It is April 15, 2022, and you have been working as a CPA with Serringers Consulting Group LLP (SCG). You have been assigned to develop a report for the board of directors and management of CanDo Fitness Ltd. (CFL). CFL has approached SCG with a request to assist with strategic quantitative and qualitative analysis for entering into a distributor agreement with Zenfit and create streaming videos.

The board met on April 13, 2022. Excerpts from the discussions that took place are detailed below.

Frank: Yes, I have a proposal that will allow CFL to tap into an increasing market, with little upfront capital. It is consistent with our value to help people achieve their fitness goals. Zenfit Equipment Co. (Zenfit), my old employer, has asked if we would be interested in being a distributor for its equipment in Western Canada. They have provided a draft distributor's agreement, which I am very familiar with, since I used to work as one of their distributors. As you know, CFL currently buys a lot of its cardio equipment from Zenfit since they manufacture reliable and innovative equipment. But there is an even more interesting part to this association, as they want us to help create their group fitness class videos using their new Zentracker machines, which I have provided more detail on (Appendix VII and VIII). Brian: I have read about these machines. They are seen to be the up-and-coming fitness equipment that takes cross-training to a new level. They are also each fitted with a great TV that allows for streaming of videos. Impressive! I think we should be involved, to be at the leading edge of this growing market. Frank: Yes, Zenfit is very excited about this and they want to have us demo these machines in some of our facilities. They also want us to run a group fitness class at one of our facilities using these machines. I am thinking that we could convert one spinning room to a Zentracker room to begin with. Rosa: I have read the distributor's agreement and what I don't like is that we have to achieve the $1 million of equipment sales target quarterly. This is really aggressive, given all of the other known competitors in the industry. Frank: Yes, it is, but I think it is achievable given what I know about the company and this new machine. I think it's worth a try. Phillip: We only currently purchase about 40% of our cardio equipment from Zenfit and the other 60% comes from other well-known brands. This agreement will require us to purchase only from Zenfit if they have the machines that we need ? which I think would be around 90% of our current cardio equipment expenditures. I don't want someone else to tell me what to buy and controlling these decisions. Frank: Your numbers are correct, but I think you will find that Zenfit, which has been outspending competitors in the area of R&D, will very often have the better machines on the market. Brian: I like this idea. It would be great, from a marketing perspective, to create these videos, and give us greater exposure even in our local communities. I think we could draw new members who would want to be part of this online community and be part of our classes. I see us expanding these classes to our other facilities. It will definitely promote some excitement around our brand, which has been lost in recent years. Sandra: I have watched videos of competitors' fitness streaming, and it is all dependent on the fitness instructor. These video stars must not only be good instructors, but they must also be charismatic, motivational, and entertaining. This is quite a combination of skills and I am not sure who we would get. Without the right instructors, we would not be able to even get 10% of the viewership that has been assumed. Rosa: To meet our sales targets, we will likely have to sell Zenfit equipment to other gyms that are our competitors.

Phillip: What happens if the Zentracker is a bust ? it doesn't work or fails to live up to expectations? We will be blamed for selling these machines and tying our name to it, which will impact negatively on our brand. Frank: I think this is a great way to slowly move into a new market and get away from being in a rut of only running a traditional gym.

Appendix VII Zenfit Equipment Co. proposal Prepared by Frank Chang Zenfit, a U.S.-based company, is an equipment supplier, selling traditional cardio equipment and a new line of state-of-the-art cross-trainers, called Zentrackers, that can be custom designed by the customer to add components as required to meet their specific needs. The Zentracker has streaming capabilities for workout videos and live classes. Zenfit recently lost its distributor in Western Canada and would like CFL to become its exclusive distributor. CFL would have demo equipment available, and trained staff would be available to demonstrate this equipment. Potential customers could come in and try out the different lines of fitness equipment to make their decision about the right type of machine. More importantly, customers could try the Zentracker and determine the components that are right for their needs, prior to purchasing. CFL would sell to customers who want in-home gym equipment; other facilities like hospitals, hotels, and corporate clients; and other gyms. Zenfit has agreed that CFL would have the exclusive distribution rights for Western Canada, which includes B.C., Alberta, Manitoba, and Saskatchewan. It has also agreed to offer CFL the Eastern Canada region in the future, if this agreement works out. Zenfit stated that in approximately four years, it might be looking for a new Eastern Canada distributor. Zenfit is a well-known company in the fitness equipment supplier industry. It has been selling equipment for more than 20 years and has always been at the leading edge of the industry. The Zentracker was awarded the prize as the best cross-trainer in the market in 2021, and analysts believe that it will set a new trend in cardio equipment. Zenfit has already seen a large increase in demand for this new and innovative product. The draft proposed distributor agreement with Zenfit is provided in Appendix VIII. Direct costs related to earning the distributor's fees are estimated to be $50,000 annually. In addition to being a distributor, Zenfit would like to hire CFL to livestream classes and create workout videos using Zentrackers. These would be made available, along with other instructors' videos, to Zentracker customers that have paid monthly subscription fees to view these videos. Zenfit would like CFL to initially convert one of its spinning rooms to a Zentracker room and provide group classes using these machines. These classes would then be livestreamed and recorded, and the videos made available for later viewing. Zenfit will pay for the recording, which will be done by professionals. Zenfit will pay CFL a flat royalty fee of $0.75 for each video streamed. The target market for these livestreams and videos are predominantly 25- to 40-year-olds.

