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COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

12 Months Ended

Dec. 31, 2020

COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS [Abstract]

COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

NOTE 12 — COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS:

Employment Contracts:

The Company has multi-year contracts with two key employees. The contracts call for salaries presently aggregating $843,292 per year, and they expire in December 2021 and December 2022. The following table is a schedule of future minimum salary commitments:

2021	$	843,292
2022		460,000
2023		-

Benefit Plan:

The Company has a 401(k) plan established for its employees whereby it matches 40% of the first 5% (or 2% of salary) that an employee contributes to the plan. Matching contribution expenses totaled $87,377 and $93,892 for the years ended December 31, 2020 and 2019, respectively.

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 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 components of lease expense were as follows:

	Year Ended December 31, 2020		Year Ended December 31, 2019
Operating lease expense	$	1,669,105	$	1,655,573

Finance lease cost
Amortization of right-of-use assets	$	58,414	$	23,372
Interest on lease liabilities		19,986		7,892
Total finance lease expense	$	78,400	$	31,264

Supplemental cash flow and other information related to leases were as follows:

	Year Ended December 31, 2020		Year Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	1,139,944	$	632,952
Operating cash flows for finance leases		19,987		7,892
Financing cash flows for finance leases		51,166		19,875
Right-of-use assets obtained in exchange for lease obligations:				7,892
Operating leases	$	-	$	7,030,744
Finance leases		69,528		210,350

Supplemental balance sheet information related to leases was as follows:

	December 31, 2020			December 31, 2019
Finance Leases
Finance lease right of use asset	$	315,154		$	233,722
Accumulated depreciation		(82,020	)		(23,372	)
Finance lease right of use asset, net	$	233,134		$	210,350

Current portion of finance lease liability		58,877			41,894
Finance lease liability		185,239			171,953
Total finance lease liabilities	$	244,116		$	213,847

Weighted Average Remaining Lease Term
Operating leases	9.0 years			9.3 years
Finance leases	3.7 years			4.8 years

Weighted Average Discount Rate
Operating leases		8.58	%		8.67	%
Finance leases		8.18	%		7.00	%

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

Maturities of lease liabilities as of December 31, were as follows.

	December 31, 2020						December 31, 2019
	Operating Leases			Finance Leases			Operating Leases			Finance Leases
2021	$	1,209,787		$	76,904		$	1,205,161		$	55,536
2022		1,057,757			76,904			1,209,787			55,536
2023		1,026,272			76,904			1,057,757			55,536
2024		1,018,875			49,136			1,026,272			55,536
2025		1,049,442			5,755			1,018,875			27,767
Thereafter		4,724,445			-			5,773,887			-
Total lease payments	$	10,086,578		$	285,603		$	11,291,739		$	249,911
Less: imputed interest		(3,116,975	)		(41,487	)		(3,753,842	)		(36,064	)
Total	$	6,969,603		$	244,116		$	7,537,897		$	213,847

Economic Dependency:

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

	For The Years Ended										Accounts Receivable
	December 31, 2020					December 31, 2019					December 31, 2020		December 31, 2019
	Net Sales		% of Net Sales			Net Sales		% of Net Sales
Customer 1	$	6,224,737		25.1	%	$	11,263,573		39	%	$	522,218	$	941,962
Customer 2		2,955,312		11.9	%		5,782,543		20	%		1,987		16,033
Customer 3		2,956,945		11.9	%		*		*			*		*

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

The following table discloses purchases the Company made form vendors in excess of 10% of the Company’s net purchases for the periods indicated:

For The Years Ended

Accounts Payable

December 31, 2020

December 31, 2019

December

31, 2020

December

31, 2019

Purchases

% of Purc.

Purchases

% of Purc.

Vendor 1

2,222,182

13.0

222,588

In the tables above, an asterisk (*) indicates that indicates that sales, accounts receivable, purchases or accounts payable, as applicable to the tabular column, did not exceed 10% for the period indicated.

The Company purchases materials pursuant to intellectual property rights agreements that 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 and a possible loss of sales, which could adversely affect operating results.

Litigation:

Employee Litigation

John J. Sperzel III, our former chief executive officer, filed suit in the United States District Court in Maine asserting 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 Sperzel’s attempt to exercise the options following the thirty day period was not valid. The Court has dismissed Sperzel’s lawsuit for lack of personal jurisdiction in Maine. If Sperzel refiles the lawsuit in another jurisdiction, Chembio intends to vigorously defend against any claim by Mr. Sperzel that he continues to have a right to exercise any options.

