NOTE 5 — COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS:

Concentrations:

The following table discloses product sales the Company had to each customer that purchased in excess of 10% of the Company’s net product sales for the periods indicated:

	For the three months ended										For the six months ended										Accounts Receivable as of
	June 30, 2019					June 30, 2018					June 30, 2019					June 30, 2018					June 30, 2019		Dec. 31, 2018
	Sales		% of Sales			Sales		% of Sales			Sales		% of Sales			Sales		% of Sales
Customer 1	$	4,573,434		54	%	$	3,217,387		47	%	$	5,615,932		38	%	$	5,627,145		42	%	$	2,804,382	$	3,499,340
Customer 2		1,627,075		19	%		1,460,630		21	%		3,460,666		23	%		1,460,630		11	%		1,746,939		1,033,824

Sales include product sales only, while accounts receivable reflects the total due from the customer, including freight.

The following table discloses purchases the Company made from each vendor that sold to the Company in excess of 10% of the Company’s total purchases for the periods indicated:

For the three months ended

For the six months ended

Accounts Payable as of

June 30, 2019

June 30, 2018

June 30, 2019

June 30, 2018

June 30, 2019

Dec. 31, 2018

Purchases

% of Purc.

Purchases

% of Purc.

Purchases

% of Purc.

Purchases

% of Purc.

Vendor 1

548,605

Vendor 2

394,518

863,875

Vender 3

326,282

In the table above, an asterisk (*) indicates that purchases from the vendor did not exceed 10% for the period indicated or that accounts payable by the vendor did not exceed 10% of total accounts payable at the date indicated.

The Company currently buys materials that are purchased under intellectual property rights agreements and are important components in its products. Management believes that other suppliers could provide similar materials on comparable terms as the vendors shown in this table. A change in suppliers, however, could cause a delay in manufacturing, either from the logistics of changing suppliers or from product changes attributable to new components, which could result in a possible loss of sales, and which could adversely affect operating results.

Governmental Regulation:

All of the Company’s existing and proposed diagnostic products are regulated by the U.S. Food and Drug Administration, U.S. Department of Agriculture, certain U.S., state and local agencies, and/or comparable regulatory bodies in other countries. Most aspects of development, production, and marketing, including product testing, authorizations to market, labeling, promotion, manufacturing, and record keeping, are subject to regulatory review. After marketing approval has been granted, Chembio must continue to comply with governmental regulations. Failure to comply with applicable requirements can lead to sanctions, including withdrawal of products from the market, recalls, refusal to authorize government contracts, product seizures, civil money penalties, injunctions, and criminal prosecution.

Employment Contracts:

The Company has multi-year contracts with two key employees that call for salaries presently aggregating $800,000 per year. The contracts expire in March 2020 and December 2021. The following table is a schedule of future minimum salary commitments as of June 30, 2019:

2019	$	400,000
2020		458,750
2021		345,000

Pension Plan:

The Company has a 401(k) plan established for its employees whereby it matches 40% of the first 5% of salary (or up to 2% of salary) that an employee contributes to the plan. Matching contribution expenses totaled approximately $49,000 and $46,000 for the six months ended June 30, 2019 and 2018, respectively.

Leases:

Chembio’s leases have historically been limited to its facilities in New York, Germany, and Malaysia. As of June 30, 2019, the Company was a party to six leases. One of the leases is subject to a sublease for the remainder of its term, as further described below.

The Company’s leases generally include optional renewal periods. Upon entering into a new lease, the Company evaluates the leasehold improvements and regulatory requirements related to its operations in that location. To the extent that the initial lease term of the related lease is less than the useful life of the leasehold improvements and potential regulatory costs associated with moving the facility, the Company concludes that it is reasonably certain that a renewal option will be exercised, and thus that renewal period is included in the lease term and the related payments are reflected in the right-of-use (“ROU”) asset and lease liability.

The Company’s leases generally include fixed rental payments with defined annual increases. While certain of the Company’s leases are gross leases, the majority of the Company’s leases are net leases in which the Company makes separate payments to the lessor based on the lessor’s property and casualty insurance costs, the property taxes assessed on the property, and a portion of the common area maintenance where applicable. The Company has elected the practical expedient not to separate lease and nonlease components for all of the Company’s facility leases. The Company has also elected the practical expedient for short-term lease exception for all of its facility leases.

During Q2 the Company adjusted the right-of-use asset to include deferred rent that was previously included in Prepaid and Other Current Assets on the consolidated Balance Sheet.

The components of lease expense for the three and six month periods ended June 30, 2019 were as follows:

	Three Months Ended		Six Months Ended
	June 30, 2019		June 30,2019
Operating lease cost	$	400,658	$	682,261

Finance lease cost
Amortization of right-of-use assets	$	-	$	-
Interest on lease liabilities		-		-
Total finance lease cost	$	-	$	-

Supplemental cash flow information related to leases was as follows.

	Three Months Ended		Six Months Ended
	June 30, 2019		June 30,2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	147,107	$	305,157
Operating cash flows from finance leases		-		-
Financing cash flows from finance leases		-		-
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	-	$	6,949,611
Finance leases		233,722		233,722

Supplemental balance sheet information related to leases was as follows.

	June 30, 2019
Operating Leases
Operating lease right-of-use assets	$	6,949,611

Current portion of operating lease liability		389,051
Operating lease liabilities		6,582,446
Total operating lease liabilities	$	6,971,497

Finance Leases
Finance lease right of use asset	$	233,722
Accumulated depreciation		-
Finance lease right of use asset, net	$	233,722
Current portion of finance lease liability		43,931
Finance lease liability		189,791
Total finance lease liabilities	$	233,722

Weighted Average Remaining Lease Term
Operating leases		10 years
Finance leases		5 years

Weighted Average Discount Rate
Operating leases		8.53	%
Finance leases		7.0	%

During the three months ended June 30, 2019, the Company executed an operating sublease related to its former Holbrook, NY facility. The sublease runs conterminously with the base lease in Holbrook, for which the Company remains primarily responsible. In addition, the Company has entered into a finance lease agreement relating to the office furniture in late June 2019. The Company has recognized the corresponding lease asset and liability effective June 30, 2019 and will commence to record related depreciation starting on July 1, 2019. Monthly payments towards this lease will also commence in July 2019.

The interest rates implicit in each of the leases are not readily determinable, and the Company does not have an established incremental borrowing rate as its only debt is a seller-financed note for manufacturing equipment. Therefore, the Company used an interest rate based on the marketplace for public debt.

Maturities of lease liabilities as of June 30, 2019 were as follows.

	Operating Leases			Finance Leases
2019 (excluding the six months ended June 30, 2019)	$	316,100		$	27,768
2020		813,443			55,536
2021		998,071			55,536
2022		1,026,044			55,536
2023		1,011,085			55,535
Thereafter		6,792,767			27,768
Total lease payments	$	10,957,510		$	277,679
Less imputed interest		(3,986,013	)		(43,957	)
Total	$	6,971,497		$	233,722

As previously disclosed in the Company's 2018 Annual Report on Form 10-K, and under the previous lease accounting standard, future minimum lease payments for operating leases having initial or remaining non-cancellable lease terms in excess of one year would have been as follows for the years ending December 31:

2019	$	384,308
2020		88,576
2021		-
	$	472,884

Litigation:

From time to time, the Company is involved in certain legal actions arising in the ordinary course of business. The outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on the Company’s future financial position or results of operations.