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 nine months ended										Accounts Receivable as of
	September 30, 2019					September 30, 2018					September 30, 2019					September 30, 2018					September 30, 2019		Dec. 31, 2018
	Sales		% of Sales			Sales		% of Sales			Sales		% of Sales			Sales		% of Sales
Customer 1	$	3,966,142		46.6	%	$	3,256,390		39	%	$	10,012,644		42.8	%	$	9,241,445		42	%	$	2,209,986	$	3,499,340
Customer 2		-		-	%		1,852,186		22	%		4,378,773		18.7	%		3,312,816		15	%		189,283		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 nine months ended

Accounts Payable as of

September 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

September 30, 2019

Dec. 31, 2018

Purchases

% of Purc.

Purchases

% of Purc.

Purchases

% of Purc.

Purchases

% of Purc.

Vendor 1

508,646

1,372,521

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 $820,000 per year. The contracts expire in March 2020 and December 2021. The following table is a schedule of future minimum salary commitments as of September 30, 2019:

2019	$	205,000
2020		478,800
2021		365,000

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 $74,600 and $71,900 for the nine months ended September 30, 2019 and 2018, respectively.

Leases:

Chembio’s leases have historically been limited to its facilities in New York, Germany, and Malaysia. As of September 30, 2019, the Company was a party to seven 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.

The components of lease expense for the three and nine months ended September 30, 2019 were as follows:

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
Operating lease expense	$	425,757	$	1,108,016

Finance lease cost
Amortization of right-of-use assets	$	11,686	$	11,686
Interest on lease liabilities		4,033		4,033
Total finance lease expense	$	15,719	$	15,719

Supplemental cash flow information related to leases was as follows.

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	158,050	$	474,150
Operating cash flows for finance leases		4,033		4,033
Financing cash flows for finance leases		9,851		9,851
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	-	$	6,697,896
Finance leases		-		222,036

Supplemental balance sheet information related to leases was as follows:

	September 30, 2019
Operating Leases
Operating lease right-of-use assets	$	6,697,896

Current portion of operating lease liability		255,030
Operating lease liabilities		6,706,918
Total operating lease liabilities	$	6,961,948

Finance Leases
Finance lease right of use asset	$	233,722
Accumulated depreciation		(11,686	)
Finance lease right of use asset, net	$	222,036

Current portion of finance lease liability		41,169
Finance lease liability		182,702
Total finance lease liabilities	$	223,871

Weighted Average Remaining Lease Term
Operating leases	9.9 years
Finance leases	4.8 years

Weighted Average Discount Rate
Operating leases		8.51	%
Finance leases		7.00	%

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

At the time of the assessment, the Company did not have an established incremental borrowing rate and the interest rates implicit in each of the leases were not readily determinable, therefore the Company used an interest rate based on the market place for the public debt. In September 2019, the Company has entered into a credit agreement for a $20 million term loan as described on Note 6 - Long Term Debt.

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

	Operating Leases		Finance Leases
2019	$	158,050	$	13,884
2020		813,443		55,536
2021		998,071		55,536
2022		1,026,044		55,536
2023		1,011,085		55,536
Thereafter		6,792,762		27,767
Total lease payments	$	10,799,455	$	263,795
Less: imputed interest		3,837,507		39,924
Total	$	6,961,948	$	223,871

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.