Appendix VII (continued) Zenfit Equipment Co. proposal Prepared by Frank Chang Zent has provided the following assumptions, which it believes are very conservative: -m--azs-m- Number of Zentracker subscribers 100,000 200,000 350,000 --- subscriber 3 3 3 -- videos 10% 10% 10% CFL will have to immediately convert one spinning room in one of its locations to a Zentracker room. This will cost $400,000 for new equipment, renovations, and the required technology and cameras to livestream. If it is successful and members are interested, CFL would be able to expand this to some of its other facilities. CCA on the long-lived assets involved is assumed to equal depreciation. A tax rate of 26% should be used in this analysis. The Zenfit proposal includes both the equipment distribution and video services. Zenfit is not open to pursuing either option separately. The terms of the distributor agreement are also not negotiable. Appendix VIII Extracts from draft distributor agreement with Zenfit Equipment Co. Provided by Frank Chang EXCLUSIVE DISTRIBUTOR AGREEMENT This Exclusive Distributor Agreement {\"Agreement") is made and effective on this, them day of y, 2022, by and between Zent Eguipment Co, Inc., a US. Corporation with its principal place of business at 120 Hammond Road, Portland, Oregon, United States, {\"Company") and CanDo Fitness Limited, a Canadian corporation having ofces at 589 Southam St, Vancouver, British Columbia, Canada {\"Distributor"). 1. Appointment Company hereby appoints Distributor as its exclusive Distributor for the Products in the exclusive Territory of Western Canada, including British Columbia, Alberta, Manitoba, and Saskatchewan. Distributor's sole authority shall be to solicit orders for the Products in the Territory in accordance with the terms of this Agreement. \"Products\" includes all the Company's Fitness Equipment Products that are available for sale. 3. General Duties Distributor shall use its best efforts to promote the Products and maximize the sale of the Products in the Territory. Distributor will provide adequate space and time for the demonstration of Products to potential customers and Distributor will work with the customer to determine the best choice of equipment. Monthly, the Company shall provide Distributor with the Product Sales Report showing customer name, Products ordered, and date of sale. All sales will be made directly between the Company and the Customer. 5. Conict of Interest Distributor warrants to Company that it does not currently represent or promote any lines or products that compete with the Products. During the term of this Agreement, Distributor shall not represent, promote, or otherwise try to sell within the Territory any lines or products that, in Company's judgment, compete with the Products covered by this Agreement. Distributor shall provide Company with a list ofthe companies and products that it currently uses in its facilities and shall notify Company in writing of any new companies and products at such time as its promotion ofthose new companies and products commences. 6. Independent Contractor Distributor is an independent contractor. 7. Distributor's Purchases for Own Use Distributor has the right to purchase Products for its own use at a discounted price of 10% off the normal retail price. This Agreement requires Distributor to purchase cardio equipment only from Company if they have the machines that are needed. In cases where Company does not produce the type of cardio equipment required, then another supplier may be used, on approval by Company. 12. Demo Product Company will provide Distributor, for free, all demo Products that Company wants shown and available for demonstration. These Products will become the property of Distributor. Distributor shall have full responsibility of keeping each demo Product in proper operating condition during the entire length of the contract. 13. Additional Responsibilities of Distributor A. Expense of doing business: Distributor shall bear the entire cost and expense of conducting its business in accordance with the terms of this Agreement. B. Facilities: Distributor shall provide itself with, and be solely responsible for, (1) such facilities, employees, and business organization, and {2) such permits, licences, and other forms of clearance from governmental or regulatory agencies, if any, as are necessary for the conduct of Distributor's business operations in accordance with this Agreement. C. Promotion of the Products: Distributor shall, at its own expense, vigorously promote the sale of and stimulate demand for the Products within the Territory by direct solicitation, which will be all expressly authorized by Company. D. Customer service: Distributor shall diligently assist customers\" personnel in using the Products and shall perform such additional customer service as required to effectively sell the Product and as Company may reasonably request. 18. Term This Agreement shall commence on the date first written above and shall continue for three (3) years unless terminated earlier as provided herein. Thereafter, this Agreement shall continue until terminated upon at least ninety (90) days notice by Company or ninety (90) days notice by Distributor. The below signed parties hereby acknowledge that they have read and understand the entire Agreement, that they have authority to enter this Agreement on behalf of their respective organizations, and that they have freely and voluntarily executed this Agreement as of the day and year rst written above. Attachment 1: Terms and Conditions of Sale of Products Shipping and delivery timing: Company shall determine a "ship by" date separately for each order received from Distributor. Company shall be responsible for shipping the order no later than the \"ship by\" date for each order received and the goods will be shipped directly to the customer. At no time will Distributor take ownership of the goods. The customer will pay the Company directly for all sales. Minimum quarterly sales to maintain exclusivity: Distributor must sell at least C$1,UUO,DOO.DU per calendar quarter to maintain exclusivity. Failure by Distributor to meet this minimum for two consecutive quarters shall subject Distributor to loss of exclusivity and possible termination of this Agreement. Minimum annual sales to renew exclusivity: If each quarterly sales minimum is met as outlined above (meaning minimum annual sales of C$4,000,000), then Distributor shall be entitled to renewal of its exclusivity under this Agreement for an additional year subject to new quarterly minimums to be determined by Company. Product prices will range from C$5,000 to C$15,000 per product. Company agrees to pay Distributor a distributor's fee of 15% of the retail price of any Products sold. This distributor's fee will be paid within 30 days of the sales date. Sales made to CFL itself or its affiliates will not earn the distributor's fee or count toward minimum quarterly and annual sales requirements