COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS

6 Months Ended

Jun. 30, 2020

COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS [Abstract]

COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS

NOTE 5 – COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS:

(a) Concentrations:

The following table discloses product sales the Company had to the only 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, 2020					June 30, 2019					June 30, 2020					June 30, 2019					June 30, 2020		Dec. 31, 2019
	Sales		% of Sales			Sales		% of Sales			Sales		% of Sales			Sales		% of Sales
Customer 1	$	657,304		17.0	%	$	4,573,434		54	%	$	2,297,376		24.0	%	$	5,615,932		38	%	$	806,196	$	941,962
Customer 2	$	-		0.0	%	$	1,627,075		19	%	$	-		0.0	%	$	3,460,666		23	%	$	-	$	-

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

For the three and six months ended June 30, 2020 and 2019, there were no vendors that sold to the Company in excess of 10% of the Company’s total purchases.

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. A change in suppliers, however, could cause a delay in manufacturing, either from the logistic and regulatory implications of changing suppliers or from product attributable changes to new components, any of which could result in a possible loss of sales and adversely affect operating results.

(b) Governmental Regulation:

All of the Company’s existing and proposed diagnostic products are regulated by the U.S. Food and Drug Administration, the 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, the Company 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 monetary penalties, injunctions, and criminal prosecution.

(c) Employment Contracts:

As of June 30, 2020, the Company had multi-year contracts with two key employees that include salaries presently aggregating $765,000 per year. The contracts expire in December 2020 and December 2022. The following table is a schedule of future minimum salary commitments related to those contracts as of June 30, 2020:

2020	$	382,500
2021		765,000
2022		400,000

(d) Pension Plan:

Chembio has a 401(k) plan established for the Company's employees whereby the Company matches 40% of the first 5% of salary (or up to 2% of salary) that an employee contributes to the plan. For the six months ending June 30, 2020 and 2019, matching contribution expenses totaled $49,407, and $49,000, respectively.

(e) Leases:

The Company leases  facilities in New York, Germany, Malaysia, and Brazil, and certain equipment.

The Company’s facility leases generally include optional renewal periods. Upon entering into a new facility 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 facility 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 asset and lease liability.

The Company’s facility leases generally include fixed rental payments with defined annual increases. While certain of the Company’s facility leases are gross leases, the majority of the Company’s facility 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 non-lease 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 were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Operating lease expense	$	388,951	$	400,658	$	852,808	$	682,261
Finance lease cost
Amortization of right-of-use assets	$	14,687	$	-	$	27,085	$	-
Interest on lease liabilities		5,156		-		9,367		-
Total finance lease expense	$	19,843	$	-	$	36,452	$	-

Supplemental cash flow information related to leases was as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	292,058	$	147,107	$	457,277	$	305,157
Operating cash flows for finance leases		5,156		-		9,367		-
Financing cash flows for finance leases		12,666		-		23,578		-
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		-		-		-		6,949,611
Finance leases	$	47,499	$	233,722	$	75,852	$	233,722

Supplemental balance sheet information related to leases was as follows:

	June 30, 2020			June 30, 2019
Finance Leases
Finance lease right of use asset	$	309,574		$	233,722
Accumulated depreciation		(50,690	)		-
Finance lease right of use asset, net	$	258,884			233,722
Weighted-Average Remaining Lease Term
Operating leases	9 years			10 years
Finance leases	4 years			5 years
Weighted-Average Discount Rate
Operating leases		8.62	%		8.52	%
Finance leases		9.73	%		7.0	%

During the three months ended March 31, 2019, the Company executed an operating sublease related to its former Holbrook, New York facility. The sublease ran conterminously with the base lease, for which the Company was primarily responsible until the end of the lease term in April 2020.

At the time of the initial 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 entered into a credit agreement for a $20 million term loan as described on Note 6 - Long Term Debt.

Maturities of lease liabilities were as follows.

	June 30, 2020				June 30, 2019
	Operating Leases		Finance Leases		Operating Leases		Finance Leases
2019 and 2020	$	682,667	$	37,720	$	1,129,543	$	27,768
2021		1,209,787		75,440		998,071		55,536
2022		1,057,757		75,440		1,026,044		55,536
2023		1,026,272		75,440		1,011,085		55,536
2024		1,018,875		47,672		-		55,536
Thereafter		5,773,887		4,774		6,792,767		27,767
Total lease payments	$	10,769,245	$	316,486	$	10,957,510	$	277,679
Less: imputed interest		3,427,535		50,366		3,986,013		43,957
Total	$	7,341,710	$	266,120	$	6,971,497	$	233,722

(f) Litigation:

Employee Litigation

John J. Sperzel III, our former chief executive officer, has asserted a right to exercise certain options to purchase, for an aggregate exercise price of $943,126, a total of 266,666 shares of common stock that were vested when he resigned on January 3, 2020. Under their terms, those options were exercisable for a period of thirty days after his service to our company ended. The compensation committee of the board, acting in its discretion in accordance with the terms of the underlying equity incentive plans, has determined that Mr. Sperzel failed to exercise the options in a timely manner prior to their expiration. Chembio intends to vigorously defend against any claim by Mr. Sperzel that he continues to have a right to exercise any options.

