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EX-32.2 - EXHIBIT 32.2 - Canfield Medical Supply, Inc.ex32x2.htm
EX-32.1 - EXHIBIT 32.1 - Canfield Medical Supply, Inc.ex32x1.htm
EX-31.2 - EXHIBIT 31.2 - Canfield Medical Supply, Inc.ex31x2.htm
EX-31 - EXHIBIT 31.1 - Canfield Medical Supply, Inc.ex31x1.htm
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X]
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
   
For the fiscal year ended December 31, 2017
     
[_]
 
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________to _________

Commission File Number 000-55114

Canfield Medical Supply, Inc.
(Exact name of registrant as specified in its charter)

Colorado
 
34-1720075
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

4120 Boardman-Canfield Road, Canfield, Ohio
 
44406
(Address of principal executive offices)
 
(Zip Code)

Registrant's Telephone Number, including area code: (330) 533-1914

Securities Registered pursuant to Section 12(b) of the Act:  None

Securities Registered pursuant to Section 12(g) of the Act:  Common Stock, No Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes    No

Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company," in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
Accelerated filer  
Non-accelerated filer   
 
Smaller reporting company  
Emerging growth company
   

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Act).  Yes    No


State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter:  $263,320.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of March 30, 2018, the registrant had 11,277,200 shares of common stock outstanding.




CANFIELD MEDICAL SUPPLY, INC.

FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2017

TABLE OF CONTENTS

PART I
   
Page
     
Item 1.
Business
2
Item 1A.
Risk Factors
14
Item 1B.
Unresolved Staff Comments
14
Item 2.
Properties
14
Item 3.
Legal Proceedings
14
Item 4.
Mine Safety Disclosures
14
     
PART II
     
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
15
Item 6.
Selected Financial Data
15
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
16
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
17
Item 8.
Financial Statements and Supplementary Data
17
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
19
Item 9A.
Controls and Procedures
19
Item 9B.
Other Information
19
     
PART III
     
Item 10.
Directors, Executive Officers and Corporate Governance
20
Item 11.
Executive Compensation
21
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
21
Item 13.
Certain Relationships and Related Transactions and Director Independence
22
Item 14.
Principal Accounting Fees and Services
22
     
PART IV
     
Item 15.
Exhibits, Financial Statement Schedules
23
 
Signatures
24
 
1



PART I

Item 1.  Business.

General Information

Canfield Medical Supply, Inc. ("the Company", "it", "we', "us" or "our") was incorporated in the State of Ohio on September 3, 1992.  On April 18, 2012 it changed its domicile to the State of Colorado by merging with a newly formed Colorado subsidiary.


We commenced our operations in September 1992.  Initially we operated as a compounding pharmacy providing Intradialytic Parenteral Nutrition (a means of providing additional nutrition to patients on dialysis) to patients with End Stage Renal Disease who had experienced excessive weight loss due to intestinal malabsorption.  We also provided pharmacy services to patients who required intravenous antibiotic therapy, home total parenteral nutrition and home enteral nutrition. (Enteral nutrition involves absorption of the drug through the gastrointestinal tract and parenteral nutrition involves administering the drug/nutrition in some way other than the digestive tract.)  We also provided various nebulizer medications for patients with chronic obstructive pulmonary disease. (A nebulizer is a device used to administer medication in the form of a mist inhaled into the lungs.) We ceased pharmacy operations in May 2002 in response to significant reductions in reimbursement by Medicare, Medicaid and Private Insurance Companies, and changed our focus to providing quality home medical equipment and supplies to patients in our geographical area.

Business

We are a provider of home medical equipment, supplies and services (which relate to the equipment sales) in Ohio's Mahoning Valley, with an emphasis on providing for patients with mobility related limitations.  We also sell to patients in Western Pennsylvania and Northern West Virginia.  We typically provide equipment, supplies and services to people who have had strokes, hip or knee replacements, and other surgeries after they are discharged from a hospital or rehab center.  We provide almost any medical equipment and supplies these persons need to enable them to remain in their homes. We have been in the home health care business since 1992 and have developed relationships with many of the local physicians, discharge planners for hospitals and rehab facilities, nursing services, and home health agencies.

We operate in only one segment, which is home medical equipment and supplies.  We also provide the services described below along with the equipment and supplies, but most of our revenue is derived from the sale of equipment and supplies.  Most of the equipment and supplies that we sell are prescribed by a physician and are part of a care plan.  We provide substantial benefits to both patients and payors by allowing patients to receive necessary care and services in the comfort of their own home while reducing the cost of treatment.  Our services include:


 
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1.
Providing in-home delivery, set-up, and maintenance of equipment;
2.
Providing patients and caregivers with written instructions about home safety, self-care, and the proper use of equipment;
3.
Processing claims to third-party payors and billing/collecting patient co-pays and deductibles.

We supply a wide range of home medical equipment to help improve the quality of life for patients with special needs, particularly those who face unique mobility challenges as they try to remain independent in their homes.  The use of home medical equipment provides a significant relative cost advantage to our patients and payors.  The basic categories of equipment we carry are:

1.
Electric wheelchairs, scooters, and lift chairs
2.
Manual wheelchairs and ambulatory equipment, such as wheeled walkers, canes, and crutches;
3.
Hospital beds;
4.
Bathroom equipment, such as bedside commodes, shower chairs, grab bars, and toilet risers;
5.
Support surfaces, such as pressure pads and mattresses, for patients at risk for developing pressure sores or decubitus ulcers;
6.
Threshold ramps, folding ramps, and lift systems for cars or vans that make it easy to exit the home or transport electric wheelchairs or scooters.

Industry Overview

The home healthcare market comprises a broad range of products and services – including respiratory therapy, infusion therapy (which deals with all aspects of fluid and medication infusion, usually via the intravenous route), home medical equipment, home healthcare nursing, orthotics and prosthetics, and general medical supplies.

We expect to benefit from the following trends within the home healthcare market:

Favorable industry dynamics.  Favorable demographic trends and the continued shift to in-home healthcare have resulted in patient volume growth in the United States and are expected to continue to drive growth.  As the baby boomer population ages and life expectancy increases, the elderly – who comprise the majority of our patients – will represent a higher percentage of the overall population.  According to a 2010 U.S. Census Bureau projection, the U.S. population aged 65 and over is expected to grow substantially from 13 % of the population in 2010 to 19 % of the population by 2030.

Compelling in-home economics.  Between 2010 and 2020, the nation's healthcare spending is projected to increase to $4.6 trillion, growing at an average annual rate of 5.8 % according to the Centers for Medicare and Medicaid Services ("CMS").  The rising cost of healthcare has caused many payors to look for ways to contain costs and home healthcare is increasingly sought out as an attractive, cost-effective, clinically appropriate alternative to expensive facility-based care.

Increased prevalence of in-home care.  Improved technology has resulted in a wider variety of treatments being administered in patients' homes.  Based on its experience, management believes that these improvements have allowed for earlier patient discharge and have lengthened the portion of the recuperation period spent outside of an institutional setting.  In addition, medical advancements have also made medical equipment simpler, and more adaptable and cost-effective for use in the home.

Preference for in-home care.  Based on its experience, management believes that many patients prefer the convenience and typical cost advantages of home healthcare over institutional care, as it provides patients with greater independence, increased responsibility, and improved responsiveness to treatment.


 
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Our Competitive Strength

Our principal competitive strength is that we are an established local company in the Mahoning Valley with a reputation for good service and good quality.  If a patient has any problems with a piece of equipment they purchase from us, they can call us and we will take care of the problem. Historically we have not experienced significant returns or refunds. We contract with Medicare, Medicaid, most major health insurance companies, and a number of other payors.  We are especially known as a business that can provide almost anything a patient with reduced mobility needs, including home modifications necessary to remain independent in the home.

We also qualify as a "small supplier" under the Medicare competitive bidding program, since our annual revenues are less than $3.5 million.  The Medicare regulations have established a 30 percent target for small supplier participation, which improves our chances of winning small bids from Medicare.  As a supplier in the Medicare program, we are required to meet and adhere to certain standards set by Medicare.

We also participate in the Ohio Medicaid program.  Our agreement with the Ohio Department of Jobs and Family Services expires on July 31, 2020 at which time we must apply for a new agreement.

Our Business Strategy

We are attempting to grow our revenue and increase our market share in our primary market, which is the Mahoning Valley with an estimated population in excess of 900,000 persons.  In addition to continuing our marketing activities in the Mahoning Valley, we intend to enhance our website to cater to patients located both inside and outside of our primary market area who might be interested in looking for better prices on certain equipment or supplies.  These persons would not be buying products because of physician referrals or under their health insurance policies.  Instead, they would merely be buying products online and paying with a credit card.

In 2012, we submitted bids in Medicare's Round 2 of competitive bidding.  In addition to our local Youngstown-Warren market area, we also submitted bids in four additional Ohio markets of Akron, Columbus, Dayton and Toledo.  We won the bid for our local market area for wheel chairs, enteral tube feeding, and pressure reduction surfaces.  The next round of bidding has been postponed until the new administration in Washington D.C. decides on how they are going to proceed.