Stockholder Litigation

Putative Stockholder Securities Class Action Litigation

As we reported previously, four purported securities class action lawsuits were filed by alleged stockholders of our Company in the United States District Court for the Eastern District of New York:

●

Sergey Chernysh v. Chembio Diagnostics, Inc., Richard L. Eberly, and Gail S. Page, filed on June 18, 2020, which we refer to as the Chernysh case;

●

James Gowen v. Chembio Diagnostics, Inc., Richard L. Eberly, and Gail S. Page, filed on June 22, 2020, which we refer to as the Gowen case;

●

Anthony Bailey v. Chembio Diagnostics, Inc. Richard J. Eberly, Gail S. Page, and Neil A. Goldman, filed on July 3, 2020, which we refer to as the Bailey case; and

●

Special Situations Fund III QP, L.P., Special Situations Cayman Fund, L.P., and Special Situations Private Equity Fund, L.P. v. Chembio Diagnostics, Inc., Richard Eberly, Gail S. Page, Robert W. Baird & Co. Inc. and Dougherty & Company LLC, filed August 17, 2020, which we refer to as the Special Situations Funds case.

The plaintiffs in each of the cases alleged claims under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 thereunder, and Section 20(a) of the Exchange Act. Special Situations Fund III QP, L.P., Special Situations Cayman Fund, L.P., and Special Situations Private Equity Fund, L.P. (together, the “Special Situations Funds”) also asserted claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act”) relating to Chembio’s May 2020 public offering.

We and the plaintiffs entered into court-approved stipulations relieving the defendants of the obligation to respond to the complaints in these cases pending the designation of a lead plaintiff pursuant to the Private Securities Litigation Reform Act of 1995. Eight motions for appointment as lead plaintiff were filed by various prospective lead plaintiffs. However, all but two of these motions were withdrawn or otherwise abandoned, leaving before the Court two motions for appointment as lead plaintiff -- one filed by the Special Situations Funds, and one by Municipal Employees’ Retirement System of Michigan (“MERS”). By Order entered December 29, 2020, Magistrate Judge Lindsay consolidated the cases and appointed the Special Situations Funds and MERS as co-lead plaintiffs, and their respective counsel as co-lead counsel. The consolidated cases are now pending under the caption “In re Chembio Diagnostics, Inc. Securities Litigation.”

The Special Situations Funds and MERS (together “Lead Plaintiffs”) filed their Consolidated Amended Complaint (“CAC”) on February 12, 2021. In summary, the CAC purports to allege claims based on assertedly false and misleading statements and omissions concerning the performance of the DPP COVID-19 IgM/IgG System, as well as an asserted failure to timely disclose that the Emergency Use Authorization that had been granted by the Food and Drug Administration with respect to the System “was -- or was at an increased risk of -- being revoked.” The CAC names as defendants the Company, Richard L. Eberly, Gail S. Page, Neil A. Goldman, Javan Esfandiari, Katherine L. Davis, Dr. Mary Lake Polan, Dr. John Potthoff, and the underwriters for the Company’s May 2020 public offering, Robert W. Baird & Co., Inc. and Dougherty & Company LLC.

The CAC purports to assert five counts under the Securities Act and the Exchange Act of 1934. Counts I through III are brought under the Securities Act, allegedly on behalf of a purported class consisting of all persons who purchased Chembio common stock directly in or traceable to the Company’s May 2020 offering pursuant to the Company’s Form S-3 Registration Statement and its Prospectus and Prospectus Supplement dated May 7, 2020 (the “Securities Act Class”). Count I purports to allege a claim for violation of Section 11 of the Securities Act against all defendants other than Messrs. Eberly and Esfandiari. Count II purports to allege a claim for violation of Section 12 of the Securities Act against all defendants other than Messrs. Eberly and Esfandiari. Count III purports to allege a claim under Section 15 of the Securities Act against Ms. Davis, Dr. Polan, Dr. Potthoff, Ms. Page, and Mr. Goldman.

Counts IV and V are alleged claims under the Exchange Act on behalf of a purported class consisting of all persons who purchased Chembio securities on the open market between March 12, 2020 and June 16, 2020, inclusive (the “Exchange Act Class”). Count IV purports to allege a claim for violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder against the Company, Mr. Eberly, Ms. Page, Mr. Goldman, and Mr. Esfandiari. Count V purports to allege a claim under Section 20(a) of the Exchange Act against Mr. Eberly, Ms. Page, Mr. Goldman, and Mr. Esfandiari.

Lead Plaintiffs seek, on behalf of the Securities Act Class and the Exchange Act Class, among other things, an award of damages in an amount to be proven at trial, as well as an award of reasonable costs, including attorneys’ fees and expenses, expert fees, pre-judgment and post-judgment interest, and such other relief as the court deems just and proper. The Lead Plaintiffs also seeks rescission “or a rescissory measure of damages” on behalf of the Securities Act Class as to Count II.

