COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS

3 Months Ended

Mar. 31, 2021

COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS [Abstract]

COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS

NOTE 6 — 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

Accounts Receivable as of

March 31, 2021

March 31, 2020

March 31, 2021

December 31, 2020

Sales

% of Sales

Sales

% of Sales

Customer 1

1,640,073

28.7

1,875,176

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

The following table discloses purchases the Company had from each vendor that represented in excess of 10% of the Company’s net purchases for the periods indicated:

	For the three months ended									Accounts Payable as of
	March 31, 2021					March 31, 2020				March 31, 2021		December 31, 2020
	Purchases		% of Sales			Purchases		% of Sales
Vendor 1	$	609,000		13.8	%	$	*		*	$	253,853	$	*
Vendor 2		469,635		10.6	%		*		*		336,868		*

In the tables above, an asterisk (*) 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 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 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, 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 money penalties, injunctions, and criminal prosecution.

Employment Contracts:

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

2021		$	632,469
2022			460,000

Benefit Plan:

Chembio 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 $35,456 and $28,120 for the three months ended March 31, 2021 and 2020, 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:

	Three months ended March 31,
	2021		2020
Operating lease expense	$	408,466	$	463,857

Finance lease cost
Amortization of right-of-use assets	$	15,758	$	12,398
Interest on lease liabilities		4,944		4,211
Total finance lease expense	$	20,702	$	16,609

Supplemental cash flow information related to leases was as follows.

	Three months ended March 31,
	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	347,871	$	165,218
Operating cash flows for finance leases		4,944		4,211
Financing cash flows for finance leases		14,282		10,913
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	-	$	-
Finance leases		-		27,641

Supplemental balance sheet information related to leases was as follows:

	March 31, 2021			March 31, 2020
Finance Leases
Finance lease right of use asset	$	315,153		$	262,075
Accumulated depreciation		(97,777	)		(35,770	)
Finance lease right of use asset, net	$	217,376		$	226,305

Weighted Average Remaining Lease Term
Operating leases	8.6 years			9.0 years
Finance leases	3.5 years			4.0 years

Weighted Average Discount Rate
Operating leases		9.30	%		8.64	%
Finance leases		8.18	%		7.50	%

Maturities of lease liabilities were as follows.

	March 31, 2021				March 31, 2020
	Operating Leases		Finance Leases		Operating Leases		Finance Leases
2019 and 2021	$	861,916	$	57,678	$	1,039,942	$	47,232
2022		1,057,757		76,904		1,209,787		62,976
2023		1,026,272		76,904		1,057,757		62,976
2024		1,018,875		49,136		1,026,272		62,976
2025		1,049,442		5,751		1,018,875		35,207
Thereafter		4,724,446		-		5,773,890		620
Total lease payments	$	9,738,708	$	266,373	$	11,126,523	$	271,987
Less: imputed interest		2,968,703		36,544		3,589,622		40,700
Total	$	6,770,005	$	229,829	$	7,536,901	$	231,287

Litigation:

Employee Litigation

John J. Sperzel III, our former chief executive officer, filed suit in the United States District Court in the Eastern District of New York 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 United States District Court in Maine had previously dismissed Mr. Sperzel’s lawsuit for lack of personal jurisdiction in Maine. 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

Four purported securities class action lawsuits were filed by alleged stockholders of Chembio 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;

●	James Gowen v. Chembio Diagnostics, Inc., Richard L. Eberly, and Gail S. Page, filed on June 22, 2020;

●	Anthony Bailey v. Chembio Diagnostics, Inc. Richard J. Eberly, Gail S. Page, and Neil A. Goldman, filed on July 3, 2020; 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.

The plaintiffs in each of the above 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.

Chembio 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 (the “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 DPP COVID-19 IgM/IgG System “was -- or was at an increased risk of -- being revoked.” The CAC names as defendants Chembio, 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. 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 Chembio’s May 2020 offering pursuant to the Company’s Registration Statement on Form S-3 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 Chembio, 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. However, the defendants subsequently agreed with Lead Plaintiffs’ counsel to a modification of the schedule, which was then approved by the Court. Pursuant to that schedule, defendants’ motions and supporting papers were filed on March 26, 2021, the Lead Plaintiffs’ opposition papers were filed on April 16, 2021, and the defendants’ reply papers were filed on April 30, 2021.

Putative Stockholder Derivative Litigation

On September 11, 2020, a putative stockholder derivative action was filed purportedly on Chembio’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 (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 Chembio, 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 Chembio, an award of damages to Chembio, 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 Chembio’s corporate governance and internal procedures regarding compliance with laws. Pursuant to a stipulation by which the individual defendants named in the Wong complaint 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 action relating to the Wong complaint 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’s subsidiary Chembio Diagnostic Systems Inc. (“Systems”) 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 the Company’s Sure Check HIV 1/2 pouched tests. The Distribution Agreement terminated on April 1, 2019. On September 16, 2019, Systems initiated arbitration in New York, USA. Systems alleges that BioSure (1) breached various provisions of the Distribution Agreement, (2) misappropriated trade secrets of Systems, (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 Systems. Systems 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 Systems made to third parties about the Distribution Agreement were in bad faith and are a defense to Systems’ claims. BioSure also asserts that certain alleged misrepresentations entitle BioSure to “set off” any award Systems might receive from the Tribunal. The parties have completed discovery, and submitted their first pre-hearing submissions. Systems intends to vigorously pursue its claims in the arbitration. The final merits hearing is scheduled for April 2021. At this stage in the litigation, the Company is not able to predict the probability of a favorable or unfavorable outcome.