We are also attempting to increase our private pay business because of the continuing reduction in Medicare reimbursement rates.  We offer the same home medical equipment and supplies to private pay customers that we offer to Medicare and Medicaid customers.  Our private pay customers include persons who have private (non-government) health insurance and persons who have no insurance or are buying something that is not covered by their insurance policy.  In this regard, we are contacting home care coordinators from private insurance companies and Bureau of Worker's Compensation in order to gain additional referrals. The amount of revenue earned from each classification as a percent of total revenues is as follows:

   
December 31,
 
   
2017
   
2016
 
Medicare
   
38
%
   
39
%
Medicaid
   
14
%
   
13
%
Private pay/private insurance
   
47
%
   
45
%
Other
   
1
%
   
3
%
Total
   
100
%
   
100
%


We do not manufacture any of the products and supplies that we sell to our customers.  We do not have exclusive relationships with any of these suppliers/manufacturers.  When the products we sell come with warranties, we are usually the person who the customer contacts when they have any kind of issue covered by a warranty.  We then go to the manufacturer and order the part needed or otherwise take care of the problem.  We do not warranty any products ourselves.

 
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We are also attempting to increase our exposure to assisted living facilities, nursing homes, and acute rehabilitation facilities in order to gain additional referrals.  We have experienced some success due to recent marketing efforts in these areas.  We will continue to provide in-service education programs to the staff of these facilities in order to make them aware of the services we are able to provide for their patients.  We would not need any additional level of accreditation to make sales to patients in these facilities.

We are always evaluating our ability to provide equipment and services to our patients and trying to improve wherever we can.  We are not operating close to our capacity and we have room for substantial growth without needing to add any significant overhead.

Organization and Operations

Organization.  Our only facility is our office/showroom located at 4120 Boardman-Canfield Road in Canfield, Ohio, about eight miles southwest of Youngstown, Ohio.  From this location we deliver our home healthcare products and services to patients in their homes and to other care sites using our delivery vehicles and our employees.

Payors.  We derive substantially all of our revenues from third-party payors, including private insurers, Medicare, Medicaid, and managed care organizations.  For the year ended December 31, 2017, approximately 52% of our net revenues were derived from Medicare and Medicaid.  Generally, each third-party payor has specific requirements, which must be met before claim submission will result in payment.  We have procedures in place to manage the claims submission process, including verification procedures to facilitate complete and accurate documentation.  Notwithstanding these measures, violation of these requirements may still occur and could result in the termination of a contract with a payor, the repayment of amounts previously received, or other potentially significant liability.  When the third-party payor is a governmental entity, violations of these requirements could subject us to civil, administrative, and criminal enforcement actions.  We are subject to periodic audits by Medicare and Medicaid, the results of which have not identified any violations by us of these governmental entities' claim submission requirements.

Medicare Claims.  Most Medicare claims are paid within 30 to 60 days of submission. High dollar claims such as power chairs and pressure reduction surfaces require increased scrutiny by Medicare.  Such high dollar claims frequently are singled out for pre-payment audits, which require all hard copy documentation of the patient's condition by the physician be sent in to Medicare prior to receiving payment.  These claims take a minimum of 60 days to process and denials must be appealed.  All subsequent claims to Medicare for rental payments for the denied equipment continue to be denied until the appeal process is finished.  All of these claims require additional time to be completed and sometimes require phone calls to patients and doctors to reconcile.  Management is constantly reviewing unpaid claims to determine their status and claims are not written off until all attempts to collect payment from Medicare have been exhausted.  We historically write off approximately 5% of Medicare payments due to unsuccessful collection attempts.

Medicaid Claims.  Based on our results for the last three years, approximately 70% of our Medicaid claims are paid within 30 days.  Any claims not paid within 30 days usually have a billing error that has not been resolved by management and end up getting resolved and paid within an additional 30 to 60 days.

Self-pay Claims.  Approximately 9% of our business during the year ended December 31, 2017 was comprised of self-pay business.  This business represents persons who come into our store and purchase items not covered by insurance and patients who already may be purchasing something from us that is covered by insurance and they desire to purchase something additional that is not covered by insurance.  Some of these customers pay for their product at the time of purchase and we send or deliver invoices to the others.  These invoices request payment on receipt of the invoice.  We consider these receivables delinquent once they are 180 days late.  We rely on our past collection experience with other patients for similar or different products to determine if any of such receivables are still collectible.  At December 31, 2017, we determined that no allowance for such items was necessary.

With respect to our claims submitted to third party payors, our billing system generates contractual adjustments based on fee schedules for the patient's insurance plan for each claim.

 
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Receivables Management.  We operate in an environment with complex requirements governing billing and reimbursement for our products and services.  We are expanding our use of technology in areas such as electronic claims submission and electronic funds transfer whenever we can to more efficiently process business transactions.  This use of technology can expedite claims processing and reduce the administrative cost associated with this activity for both us and our customers/payors.  Our policy is to collect co-payments from the patient or applicable secondary payor.  In the absence of a secondary payor, we generally require the co-payment at the time the patient is initially established with the product/service.  Subsequent months' co-payments are billed to the patient.

With respect to rentals of power chairs, once initial delivery of rental equipment is made to the patient, a monthly billing cycle is established based on the initial date of delivery.  The Company recognizes rental revenue ratably over the 13-month service period.  Routine maintenance and servicing of the equipment is the responsibility of the Company.

Marketing

We market our products and services primarily to physicians, discharge planners for hospitals and rehab facilities, nursing services, companies that provide home care companions and aides, home health agencies, and case managers.  Our marketing is primarily done by our President who has developed relationships with many of the persons to whom we market in the course of his dealings with prior patients who purchased our products or services over the past 25 years that we have been in business.  Most of our marketing consists of face-to-face meetings and in-service education with the staff at facilities to which we provide services.  We also provide educational pamphlets and product specific brochures to go along with marketing materials such as pens, scratch pads, calendars, and prescription pads.

One of the marketing steps we have taken is to be accredited by The Joint Commission, which is a nationally recognized organization that develops standards for various healthcare industry segments and monitors compliance with those standards through voluntary surveys of participating providers.  We have been accredited by The Joint Commission since 2008, with on-site accreditation renewal every three years and online recertification every year.  As the home healthcare industry has grown and accreditation has become a mandatory requirement for Medicare DMEPOS providers, the need for objective quality measurements has increased.  Accreditation is also widely considered a prerequisite for entering into contracts with managed care organizations and is required for Medicare competitive bidding.  Because accreditation is expensive and time consuming, not all providers choose to undergo the process.

Sales

Our President has primary responsibility for generating new referrals and for maintaining existing relationships for our products and services.  Our customers are typically the patients who purchase and utilize our products and services, but these patients are usually referred to us by physicians and their staffs, the discharge planners in hospitals and rehab facilities, nursing services and services that provide home care companions, and aides.  We have several rehabilitation facilities that refer a significant amount of patients to us that account for in excess of 25% of our gross revenues.  These facilities include Park Vista Rehabilitation, Sunrise Senior Living, and Whispering Pines Village Assisted & Independent Living.  However, these facilities also refer business to other providers.

 
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Website

We currently have a website which shows pictures of most of the products we sell with links to the manufacturers/suppliers of the products.  This allows viewers to obtain more information on the products.  The website is not designed to be used for online sales, and instead it is used more to show new or existing patients what products we can obtain and sell to them.  There is also no product pricing on the website.

We intend to enhance this website so that online sales can be made on the website once we have funding available.  We intend to contract with a leading web store builder program that offers a wealth of features to expand our business and provide support as our business grows.  This program will make it easy to launch and maintain our web store.  We hope to build a state-of-the-art e-commerce site that reflects our brands and puts our Company on a fast track to leveraging the sales opportunities on the Internet.  This whole process could be accomplished in only a manner of weeks once funding is available, and will not require the purchase of new computers or software licenses, or hiring of additional staff.

Competition

The segment of the healthcare market in which we compete is highly competitive.  In our line of products and services, there are a limited number of national providers and numerous regional and local providers.  The competitive factors most important in our local market are:

1.
Reputation with referral sources, including local physicians and hospital-based professionals;
2.
Price of products and services;
3.
Accessibility and overall ease of doing business;
4.
Quality of patient care and associated services;
5.
Range of home healthcare products and services;
6.
Ability to provide local maintenance service on products sold.

The primary national provider with which we compete is Apria Healthcare Group, Inc., and the primary regional providers with which we compete in Northeastern Ohio and Western Pennsylvania are Boardman Medical Supply, Inc., Community Home Medical, Inc., and Seeley Medical, Inc.  Depending on their business strategies and financial position, a very large percentage of our competitors have access to significantly greater financial and marketing resources than we do.  This may increase pricing pressure and limit our ability to maintain or increase our market share.

Government Regulation

We are subject to extensive government regulation, including numerous laws directed at regulating reimbursement of our products and services under various government programs and preventing fraud and abuse, as more fully described below. We maintain certain safeguards intended to reduce the likelihood that we will engage in conduct or enter into arrangements in violation of these restrictions.  All contracts with Insurance Companies are fairly standard and do not require legal opinions, and all our policies and procedures have been reviewed by The Joint Commission and meet Industry standards and requirements.  Federal and state laws require that we obtain facility and other regulatory licenses and that we enroll as a supplier with federal and state health programs.  Notwithstanding these measures, due to changes in and new interpretations of such laws and regulations, and changes in our business, among other factors, violations of these laws and regulations may still occur, which could subject us to civil and criminal enforcement actions; licensure revocation, suspension, or non-renewal; severe fines and penalties; and even the termination of our ability to provide services, including those provided under certain government programs such as Medicare and Medicaid.