Stockholder Litigation

As of July 31, 2020, four purported class action lawsuits had been filed by alleged stockholders of Chembio Diagnostics, Inc. (“Chembio”) in the United States District Court for the Eastern District of New York, including: (1) Sergey Chernysh v. Chembio Diagnostics, Inc., Richard L. Eberly, and Gail S. Page, 20-cv-2706, filed on June 18, 2020, or Chernysh; (2) James Gowen v. Chembio Diagnostics, Inc., Richard L. Eberly, and Gail S. Page, 2:20-cv-02758, filed on June 22, 2020, or Gowen; and (3) Anthony Bailey v. Chembio Diagnostics, Inc. Richard J. Eberly, Gail S. Page, and Neil A. Goldman, 2:20-cv-02961, filed on July 3, 2020, or Bailey; and (4) Ken Hayes v. Chembio Diagnostics, Inc., Richard L. Eberly, Gail S. Page, Katherine L. Davis, Mary Lake Polan, and John G. Potthoff, 1:20-cv-02918, filed on July 1, 2020, or Hayes.

The Chernysh, Gowen and Bailey complaints are brought by purported individual stockholders of Chembio on behalf of all persons and entities who purchased Chembio publicly traded stock during the alleged “class period” and purport to state claims for violations of Section 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission. The Chernysh and Bailey complaints define the “class period” as April 1, 2020 through June 16, 2020, inclusive, whereas the Gowen complaint defines the “class period” as March 12, 2020, through June 16, 2020, inclusive. The plaintiffs in these actions generally purport to allege that the defendants named therein misrepresented and failed to disclose that Chembio’s DPP COVID-19 IgM/IgG System did not provide high-quality results and there were material performance concerns with the DPP COVID-19 IgM/IgG System’s accuracy, including that it generates false results at a rate higher than expected and higher than reflected in its authorized labeling and was not effective in detecting antibodies against COVID 19. The Chernysh, Gowen, and Bailey complaints seek an award of damages ostensibly sustained as a result of alleged wrongdoing in an amount to be proven at trial as well as an award of reasonable attorneys’ fees and expenses, including expert fees and pre- and post-judgment interest.  Chembio and the plaintiffs in Chernysh, Gowen and Bailey have entered into a stipulation, approved by the Court on July 17, 2020, relieving the defendants from the obligation to respod to the complaints in the cases pending the designation of a lead plaintiff.  Pursuant to the stipulation, within ten days following the entry of an order by the Court appointing a lead plaintiff and a lead plaintiff’s counsel, counsel for the defendants and the lead plaintiff are to confer and submit to the Court a proposed schedule for the filing of a consolidated amended complaint and the defendants’ response to that pleading.

The Hayes complaint purports to state claims for violations of Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder by the Securities and Exchange Commission, declaratory relief, and state law claims for breach of fiduciary duty, brought by plaintiff on behalf of himself and all of Chembio’s other public stockholders against Chembio and members of our board of directors to remedy alleged misstatements of material information in the proxy statement disseminated by Chembio in advance of our Annual Meeting of Stockholders held on July 28, 2020 (the “Annual Meeting”). The Hayes plaintiff alleges that the Schedule 14A Proxy Statement filed by Chembio on June 16, 2020 with the Securities and Exchange Commission, or the Proxy Statement, in which Chembio is soliciting stockholder approval of, inter alia, a proposal to change Chembio’s state of incorporation from the State of Nevada to the State of Delaware  (the “Reincorporation Proposal”), contains misstatements of Nevada and Delaware law.  The Hayes plaintiff seeks a declaration that the Proxy Statement is false and misleading and entry of an order enjoining the stockholder vote on the Reincorporation Proposal until such time as the Proxy Statement has been corrected as well as an order finding our directors liable for breaching their fiduciary duties and awarding plaintiff the costs and disbursements of the action, including attorneys’ and expert fees.  On July 8, 2020, Chembio filed an amended proxy statement correcting, among other things, the issues raised in the Hayes complaint.  As a consequence of the supplementation, the plaintiff withdrew its motion for a preliminary injunction.  On July 23, 2020, Chembio and the plaintiff entered into a stipulation to the dismissal of the action, with prejudice as to the claims of the named plaintiff.  The stipulation was subject to plaintiff’s reservation of the right to apply for an award of attorneys’ fees and expenses from Chembio within 45 days after entry of an order approving the stipulation in the event the parties are unable to reach agreement on plaintiff’s claim for entitlement to fees.  Also, on July 23, 2020, the plaintiff filed a notice dismissing the named plaintiff’s claims, with prejudice, as to the individual defendants.  On July 27, 2020, the Court entered an order closing the case and providing that plaintiff shall have until September 28, 2020 to move to reopen the case if the attorneys’ fee issue has not been resolved.