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

Zenfit has provided the following assumptions, which it believes are very conservative:

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.

QUESTION:

 

Zenfit has provided the following assumptions, which it believes are very conservative: 2022 2023 200,000 2024 350,000 100,000 Number of Zentracker subscribers Weekly videos viewed by each subscriber Percentage that would view CFL's videos 3 10% 3 10% 3 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.