Medicare and Medicaid Revenues.  In the years ended December 31, 2017 and 2016, approximately 52% and 52% of our net revenues were reimbursed by the Medicare and state Medicaid programs, respectively.  No other third-party payor represented more than 10% of our total net revenues for the year ended December 31, 2017.  The majority of our revenues are derived from sales of equipment and supplies we sell to patients for patient care under fee-for-service arrangements.   Fee-for-service is a payment model where services are unbundled and paid for separately, and occurs when doctors and other health care providers receive a fee for each service, such as an office visit, test, or procedure.  Since most of the manufacturers of the products we sell do not provide direct patient care, our services primarily involve providing in-home-delivery, set-up, and maintenance of home medical equipment.  All of these services are included in our service under a single claim, and cannot be billed separately.  We do not have ongoing arrangements with patients or medical providers, other than rental agreements that we have for wheel chairs and hospital beds.

 
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Medicare Reimbursement. There are a number of legislative and regulatory initiatives in Congress and at CMS that affect or may affect Medicare reimbursement policies for products and services we provide. Specifically, a number of important legislative changes that affect our business were included in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("MMA"); the Deficit Reduction Act of 2005 ("DRA"); MIPPA, which became law in 2008; and the comprehensive healthcare reform law signed in March 2010 ("the Reform Package").  These Acts and their implementing regulations and guidelines contain numerous provisions that are significant to us and continue to have an impact on our operations today.

DMEPOS Competitive Bidding. The MMA required implementation of a competitive bidding program for certain DMEPOS items. By statute, CMS was required to implement the DMEPOS competitive bidding program over time, with Round 1 of competition occurring in portions of 10 of the largest Metropolitan Statistical Areas ("MSAs") in 2007, launch of the program in 2008 and in 70 additional markets in 2009, and in additional markets after 2009.

Under the competitive bidding program, suppliers compete for the right to provide items to beneficiaries in a defined region. CMS selects contract suppliers that agree to receive as payment the "single payment amount" calculated by CMS after bids are submitted.  Bids are evaluated based on the supplier meeting eligibility and financial requirements, and contracts are awarded to Medicare suppliers that offer the best price and meet these standards.  CMS determines a supplier's financial viability based on certain financial ratios and the supplier's credit report and score.  Based on the information requested in the bid forms, we believe that the CMS may also consider other factors, such as the volume which the bidder is offering to provide as compared to the volume it previously provided, whether the bidder has the staff and facilities to handle the volume it is bidding for, and other miscellaneous items.

Every bidder sets forth its estimated capacity of each item for which it is bidding and it sets forth a bid price.  It is our understanding that the CMS will set a bid price as low as possible that will still result in a sufficient number of bidders, based on their estimated capacity, to supply the number of units the CMS estimates need to be provided for the particular market in the next year.  We also believe that the CMS will attempt to award up to 30% of the bids to small businesses.  There are no material costs associated with submitting bids and obtaining contracts.

In 2007 and 2008, CMS sought and reviewed bids and developed a plan to implement Round 1 on July 1, 2008.

The bidding process for Round 1 was controversial and complex, which resulted in deadline extensions. Moreover, CMS was subject to numerous lawsuits seeking a delay of Round 1. Then on July 15, 2008, MIPPA was enacted which, among other provisions, delayed the DMEPOS competitive bidding program by requiring that Round 1 competition commence in 2009, and required a number of program reforms prior to CMS re-launching the program. Changes mandated by MIPPA include requirements for the government to administer the program more transparently, exemption of certain DMEPOS products from the program, and a new implementation schedule.

In November 2010, CMS published a final rule containing several provisions related to the competitive bidding program. The rule included a list of 21 additional MSAs to be included in Round 2.


 
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Under MIPPA, the initial competitive bidding areas ("CBAs") and product categories subject to rebidding in the Round 1 Rebid are very similar to those of Round 1. However, MIPPA excludes Negative Pressure Wound Therapy Pumps and Related Supplies and Accessories as a competitive bidding product category in Round 1 and permanently excludes Group 3 Complex Rehabilitative Power Wheelchairs and Related Accessories as a competitive bidding product category.

Notwithstanding the changes MIPPA requires, competitive bidding imposes a significant risk to DMEPOS suppliers under the rules governing the program. If a DMEPOS supplier such as us operating in a CBA is not awarded a contract for that CBA, the supplier generally will not be able to bill and be reimbursed by Medicare for DMEPOS items supplied in that CBA for the time period covered by the competitive bidding program unless the supplier meets certain exceptions or acquires a winning bidder. Because the applicable statutes mandate financial savings from the competitive bidding program, a winning contract supplier will receive lower Medicare payment rates under competitive bidding than the otherwise applicable DMEPOS fee schedule rates. As competitive bidding is phased in across the country under the revised MIPPA and Reform Package implementation schedule, we believe that we will experience a reduction in reimbursement.  In addition, there is an increasing risk that the competitive bidding prices will become a benchmark for reimbursement from other payors, as evidenced by the Administration's fiscal budget proposal which would cap state Medicaid reimbursement levels at competitive bid rates using an as-yet-undetermined methodology. Neither MIPPA nor the Reform Package prevents CMS from adjusting prices for DMEPOS items in non-bid areas; however, before using its authority to adjust prices in non-bid areas, MIPPA requires that CMS issue a regulation that specifies the methodology to be used and consider how prices through competitive bidding compare to costs for those items and services in the non-bid areas.

The Reform Package also includes changes to the Medicare DMEPOS competitive bidding program. Significantly, Round 2 of the competitive bidding program has been expanded from 70 to 91 of the largest MSAs. In August 2011, CMS announced the product categories that would be included in Round 2.  Round 2 included the majority of the same product categories, but CMS expanded the program by, among other things, (i) combining standard power wheelchairs and manual wheelchairs into a single new product category, and (ii) expanding the Support Surfaces (Group 2 mattresses and overlays) category across all Round 2 markets.

On July 1, 2016, the Medicare fee schedule was reduced in non-competitive bid areas on certain DME items, but the new 2016 fee schedule is still higher than the competitive bid pricing in adjacent areas. In addition, efforts to repeal the competitive bidding program altogether or mandate significant program changes continue. In March 2011, the Fairness in Medicare Bidding Act of 2011 ("FIMBA") was introduced into the U.S. House of Representatives and referred to the House Subcommittee on Health. FIMBA would repeal the program without specifying a reduction in the industry's current reimbursement levels. Other efforts are underway by independent economists who seek to alter certain critical aspects of the program. Specifically, those efforts are designed to change the way in which CMS conducts the auction process itself, establishes the single payment rates, determines supplier capacity needed and related aspects which, if adopted by CMS in their entirety or in part, would change how Round 2 would be administered. We cannot predict whether these or other efforts to repeal or amend the program will be successful, or their potential impact on us.

We believe that our relationships with persons who refer business to us will allow us to maintain market share under Medicare competitive bidding. However, the bidding rules are complex and it is possible for bidders to be disqualified for technical reasons other than pricing. There is no guarantee that we will be selected as a winning contract supplier in any future phases of the program and be awarded competitive bidding contracts by CMS or that we will maintain or increase market share. Under the current competitive bidding regulations, if we are not selected as a winning contract supplier for a particular CBA, we will generally not be allowed to supply Medicare beneficiaries in the CBA with products subject to competitive bidding for the contract term of program, unless we elect to continue to service existing patients under the "grandfathering provision" of the program's final rule for certain products.  Because of our combination of both managed care and traditional business, we believe we can nevertheless maintain a favorable overall market position in a particular CBA even if we are not selected as a contract supplier.


 
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Enrollment and Accreditation of Durable Medical Equipment Suppliers; Surety Bond Requirements.  While we support the elimination of fraudulent suppliers, some of the CMS initiatives and developments with respect to the enrollment and accreditation of providers could impact our operations in the future. For example, all durable medical equipment providers who bill the Medicare program for DMEPOS services and products are required by MIPPA to be accredited. Although we currently are accredited, if we lose accreditation, that could have a material adverse effect on our results of operations, cash flow, and capital resources.

CMS also requires that all durable medical equipment providers who bill the Medicare program maintain a surety bond of $50,000 per National Provider Identifier ("NPI") number which Medicare has approved for billing privileges. We obtained the required surety bond for our location before the October 2009 deadline, and it is automatically renewed annually on August 1.

Other Issues.

Medical Necessity & Other Documentation Requirements.  In order to ensure that Medicare beneficiaries only receive medically necessary and appropriate items and services, the Medicare program has adopted a number of documentation requirements. For example, the DME MAC Supplier Manuals provide that clinical information from the "patient's medical record" is required to justify the initial and ongoing medical necessity for the provision of DME. Some DME MACs, CMS staff and government subcontractors have taken the position, among other things, that the "patient's medical record" refers not to documentation maintained by the DME supplier but instead to documentation maintained by the patient's physician, healthcare facility or other clinician, and that clinical information created by the DME supplier's personnel and confirmed by the patient's physician is not sufficient to establish medical necessity. It may be difficult, and sometimes impossible, for us to obtain documentation from other healthcare providers. Moreover, auditors' interpretations of these policies are inconsistent and subject to individual interpretation. This is then translated to individual supplier significant error rates and aggregated into a DMEPOS industry error rate, which is significantly higher than other Medicare provider/supplier types. High error rates lead to further audit activity and regulatory burdens. In fact, DME MACs have continued to conduct extensive pre-payment reviews across the DME industry and have determined a wide range of error rates. For example, error rates for CPAP claims have ranged from 50% to 80%. DME MACs have repeatedly cited medical necessity documentation insufficiencies as the primary reason for claim denials. If these or other burdensome positions are generally adopted by auditors, DME MACs, other contractors or CMS in administering the Medicare program, we would have the right to challenge these positions as being contrary to law. If these interpretations of the documentation requirements are ultimately upheld, however, it could result in our making significant refunds and other payments to Medicare and our future revenues from Medicare may be significantly reduced. We have adjusted certain operational policies to address the current expectations of Medicare and its contractors. We cannot predict the adverse impact, if any, these interpretations of the Medicare documentation requirements or our revised policies might have on our operations, cash flow, and capital resources, but such impact could be material.

