclusion of the interview, counsel Langford stated on the record that Ms. Prescott was willing to participate in a follow-up interview to address the areas identified above, subject to scheduling and further consultation between Ms. Prescott and Ms. Langford.
Howard Quinn informed Ms. Langford that a second interview would likely be requested in the near term to address the follow-up areas identified during this session, and that Calderwood & Harkness would be in contact with Ms. Langford's office regarding scheduling. Mr. Quinn noted that the Audit Committee's investigation is ongoing and that additional interviews of other witnesses may be conducted in the interim.
Before the interview concluded, Mr. Quinn reminded Ms. Prescott of her continuing obligation to maintain the confidentiality of the substance of the interview and not to discuss the questions asked, the information she provided, or any other aspect of the interview with any VHG or VCR employees, officers, directors, or third parties, other than her personal counsel, Ms. Langford. Mr. Quinn also reminded Ms. Prescott of her continuing obligation to comply with the document preservation notice dated July 24, 2023, including the obligation to preserve all potentially relevant documents and ESI in her possession, custody, or control.
Ms. Prescott and Ms. Langford acknowledged these reminders and departed the offices of Calderwood & Harkness LLP at approximately 1:20 p.m.
Prepared by: Liam Donahue and Steven Hollander, Calderwood & Harkness LLP
Reviewed by: Howard Quinn, Calderwood & Harkness LLP
Distribution: Investigation file only; to be provided to the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. upon request.
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
Quarter | Period Ending | Approximate Overstatement
Q3 2022 | September 30, 2022 | $4.7 million
Q4 2022 | December 31, 2022 | $6.1 million
Q1 2023 | March 31, 2023 | $9.8 million
Q2 2023 | June 30, 2023 | $5.8 million
Total | $26.4 million

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

MEMORANDUM OF INTERVIEW

Record

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