Pursuant to an Order entered by the Court on January 29, 2021, any defendant wishing to move against the amended complaint was required to file, by February 18, 2021, a letter requesting a pre-motion conference. On that date, the defendants submitted letters to the Court requesting a pre-motion conference regarding anticipated motions to dismiss the CAC, and Lead Plaintiffs responded on February 24, 2021. In its January 29, 2021 Order, the Court indicated that it would consider a briefing schedule on motions to dismiss after it had received and reviewed the parties’ correspondence.

On March 5, 2021, the Court entered an Order in which the Court advised the parties that it had determined that a pre-motion conference was not necessary and established a briefing schedule on the defendants’ anticipated motions to dismiss. Pursuant to that schedule, defendants’ motions and supporting papers are due to be filed no later than March 19, 2021, the Lead Plaintiffs’ opposition papers are due to be filed no later than April 2, 2021, and the defendants’ reply papers are due to be filed no later than April 9, 2021. We have agreed with Plaintiffs’ counsel to a modification of the schedule such that defendants’ motions and supporting papers would be due to be filed no later than March 26, 2021, the Lead Plaintiffs’ opposition papers would be due to be filed no later than April 16, 2021, and the defendants’ reply papers would be due to be filed no later than April 30, 2021. This schedule modification is subject to the Court’s approval.

Putative Stockholder Derivative Litigation

On September 11, 2020, a putative stockholder derivative action was filed purportedly on our Company’s behalf in the United States District Court for the Eastern District of New York captioned Karen Wong, derivatively on behalf of Chembio Diagnostics, Inc., Plaintiff v. Richard L. Eberly, Gail S. Page, Neil A. Goldman, Javan Esfandiari, Katherine L. Davis, Mary Lake Polan, and John G. Potthoff, Defendants, and Chembio Diagnostics, Inc., Nominal Defendant, which we refer to as the Wong complaint. The Wong complaint purports to assert a claim for violation of Section 14(a) of the Exchange Act and Rule 14a-9 thereunder based on ostensibly false and misleading statements and omissions concerning our rapid COVID-19 antibody test in the proxy statement disseminated in advance of our Annual Meeting of Stockholders held on July 28, 2020. The Wong complaint also asserts claims against the individual defendants for purported breaches of fiduciary duties owed to our Company, as well as unjust enrichment.

The Wong complaint requests a declaration that the individual defendants have breached or aided and abetted the breach of their fiduciary duties to our Company, an award of damages to our Company, restitution, and an award of the plaintiff’s costs and disbursements in the action, including reasonable attorneys’ and experts’ fees, costs and expenses, and improvements to our Company’s corporate governance and internal procedures regarding compliance with laws. Pursuant to a stipulation by which the individual defendants in the Wong action agreed to waive service of process, the Court ordered that the time for defendants to answer or otherwise respond to the complaint be extended to November 19, 2020. The parties subsequently entered into a stipulation for a stay of proceedings in the Wong action pending final disposition of motions to dismiss the pending putative class action litigation, subject to certain conditions. The Court entered an order granting the requested stay on November 3, 2020.

Commercial Litigation

Chembio Diagnostic Systems Inc. (“Chembio”) and BioSure (UK) Ltd (“BioSure”) entered into the BioSure Sure Check® HIV 1/2 Assay OTC Agreement dated April 2, 2014, and as subsequently amended (the “Distribution Agreement”). Pursuant to the Distribution Agreement, BioSure acquired the right to sell bundled products in the UK containing Chembio’s Sure Check® HIV 1/2 pouched tests. The Distribution Agreement terminated on April 1, 2019. On September 16, 2019, Chembio initiated arbitration in New York, USA. Chembio alleges that BioSure (1) breached various provisions of the Distribution Agreement, (2) misappropriated Chembio’s trade secrets, (3) engaged in deceptive business acts and practices, and (4) breached the implied covenant of good faith and fair dealing. On November 23, 2020, BioSure requested leave to file a counterclaim seeking recession of the Distribution Agreement based on alleged fraudulent concealment by Chembio. Chembio opposed BioSure’s request for leave to file the counterclaim on procedural and substantive grounds, and on December 11, 2020 the Tribunal denied the request for leave to file the counterclaim. The Tribunal’s denial was without prejudice to BioSure’s ability to assert its claim in a separate proceeding. BioSure continues to deny the relief sought and alleges certain statements Chembio made to third parties about the Distribution Agreement were in bad faith and are a defense to Chembio’s claims. BioSure also asserts that certain alleged misrepresentations entitle BioSure to “set off” any award Chembio might receive from the Tribunal. The parties have completed discovery, and submitted their first pre-hearing submissions. Chembio intends to vigorously pursue its claims in the arbitration. The final merits hearing is scheduled for April 2021. At this stage in the litigation, we are not able to predict the probability of a favorable or unfavorable outcome.

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.