The impact of changes in Medicare reimbursement that have been enacted to date are reflected in our results of operations for the applicable periods through December 31, 2017. We cannot estimate the combined possible impact of all legislative, regulatory and contemplated reimbursement changes that could have a material adverse effect on our results of operations, cash flow, and capital resources. Moreover, our estimates of the impact of certain of these changes appearing in this "Government Regulation" section are based on a number of assumptions and are subject to uncertainties and there can be no assurance that the actual impact was not or will not be different from our estimates. However, given the recent significant increases in industry audit volume and the increasing regulatory burdens associated with responding to those audits, it is likely that the negative pressures from legislative and regulatory changes will continue and accelerate.


 
10



Medicaid Reimbursement.  State Medicaid programs implement reimbursement policies for the items and services we provide that may or may not be similar to those of the Medicare program. Budget pressures on these state programs often result in pricing and coverage changes and extended payment practices that may have a detrimental impact on our operations and/or financial performance. States sometimes have interposed intermediaries to administer their Medicaid programs, or have adopted alternative pricing methodologies for certain drugs, biologicals, and home medical equipment under their Medicaid programs that reduce the level of reimbursement received by us without a corresponding offset or increase to compensate for the service costs incurred.  We periodically evaluate the possibility of stopping or reducing our Medicaid business in any state with reimbursement or administrative policies that make it difficult for us to safely care for patients or conduct operations profitably. Moreover, the Reform Package increases Medicaid enrollment over a number of years and imposes additional requirements on states which, combined with the current economic environment and state deficits, could further strain state budgets and therefore result in additional policy changes or rate reductions. The President's most recent budget proposal, would limit the amount state Medicaid programs pay for DMEPOS to be no higher than Medicare payment levels, including those impacted by Medicare competitive bidding. We cannot currently predict the adverse impact, if any, that any such change to or reduction in our Medicaid business might have on our operations, cash flow and capital resources, but such impact could be material. In addition, we cannot predict whether states will consider similar or other reimbursement reductions, whether or how healthcare reform provisions pertaining to Medicaid will ultimately be implemented or whether any such changes would have a material adverse effect on our results of operations, cash flow and capital resources.

HIPAA. The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") is comprised of a number of components pertaining to the privacy and security of certain protected health information ("PHI"), as well as the standard formatting of certain electronic health transactions. Many states have similar, but not identical, restrictions. Existing and any new laws or regulations have a significant effect on the manner in which we handle healthcare related data and communicate with payors. Among other provisions, the HITECH Act of the American Recovery and Reinvestment Act of 2009 ("ARRA") includes additional requirements related to the privacy and security of PHI, clarifies and increases penalties of HIPAA and provides State Attorneys General with HIPAA enforcement authority. We have adopted a number of policies and procedures to conform to HIPAA requirements, as modified by the HITECH Act of ARRA, throughout our operations, and we have educated our employees about these requirements.  We cannot, however, guarantee that we will not have a HIPAA privacy or data security concern in the future. We face potential administrative, civil and possible criminal sanctions if we do not comply with the existing or new laws and regulations dealing with the privacy and security of PHI. Imposition of any such sanctions could have a material adverse effect on our operations.

Enforcement of Healthcare Fraud and Abuse Laws. In recent years, the federal government has made a policy decision to significantly increase and accelerate the financial resources allocated to enforcing the healthcare fraud and abuse laws. Moreover, Congress adopted a number of additional provisions in the Reform Package that are designed to reduce healthcare fraud and abuse. In addition, private insurers and various state enforcement agencies have increased their level of scrutiny of healthcare claims in an effort to identify and prosecute fraudulent and abusive practices in the healthcare area. From time to time, we may be the subject of investigations or a party to additional litigation which alleges violations of law. If any of those matters were successfully asserted against us, there could be a material adverse effect on our business, financial position, results of operations or prospects.

Anti-Kickback Statutes. As a provider of services under the Medicare and Medicaid programs, we must comply with a provision of the federal Social Security Act, commonly known as the "federal anti-kickback statute." The federal anti-kickback statute prohibits the offer or receipt of any bribe, kickback, or rebate in return for the referral or arranging for the referral of patients, products or services covered by federal healthcare programs. Federal healthcare programs have been defined to include plans and programs that provide health benefits funded by the United States Government, including Medicare, Medicaid, and TRICARE (formerly known as the Civilian Health and Medical Program of the Uniformed Services or CHAMPUS), among others. Some courts and the OIG interpret the statute to cover any arrangement where even one purpose of the remuneration is to influence referrals. Violations of the federal anti-kickback statute may result in civil and criminal penalties and exclusion from participation in federal healthcare programs.

 
11



Some states have enacted statutes and regulations similar to the federal anti-kickback statute, but which apply not only to the federal healthcare programs, but also to any payor source of the patient. These state laws may contain exceptions and safe harbors that are different from those of the federal law and that may vary from state to state.   The states in which we operate have laws that prohibit fee-splitting arrangements between healthcare providers, if such arrangements are designed to induce or encourage the referral of patients to a particular provider.

Physician Self-Referral. Certain provisions of the Omnibus Budget Reconciliation Act of 1993 (the "Stark Law") prohibit healthcare providers such as us, subject to certain exceptions, from submitting claims to the Medicare and Medicaid programs for designated health services if we have a financial relationship with the physician making the referral for such services or with a member of such physician's immediate family. The term "designated health services" includes several services commonly performed or supplied by us, including durable medical equipment and home health services. In addition, "financial relationship" is broadly defined to include any ownership or investment interest or compensation arrangement pursuant to which a physician receives remuneration from the provider at issue. The Stark Law prohibition applies regardless of the reasons for the financial relationship and the referral; and therefore, unlike the federal anti-kickback statute, an intent to violate the law is not required.

Violations of the Stark Law may result in loss of Medicare and Medicaid reimbursement, civil penalties, and exclusion from participation in the Medicare and Medicaid programs.

In addition, Ohio, Pennsylvania, and West Virginia have similar prohibitions against physician self-referrals, which may not necessarily be limited to Medicare or Medicaid services and may not include the same statutory and regulatory exceptions found in the Stark Law.

False Claims. The federal False Claims Act imposes civil and criminal liability on individuals or entities that submit false or fraudulent claims for payment to the government. Violations of the federal civil False Claims Act may result in treble damages, civil monetary penalties, and exclusion from the Medicare, Medicaid, and other federally funded healthcare programs. If certain criteria are satisfied, the federal civil False Claims Act allows a private individual to bring a qui tam suit (i.e., whistleblower law suit) on behalf of the government and, if the case is successful, to share in any recovery. Federal False Claims Act suits brought directly by the government or private individuals against healthcare providers, like us, are increasingly common and are expected to continue to increase.

The federal government has used the federal False Claims Act to prosecute a wide variety of alleged false claims and fraud allegedly perpetrated against Medicare and state healthcare programs. The government and a number of courts also have taken the position that claims presented in violation of certain other statutes, including the federal anti-kickback statute or the Stark Law, can be considered a violation of the federal False Claims Act, based on the theory that a provider impliedly certifies compliance with all applicable laws, regulations, and other rules when submitting claims for reimbursement.

On May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 ("FERA"). Among other things, FERA modifies the federal False Claims Act by expanding liability to contractors and subcontractors who do not directly present claims to the federal government. FERA also expanded the False Claims Act liability for what is referred to as a "reverse false claim" by explicitly making it unlawful to knowingly conceal or knowingly and improperly avoid or decrease an obligation owed to the federal government.

Ohio and Pennsylvania have enacted false claims acts that are similar to the federal False Claims Act.  In addition, there is a corresponding increase in state-initiated false claims enforcement efforts.

 
12



Other Fraud and Abuse Laws. HIPAA created, in part, two new federal crimes: "Healthcare Fraud" and "False Statements Relating to Healthcare Matters." The Healthcare Fraud statute prohibits executing a knowing and willful scheme or artifice to defraud any healthcare benefit program.  A violation of this statute is a felony and may result in fines and/or imprisonment. The False Statements statute prohibits knowingly and willfully falsifying, concealing, or covering up a material fact by any trick, scheme, or device or making any materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services. A violation of this statute is a felony and may result in fines and/or imprisonment.

The increased public focus on waste, fraud, and abuse, and their related cost to society will likely result in additional Congressional hearings, CMS regulatory changes, and/or new laws. The Reform Package also provides for new regulatory authority, and additional fines and penalties. More recently, additional legislation has been proposed in the U.S. Senate which would further expand the government's oversight of the healthcare industry via new regulatory authority. In addition, a Senate bill released in June 2011 (S. 1251) would require pre-payment review of all claims for durable medical equipment that are at high risk for fraud and abuse. At this time, we cannot predict whether these or other reforms will ultimately become law, or the impact of such reforms on our business operations and financial performance.

Facility Licensure.  We only have one facility and it is located in Canfield, Ohio.  We are regulated by and licensed with the Ohio Respiratory Care Board, and we also have a home medical equipment vendor's license from the State of Ohio.  We are committed to complying with all applicable licensing requirements.

Healthcare Reform. Economic, political, and regulatory influences are causing fundamental changes in the healthcare industry in the United States. Various healthcare reform proposals are formulated and proposed by the legislative and administrative branches of the federal government on a regular basis.  In addition, Ohio and Pennsylvania periodically consider various healthcare reform proposals. Even with the passage of the Reform Package, we anticipate that federal and state governments will continue to review and assess alternative healthcare delivery systems and payment methodologies and public debate of these issues will continue in the future.

The elections since the passage of the Reform Package changed the composition of Congress and affected certain priorities related to healthcare. Congress is debating the potential to repeal or amend the Reform Package altogether. A number of other parties, including some State governments, are challenging the Reform Package, and we cannot predict the outcome of such challenges. Changes in the law or new interpretations of existing laws can have a substantial effect on permissible activities, the relative costs associated with doing business in the healthcare industry and the amount of reimbursement by governmental and other third-party payors. Also, the government has begun to promulgate the implementing of rules and regulations of the Reform Package, including additional requirements related to our business and that of our customers. Until those rules are more clearly understood, and due to uncertainties regarding the ultimate features of additional reform initiatives and their enactment and implementation over the next few years, we cannot predict which, if any, of such reform proposals will be adopted, or when they may be adopted, or that any such reforms will not have a material adverse effect on our results of operations, cash flow, capital resources, and liquidity.

Employees

As of December 31, 2017, we had four full-time and five part-time employees.  None of our employees were represented by a labor union or other labor organization.

 
13



Item 1A.   Risk Factors.

As a smaller reporting company, we are not required to provide the information required by this item.

Item 1B.  Unresolved Staff Comments.

None.

Item 2.    Properties.

Our offices are located at 4120 Boardman-Canfield Road, Canfield, Ohio 44406.  We rent our offices pursuant to a three-year lease extension which expires in June 2020.  Our monthly rent is approximately $2,700, plus costs.

Item 3.    Legal Proceedings.

No legal proceedings are currently pending or threatened to the best of our knowledge.

Item 4.    Mine Safety Disclosures.

Not applicable.
 
14



PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Price Ranges of Common Stock

Our stock has not yet commenced trading.

Aggregate Number of Holders of Common Stock

The number of record holders of our common stock on December 31, 2017 was approximately 140.

Dividends

Holders of our common stock are entitled to receive dividends as may be declared from time to time by our Board of Directors. We have not paid any cash dividends on our common stock and do not anticipate paying any in the foreseeable future. Management's current policy is to retain earnings, if any, for use in our operations and for expansion of the business.

Securities Authorized for Issuance under Equity Compensation Plans

None.

Equity Compensation Plan Information

We do not have any compensation plans or stock option plans.

Recent Sales of Unregistered Securities

In January 2017, the Company received from an independent investor net proceeds of $35,000 from the sale of 350,000 shares of no-par value common stock at $0.10 per share.  

In March and December 2016, the Company received from independent investors net proceeds of $90,000 from the sale of 900,000 shares of no-par value common stock at $0.10 per share.  

Item 6.    Selected Financial Data.

This item is not required for Smaller Reporting Companies.

Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the Financial Statements and Notes to Financial Statements filed herein.

 
15



Business Overview

We primarily provide services to the rehabilitation market, which consists primarily of home medical equipment and supplies.  More than 50% of our revenues are derived from the sale and rental of durable home medical equipment including such items as wheeled walkers, manual and power wheelchairs, hospital beds, ramps, bedside commodes, and miscellaneous bathroom equipment.  The balance of our revenue is from the sale of various home medical supplies including diabetic testing, incontinence, ostomy, wound care, and catheter care.  Our emphasis is on helping patients with mobility related limitations, but our overall business is aimed at helping patients remain in their homes instead of having to go to hospitals, rehab centers, and other similar facilities.  Most of the equipment and supplies that we sell are prescribed by a physician as part of an overall care plan.

Results of Operation for the year ended December 31, 2017 as compared to the year ended December 31, 2016

Revenues for the year ended December 31, 2017 were $895,346 as compared to the revenues of $1,012,290 for the year ended December 31, 2016.  The decrease in sales is primarily due to the fact that a significant number of our tube feeding patients passed away, and our complex rehab powerchair sales decreased during the last two quarters of 2017.

Cost of goods sold for the year ended December 31, 2017 were $440,417 as compared to cost of goods sold for the year ended December 31, 2016 of $484,908.  The decrease in the latest year was due to the decrease in the sales volume, and as the sales volume decreased, the cost of goods sold proportionately decreased.

Operating expenses for the year ended December 31, 2017 were $612,133 as compared to $577,623 for the year ended December 31, 2016.  The increase in the latest one year period was primarily due to the net effect of a $21,151 increase in salaries and wages, a $25,891 decrease in professional fees, a $16,157 increase in depreciation expense, and a $26,474 increase in our selling, general and administrative fees.

The net loss for the year ended December 31, 2017 was $147,532 as compared to a net loss of $48,847 for the year ended December 31, 2016.  The primary reasons for the increase in our net loss were the increase in salaries and wages and the increase in selling, general and administrative fees, coupled with our decrease in revenues.


 

16



Liquidity and Capital Resources

As of December 31, 2017, we had a working capital deficit of $105,491 compared to working capital of $5,548 as of December 31, 2016.

Net cash used for operating activities during the year ended December 31, 2017 was $17,597 as compared to net cash provided by operating activities in the year ended December 31, 2016 of $32,113.  The primary reason for the change in our cash related to operating activities was in increase in our overall net loss for the year ended December 31, 2017.

Net cash used for investing activities during the year ended December 31, 2017 was $42,228 which represented $58,275 used for the purchase of equipment which was offset by $16,047 received from the sale of equipment as compared to net cash used for investing activities of $52,076 for the year ended December 31, 2016, which represented $58,423 used for the purchase of equipment and $6,347 received from the sale of equipment.

Net cash provided by financing activities during the year ended December 31, 2017 was $16,087 as compared to $74,279 provided by financing activities in the year ended December 31, 2016.  The Company sold shares of its common stock during the years ended December 31, 2017 and 2016 to raise $35,000 and $90,000, respectively, to help pay for the costs associated with being a public company.  The Company also paid $18,913 and $15,721 in debt principal during the years ended December 31, 2017 and 2016, respectively.

We believe that our recent public and private offerings will provide sufficient capital in the short term for our current level of operations.  Additional resources will be needed to build our web store and to otherwise increase advertising and marketing.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Policies and Estimates

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue recognition

Revenue from product sales is recognized subsequent to a patient (customer) ordering a product at an agreed upon price, and when delivery has occurred, and collectability is reasonably assured. A purchase arrangement is evidenced by a written order, with delivery considered as made after physical customer acceptance. Although rare, defective products may be returned, with other return issues considered on a case by case basis. Services such as periodic scheduled deliveries are contracted in writing, and generally billed monthly. Any service revenue earned by the Company for services such as safety and set up consulting or claims processing is recorded after the service is performed. Rental of durable home medical equipment is evidenced by written contract, with revenue recognized when rent is earned.

Accounts receivable

The majority of the Company's revenues are received from Medicare, Medicaid, and private insurance companies.  As such, the Company records revenues at allowable amounts, net of estimated allowances and discounts based on contracted prices and historical collection rates.  The Company reviews accounts receivable periodically for collectability and establishes an allowance for doubtful accounts and records bad debt expense when deemed necessary. The Company has determined that at December 31, 2017 and 2016 no allowance for bad debts was necessary.

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk.

Not applicable for smaller reporting companies.

Item 8.    Financial Statements and Supplementary Data.



 
17


CANFIELD MEDICAL SUPPLY, INC.
Financial Statements

TABLE OF CONTENTS


 
Page
   
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
F-1
   
FINANCIAL STATEMENTS
 
   
     Balance Sheets
F-3
     Statements of Operations
F-4
     Statements of Changes in Stockholders' Deficit
F-5
     Statements of Cash Flows
F-6
     Notes to Financial Statements
F-7 - F-13


 
18


1438 N. HIGHWAY 89, STE. 120
FARMINGTON, UTAH  84025
 PH (801) 447-9572     FAX (801) 447-9578
 
 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Canfield Medical Supply, Inc.
Canfield, OH

Opinion on the Financial Statements
We have audited the accompanying balance sheet of Canfield Medical Supply, Inc. (the Company) as of December 31, 2017, and the related statements of operations, stockholders' equity (deficit), and cash flows for the year then ended, and the notes thereto (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has suffered recurring losses and has working capital and stockholders' equity deficits, which raise substantial doubt about its ability to continue as a going concern.  Management's plans regarding these matters are described in Note 7. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/S/:  Pinnacle Accountancy Group of Utah, PLLC
Pinnacle Accountancy Group of Utah, PLLC

We have served as the Company's auditor since 2018.
Farmington, UT
March 29, 2018
 
F-1


 

PRITCHETT,SILER & HARDY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
A PROFESSIONAL CORPORATION
515 S 400 E, STE 100
SALT LAKE CITY, UT 84111
_______________________________________________________________________________
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors
Canfield Medical Supply, Inc.
Canfield, Ohio

We have audited the accompanying balance sheet of Canfield Medical Supply, Inc. (the Company) as of December 31, 2016, and the related statements of operations, stockholders' equity (deficit), and cash flows for the year then ended.  The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 7 to the financial statements, the Company has incurred losses since its inception, has a working capital deficit, and has not yet established profitable operations.  These factors raise substantial doubt about the ability of the Company to continue as a going concern.  Management's plans in regards to these matters are also described in Note 7.  These financial statements do not include any adjustments that might result from the outcome of these uncertainties.

/s/ Pritchett, Siler & Hardy, P.C.

PRITCHETT, SILER & HARDY, P.C.

Farmington, Utah
March 27, 2017



F-2



CANFIELD MEDICAL SUPPLY, INC.
 
BALANCE SHEETS
 
             
             
     
December 31,
   
December 31,
 
ASSETS
 
2017
   
2016
 
             
             
Current Assets
           
 Cash
 
$
17,921
   
$
61,659
 
Accounts receivable
   
151,262
     
206,254
 
Inventory
   
25,209
     
25,231
 
Total Current Assets
   
194,392
     
293,144
 
                 
Equipment, net of accumulated depreciation of $93,158 and $76,197
   
46,636
     
62,190
 
         Total Assets
 
$
241,028
   
$
355,334
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
               
                 
Current Liabilities
               
Accounts payable and accrued liabilities
 
$
226,210
   
$
209,069
 
Line of credit
   
62,378
     
70,373
 
Current portion of long-term debt
   
11,296
     
10,918
 
Total Current Liabilities
   
299,884
     
290,360
 
                 
Long-term debt
   
14,009
     
25,305
 
          Total Liabilities
   
313,893
     
315,665
 
                 
Stockholders' Equity (Deficit)
               
Preferred stock, no par value; 5,000,000 shares authorized; no shares
               
 issued and outstanding
   
-
     
-
 
Common stock, no par value; 100,000,000 shares authorized;
               
11,277,200 (December 31, 2017) and 10,927,200 (December 31, 2016) shares
         
 issued and outstanding
   
243,515
     
208,515
 
Accumulated deficit
   
(316,380
)
   
(168,846
)
Total Stockholders' Equity (Deficit)
   
(72,865
)
   
39,669
 
Total Liabilities and Stockholders' Equity (Deficit)
 
$
241,028
   
$
355,334
 
                 
                 
The accompanying footnotes are an integral part of these financial statements.
 
 
F-3


CANFIELD MEDICAL SUPPLY, INC.
STATEMENTS OF OPERATIONS
 
    
 
 
    
Year Ended
   
Year Ended
 
    
December 31, 2017
   
December 31, 2016
 
             
             
Sales (net of returns)
 
$
895,346
   
$
1,012,291
 
Cost of goods sold
   
440,417
     
484,908
 
Gross profit
   
454,929
     
527,383
 
                 
Operating expenses:
               
Salaries and wages
   
319,519
     
298,368
 
Professional fees
   
58,167
     
87,198
 
Depreciation
   
71,917
     
55,760
 
Other selling, general and administrative
   
162,532
     
136,058
 
    Total operating expenses
   
612,135
     
577,384
 
                 
Income (loss) from operations
   
(157,206
)
   
(50,001
)
                 
Other income (expense):
               
Interest expense
   
(4,463
)
   
(4,671
)
Gain on sale of fixed assets
   
14,135
     
5,826
 
  Total other income (expense)
   
9,672
     
1,155
 
                 
Income (loss) before provision for income taxes
   
(147,534
)
   
(48,846
)
Provision for income tax
   
-
     
-
 
                 
Net income (loss)
 
$
(147,534
)
 
$
(48,846
)
                 
Net income (loss) per share (basic and fully diluted)
 
$
(0.01
)
 
$
(0.00
)
                 
Weighted average number of common shares outstanding
   
11,267,611
     
10,484,113
 
 
The accompanying footnotes are an integral part of these financial statements.
 
 
F-4

 
CANFIELD MEDICAL SUPPLY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
 
 
 
   
Common Stock (No Par)
   
Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Deficit
   
Equity (Deficit)
 
                         
                         
Balances at December 31, 2015
   
10,027,200
   
$
118,515
   
$
(120,000
)
 
$
(1,485
)
                                 
Sales of common stock
   
900,000
     
90,000
     
-
     
90,000
 
                                 
Net income (loss) for the year
   
-
     
-
     
(48,846
)
   
(48,846
)
                                 
Balances at December 31, 2016
   
10,927,200
   
$
208,515
   
$
(168,846
)
 
$
39,669
 
                                 
Sales of common stock
   
350,000
     
35,000
     
-
     
35,000
 
                                 
Net income (loss) for the year
   
-
     
-
     
(147,534
)
   
(147,534
)
                                 
Balances at December 31, 2017
   
11,277,200
   
$
243,515
   
$
(316,380
)
 
$
(72,865
)
                                 
 
 
The accompanying footnotes are an integral part of these financial statements.
 
 
F-5

CANFIELD MEDICAL SUPPLY, INC.
STATEMENTS OF CASH FLOWS
 
             
    
December 31,
   
December 31,
 
   
2017
   
2016
 
             
Cash Flows From Operating Activities:
           
Net income (loss)
 
$
(147,534
)
 
$
(48,846
)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
         
Gain on disposal of fixed assets
   
(14,135
)
   
(5,826
)
Depreciation
   
71,917
     
55,760
 
Changes in current assets and liabilities
               
Decrease (Increase) in accounts receivable
   
54,992
     
(39,191
)
Decrease (Increase) in inventory
   
22
     
(3,642
)
Increase in accounts payable and accrued liabilities
   
17,141
     
73,858
 
     Net cash provided by (used for) operating activities
   
(17,597
)
   
32,113
 
                 
Cash Flows From Investing Activities:
               
Proceeds from sale of fixed assets
   
16,047
     
6,348
 
Purchases of property and equipment
   
(58,275
)
   
(58,424
)
     Net cash provided by (used for) investing activities
   
(42,228
)
   
(52,076
)
                 
Cash Flows From Financing Activities:
               
Net payments on line of credit
   
(7,995
)
   
(6,877
)
Payments on long-term debt
   
(10,918
)
   
(8,844
)
Proceeds from sales of common stock.
   
35,000
     
90,000
 
       Net cash provided by (used for) financing activities
   
16,087
     
74,279
 
                 
Net Increase (Decrease) in Cash
   
(43,738
)
   
54,316
 
Cash At The Beginning Of The Period
   
61,659
     
7,343
 
Cash At The End Of The Period
 
$
17,921
   
$
61,659
 
                 
Schedule Of Non-Cash Investing And Financing Activities
               
Purchase of equipment with long-term debt
 
$
-
   
$
16,295
 
                 
Supplemental Disclosure
               
Cash paid for interest
 
$
4,463
   
$
4,671
 
Cash paid for income taxes
 
$
-
   
$
-
 
 
 
The accompanying footnotes are an integral part of these financial statements.
 
F-6

CANFIELD MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2017 and 2016

NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Canfield Medical Supply, Inc. (the "Company"), was incorporated in the State of Ohio on September 3, 1992, and changed domicile to Colorado on April 18, 2012. The Company is in the business of home health services, primarily the selling of durable medical equipment and medical supplies to the public, nursing homes, hospitals and other end users.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents

The Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents.

Accounts receivable

The majority of the Company's revenues are received from Medicare, Medicaid, and private insurance companies.  As such, the Company records revenues at allowable amounts, net of estimated allowances and discounts based on contracted prices and historical collection rates.  The Company reviews accounts receivable periodically for collectability and establishes an allowance for doubtful accounts and records bad debt expense when deemed necessary. The Company has determined that at December 31, 2017 and 2016 no allowance for bad debts was necessary.

Property and equipment

Property and equipment are recorded at cost and depreciated under straight line methods over each item's estimated useful life.
 
Inventory

The Company carries inventory of durable medical equipment and medical supplies for resale.  Inventory is stated at cost and accounted for on a first–in first-out basis.


F-7

CANFIELD MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2017 and 2016


NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Revenue recognition

Revenue from product sales is recognized subsequent to a patient (customer) ordering a product at an agreed upon price, and when delivery has occurred, and collectability is reasonably assured. A purchase arrangement is evidenced by a written order, with delivery considered as made after physical customer acceptance. Although rare, defective products may be returned, with other return issues considered on a case by case basis. Services such as periodic scheduled deliveries are contracted in writing, and generally billed monthly. Any service revenue earned by the Company for services such as safety and set up consulting or claims processing is recorded after the service is performed. Rental of durable home medical equipment is evidenced by written contract, with revenue recognized when rent is earned.

The Company's primary source of revenue is reimbursement from Medicare, Medicaid, and private insurance companies for the procurement and sale of medical equipment and supplies to patients.  The amount of revenue earned from each classification as a percent of total revenues is as follows:

   
December 31,
 
   
2017
   
2016
 
Medicare
   
38
%
   
39
%
Medicaid
   
14
%
   
13
%
Private pay/private insurance
   
47
%
   
45
%
Other
   
1
%
   
3
%
Total
   
100
%
   
100
%


Advertising costs

Advertising costs are expensed as incurred. The Company had advertising costs in 2017 and 2016 of $7,074 and $4,912, respectively.

Income tax

The Company accounts for income taxes pursuant to ASC 740. Under ASC 740, deferred taxes are provided for using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.


 
F-8


CANFIELD MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2017 and 2016

NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Income tax

Through February 2012, the Company was an S-Corporation for income tax purposes, and therefore a pass-through entity paying no income tax at the corporate level.  The Company had no material loss carryforwards as of December 31, 2011.  Included in the Company's accumulated deficit from February 2012 forward is approximately $99,000 in undistributed S-Corporation losses.

The Company has evaluated Staff Accounting Bulletin No. 118 regarding the impact of the decreased tax rates of the Tax Cuts & Jobs Act, and have presented the Federal tax provision, deferred tax asset, and valuation allowance using the new rates adjusted in the period of enactment.  At December 31, 2017 and 2016 the Company had net operating loss carryforwards (NOL's) of approximately $220,000 and $70,000 respectively, which may be applied against future taxable income and which expire beginning in 2034.  However, if certain substantial changes in the Company's ownership should occur, there could be an annual limitation on the amount of net operating loss carryforwards that can be utilized.  The amount of and ultimate realization of the benefits from the operating loss carryforwards for income tax purposes is dependent, in part, upon the tax laws in effect, the future earnings of the Company, and other future events, the effects of which cannot be determined.  Because of the uncertainty surrounding the realization of the loss carryforwards, the Company has established a valuation allowance equal to the tax effect (2017: 26% - 21% federal and 5% state; 2016: 35% - 30% federal and 5% state) of the loss carryforwards of approximately $57,200 and $24,500 at December 31, 2017 and 2016, respectively, and therefore, no deferred tax asset has been recognized for the loss carryforwards.  The change in valuation allowance is approximately $32,700 and $17,150 for the periods ended December 31, 2017 and 2016, respectively.  The tax effect of remaining NOL's and resulting deferred tax assets of $220,000 remain fully reserved by valuation allowance, due to continued uncertainty as to their utilization.

Net income (loss) per share

The net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of common outstanding. Warrants, stock options, and common stock issuable upon the conversion of the Company's preferred stock (if any), are not included in the computation if the effect would be anti-dilutive and would increase the earnings or decrease loss per share.

There were no potentially dilutive debt or equity instruments issued or outstanding during the twelve months ended December 31, 2017 or 2016.
 
Financial Instruments

The carrying value of the Company's financial instruments, as reported in the accompanying balance sheets, approximates fair value.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents.  The Company places its cash and cash equivalents at well-known financial institutions, where at times, such balances may exceed FDIC insurance limits.

The Company receives a significant amount of its revenues in reimbursements from Medicare and Medicaid.  During the years ended December 31, 2017 and 2016, the Company received 52% and 52%, respectively, of its net revenues from Medicare and Medicaid.  The Company is able to obtain reimbursements through competitive bidding processes, and there is no guarantee that the Company will be selected as a winning contract supplier under future bidding rounds.


 
F-9


CANFIELD MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2017 and 2016


NOTE 1.  ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):


Long-Lived Assets

In accordance with ASC 350, the Company regularly reviews the carrying value of intangible and other long-lived assets for the existence of facts or circumstances, both internally and externally, that suggest impairment. If impairment testing indicates a lack of recoverability, an impairment loss is recognized by the Company if the carrying amount of a long-lived asset exceeds its fair value.

Products and services, geographic areas and major customers

The Company's business of medical supply sales constitutes one operating segment. All revenues each year were domestic and to external customers.


Other selling, general and administrative expenses

Other selling, general and administrative expenses included the following:
 
 
 
December 31,
 
 
 
2017
   
2016
 
Rent
 
$
27,497
   
$
27,492
 
Office expenses
   
54,382
     
43,107
 
Other SG&A
   
80,653
     
65,459
 
Total
   
162,532
     
136,058
 
 

 
 

F-10

CANFIELD MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2017 and 2016


NOTE 2.  EQUIPMENT

 
Property and equipment are recorded at cost and consist of the following:
 
   
December 31,
 
    2017    
2017
 
             
Office equipment
 
$
2,934
   
$
2,934
 
Vehicles
   
58,577
     
58,577
 
Wheelchair rental pool
   
78,283
     
76,876
 
Total property and equipment
   
139,794
     
138,387
 
Accumulated depreciation
   
(93,158
)
   
(76,197
)
Net property and equipment
 
$
46,636
   
$
62,190
 


Depreciation is computed using the straight-line method based upon estimated useful lives as follows:

 
Office equipment
7 yeas
 
Vehicles
5 years
 
Wheelchair rental pool
13 months


Depreciation expense for 2017 and 2016 was $71,917 and $55,760, respectively.

The wheelchair rental pool consists of wheelchairs rented to customers over the shorter of the 13 month use period as mandated by Medicare and Medicaid, or the period over which the customer requires use of a wheelchair.  At the end of the use period, the chair is either returned to the pool to be rented to another customer, or title of the chair is transferred to the customer.

 
NOTE 3.  LINE OF CREDIT

At December 31, 2017 and 2016, the Company owed a bank $62,378 and $70,373, respectively, under a line of credit note payable. The line of credit is secured by all Company assets, due on demand, and bears interest at variable rates approximating 4%. Interest expense under the note in 2017 and 2016 was $4,001 and $3,597, respectively.  During 2017 and 2016, the Company made net principal payments of $7,995 and $6,877, respectively.


 
F-11


 
CANFIELD MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2017 and 2016




NOTE 4.  LONG-TERM DEBT

Long-term debt consists of the following:
 
   
December 31,
 
   
2017
   
2016
 
 
           
3.53% installment note payable $352 monthly, including interest, through July 2019, collateralized by vehicle with carrying value of $2,936 and $7,503, respectively
 
$
6,502
   
$
10,426
 
 
               
2.99% installment note payable $350 monthly, including interest, through August 2019, collateralized by vehicle with carrying value of $5,834 and $9,723, respectively
   
6,816
     
10,745
 
 
               
3.79% installment note payable $299 monthly, including interest, through July 2021, collateralized by vehicle with carrying value of $11,732 and $14,665, respectively
   
11,987
     
15,052
 
     
25,305
     
36,223
 
Less principal due within one year
   
(11,296
)
   
(10,918
)
TOTAL LONG-TERM DEBT
 
$
14,009
   
$
25,305
 

 
 
Principal payments due on long-term debt subsequent to December 31, 2017, are as follows:
 
 2018
 
$
11,296
 
 2019
   
8,511
 
 2020
   
3,434
 
 2021
   
2,064
 
 2022
   
-
 
TOTAL
 
$
25,305
 
         

 
F-12


CANFIELD MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2017 and 2016

NOTE 5.  COMMON STOCK

In January 2017, the Company received net proceeds of $35,000 from the sale of 350,000 shares of no-par value common stock at $0.10 per share.  

In March and December 2016, the Company received net proceeds of $90,000 from the sale of 900,000 shares of no-par value common stock at $0.10 per share.  

NOTE 6.  LEASE COMMITMENTS

The Company rents office space under a non-cancellable lease through September 2020 with monthly payments of approximately $2,292 plus costs.

Lease expense incurred in each of the years ended 2017 and 2016 was approximately $33,000, which is comprised of approximately $27,500 in rent and $5,500 in common area maintenance. Subsequent to December 31, 2017, future minimum rent payments under the leases total approximately $68,750 including:  2018 - $27,500, 2019 - $27,500, and 2020 - $13,750 plus common area maintenance fees.

NOTE 7.  GOING CONCERN

The Company has suffered losses from operations and has working capital and stockholders' deficits. In all likelihood, the Company will be required to make significant future expenditures in connection with marketing efforts along with general administrative expenses. These conditions raise substantial doubt about the Company's ability to continue as a going concern.

The Company may raise additional capital through the sale of its equity securities, through an offering of debt securities, or through borrowings from financial institutions or related parties. By doing so, the Company hopes to generate sufficient capital to execute its business plan of selling medical supplies on an ongoing basis. Management believes that actions presently being taken to obtain additional funding provide the opportunity for the Company to continue as a going concern.

NOTE 8.  SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date these financial statements were issued and determined that there are no reportable subsequent events.
 
F-13


Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

On January 11, 2016, the Company engaged Pritchett, Siler & Hardy, PC, as its independent registered public accounting firm.  On January 22, 2018, the Company dismissed Pritchett, Siler & Hardy, PC as its independent registered accounting firm and engaged Heaton & Company, PLLC, dba Pinnacle Accountancy Group of Utah, as its new independent registered accounting firm.

Item 9A.  Controls and Procedures.

(a)  Evaluation of Disclosure Controls and Procedures.

An evaluation was carried out under the supervision and with the participation of our management, including our Principal Executive and Financial Officers of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report on Form 10-K. Disclosure controls and procedures are procedures designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Form 10-K, is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and is communicated to our management, including our Principal Executive and Financial Officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our management concluded that, as of December 31, 2017, our disclosure controls and procedures were not effective. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of our Principal Executive and Financial Officers and implemented by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements in accordance with U.S. generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our Principal Executive and Financial Officers evaluated the effectiveness of our internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Framework (2013). Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.  Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2017.

(b)  Changes in Internal Control over Financial Reporting.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.  Other Information.

None.
 
19

PART III

Item 10.   Directors, Executive Officers and Corporate Governance.

Each of our directors is elected by the stockholders to a term of one year and serves until his successor is elected and qualified. Each of our officers is elected by the board of directors to a term of one year and serves until his or her successor is duly elected and qualified, or until he or she is removed from office. The board of directors has no committees.

The name, address, age and position of our officers and directors is set forth below:

Name and Address
 
Age
 
Position(s)
         
Michael J. West
4120 Boardman-Canfield Road
Canfield, OH  44406
 
63
 
President, Chief Executive Officer and Director
         
Stephen H. West
16325 E. Dorado Ave.
Centennial, CO  80045
 
62
 
Chief Financial Officer, Secretary and Director

The persons named above are expected to hold said offices/positions until the next annual meeting of our stockholders. These officers and directors are our only officers, directors, promoters and control persons.

Background Information about Our Officers and Directors

Michael J. West co-founded our Company with his wife in September 1992 and served as Vice-President, Secretary and a Director until September 2004 when he became the President and sole Director.  He also founded Medical Billing Assistance, Inc. ("Medical Billing") in 1994.  Medical Billing was involved in electronic billing of medical claims to Medicare.  Medical Billing completed an acquisition of FCID Medical, Inc. in December 2010 and Mr. West resigned from all positions with Medical Billing at that time.  Mr. West received a Bachelor's of Arts Degree in Biology from Wittenberg University in 1977.  He plans to continue devoting his full time to our affairs.  We believe that Mr. Michael West's 24 years of experience serving as either our President or Vice President enables him to make valuable contributions to our Board of Directors.

Stephen H. West has served as Secretary, Treasurer, CFO and a Director of our company since September 2011.  He is the brother of Michael J. West.  He has been involved in the computer data storage market since 1978.  He spent twenty-two years at Storage Technology Corporation where he held positions as Director of Sales for their telecommunications region, Vice President and General Manager of the Western Region and Vice President of Global Accounts.  He co-founded PeakData Inc., a computer data storage company which focuses on sales and integration of enterprise storage solutions for Fortune 1000 companies in March 2001 and served as its Executive Vice president of Sales until January 2009.  Since January 2009, he has served as Director of Sales of Net Source, a computer storage company. From May 2007 until December 2010 he served as Secretary and a Director of Medical Billing Assistance, Inc. and he continued as a Director until April 2011.  Mr. West graduated from the University of Cincinnati with a BBA in 1978.  He plans to devote approximately 5 to 10 hours per month to our affairs.  We believe that Mr. Stephen West's 38 years of sales and executive experience in the technology industry and his knowledge of our Company's history qualify him to serve as a member of our Board of Directors.


 
20



Section 16(a) Beneficial Ownership Reporting Compliance

Based solely on a review of Forms 3 and 4 and amendments thereto furnished to the Company during the fiscal year ended December 31, 2017, and certain written representations, no persons who were either a director, executive officer or beneficial owner of more than 10% of the Company's Common Stock, failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the fiscal year ended December 31, 2017.

Code of Ethics

To date, the Company has not adopted a code of ethics that applies to its executive officers because it only has two executive officers who are also board members.

Audit Committee

The Company is not listed for trading yet and does not yet have an audit committee.

Item 11.   Executive Compensation.

The following table sets forth information for our two most recently completed fiscal years concerning all of the compensation awarded to, earned by or paid to the executive officers named below.  No other employees earned a salary over $100,000 in the last two completed fiscal years.

Name and Principal Position
Year
 
Salary
($)
   
Bonus
($)
   
Stock
Awards($)
   
Option
Awards($)
   
Non-Equity
Incentive Plan
Compensation
($)
   
Nonqualified
Deferred
Compensation
Earnings($)
   
All Other
Compensation
($)
   
Total($)
 
                                                   
Michael West
2017
 
$
78,050
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
   
$
78,050
 
 
2016
 
$
88,000
     
-
     
-
     
-
     
-
     
-
     
-
   
$
88,000
 
                                                                   
Steve West
2017
 
$
-
     
-
     
-
     
-
     
-
     
-
     
-
   
$
-
 
 
2016
 
$
-
     
-
     
-
     
-
     
-
     
-
     
-
   
$
-
 

We currently pay our President a salary of approximately $1,500 per week and we intend to continue this during the next twelve months.  Our Chief Financial Officer is not paid a salary.  We do not have employment agreements with either of our executive officers.

Directors Compensation

Our directors have not been paid any compensation for serving as Directors of the Company and there are no present plans or understandings with respect to future compensation.

Outstanding Equity Awards at Fiscal Year-End

We did not have any outstanding equity awards on December 31, 2017.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth the beneficial ownership of our common stock as of March 30, 2018, by (i) each person or entity who is known by us to own beneficially more than 5% of the outstanding shares of common stock, (ii) each of our Directors, (iii) each of the Executive Officers named in the Summary Compensation Table, and (iv) all of our Officers and Directors as a Group:


 
21



Name and Address of Beneficial Owner
 
Beneficial
Ownership(1)(2)
 
Approximate
Percent Owned
         
Michael J. West
4120 Boardman-Canfield Road
Canfield, OH  44406
 
8,344,000
 
74.0%
         
Stephen H. West
16325 East Dorado Avenue
Centennial, CO  80015
 
300,000
 
2.7%
         
All Officers and Directors as a group
(2 persons)
 
8,644,000
 
76.7%

(1)
This table is based upon 11,277,200 shares of common stock issued and outstanding as of March 30, 2018.
 
 
(2)
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to the shares. Shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days are deemed outstanding for computing the percentage of the person holding such options or warrants, but are not deemed outstanding for computing the percentage of any other person.

Item 13.   Certain Relationships and Related Transactions and Director Independence.

None

Item 14.   Principal Accounting Fees and Services.

Approval of Services

Pending establishment of an audit committee, the Board of Directors pre-approves all engagements for audit and non-audit services provided by the Company's principal accounting firm. Pritchett, Siler & Hardy, PC was our principal accountant between January 11, 2016 and January 22, 2018, and audited our financial statements for the years ended December 31, 2016, 2015, and 2014.  On January 22, 2018, we engaged Pinnacle Accountancy Group of Utah, a dba of Heaton & Company, PLLC, as our new independent registered accounting firm.
Audit Fees

The aggregate fees billed during the fiscal years ended December 31, 2017 and 2016 for professional services rendered by our former principal accounting firm, Pritchett, Siler & Hardy, P.C., for the audit of the financial statements included in Form 10-K, and for the review of the interim condensed financial statements included in Form 10-Q, were approximately $31,442 and $54,000, respectively.

Audit Related Fees

The aggregate fees billed during the fiscal years ended December 31, 2017 and 2016 for audit related services rendered by our former principal accounting firm, Pritchett, Siler & Hardy, P.C., were approximately $0 and $0, respectively.


 
22



Tax Compliance/Preparation Fees

The aggregate fees billed during the fiscal years ended December 31, 2017 and 2016 for professional services rendered by our former principal accounting firm, Pritchett, Siler & Hardy, P.C., for tax compliance, tax advice, and tax planning were approximately $0 and $0, respectively. Tax compliance services include the preparation of income tax returns filed with the Internal Revenue Service. Tax advice and planning services included assistance with implementation of tax planning strategies and consultation on other tax matters.

All Other Fees

The aggregate fees billed during the fiscal years ended December 31, 2017 and 2016 for all other professional services rendered by our former principal accounting firm, Pritchett, Siler & Hardy, P.C., were approximately $0 and $0, respectively. Other services consisted of assistance with the interpretation of new accounting standards and other related services.

Board of Directors Pre-Approval Process, Policies and Procedures

Our principal auditors have performed their audit procedures in accordance with pre-approved policies and procedures established by our Board of Directors. Our principal auditors have informed our Board of Directors of the scope and nature of each service provided. With respect to the provisions of services other than audit, review, or attest services, our principal accountants brought such services to the attention of our Board of Directors prior to commencing such services.


PART IV

Item 15.   Exhibits and Financial Statement Schedules.

The following documents are filed as part of this Annual Report on Form 10-K:

1.           Financial Statements.  See the Financial Statements starting on page 18.

2.           Exhibits.  The exhibits listed in the Exhibit Index, which appears immediately following the signature page and is incorporated herein by reference, and filed as part of this Annual Report on Form 10-K.



 
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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

   
CANFIELD MEDICAL SUPPLY, INC.
(Registrant)
     
     
Date:  April 2, 2018
 
By: /s/ Michael J. West                                          
   
Name:  Michael J. West
Title:    President and CEO (Principal Executive Officer)
     
     
Date:  April 2, 2018
 
By: /s/ Stephen H. West                                         
   
Name:  Stephen H. West
Title:    Chief Financial Officer, (Principal Financial and Principal Accounting Officer)


Pursuant to the requirements of the Securities Act of 1934 this Annual Report on Form 10-K was signed by the following persons on behalf of the Registrant and in the capacities and on the dates stated:

Name
 
Title
Date
       
       
/s/ Michael J. West              
 
President, CEO (Principal Executive Officer) and Director
April 2, 2018
Michael J. West
     
       
       
/s/ Stephen H. West             
 
Chief Financial Officer (Principal Financial and Principal Accounting Officer) and Director
April 2, 2018
Stephen H. West
     
       


 
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EXHIBIT INDEX

Exhibit
Number
 
Description
   
 
Articles of Incorporation and Bylaws
   
   
   
   
   
   
   
101
XBRL

 
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