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COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS

6 Months Ended

Jun. 30, 2022

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										For the six months ended										Accounts Receivable as of
	June 30, 2022					June 30, 2021					June 30, 2022					June 30, 2021					June 30, 2022		December 31, 2021
	Product Sales		% of Product Sales			Product Sales		% of Product Sales			Product Sales		% of Product Sales			Product Sales		% of Product Sales
Customer 1	$	1,947,390		22	%	$	*		*		$	3,431,910	$	13	%	$	*	$	*		$	1,534,560	$	*
Customer 2		1,729,310		20	%		1,014,638		26	%		*		*			1,151,615		15	%		1,066,340		1,433,305
Customer 3		1,633,957		18	%		*		*			*		*			*		*			996,619		*
Customer 4		*		*			*		*			12,339,644		45	%		*		*			399,420		7,672,845

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 to each vendor that purchased in excess of 10% of the Company’s net purchases for the periods indicated:

For the three months ended

For the six months ended

Accounts Payable as of

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

June 30, 2022

December 31, 2021

Purchases

% of Purchases

Purchases

% of Purchases

Purchases

% of Purchases

Purchases

% of Purchases

Vendor 1

1,361,383

Vendor 2

1,589,033

166,945

353,097

Vendor 3

1,317,233

3,640,838

187,630

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.

We have capital purchase obligations of $0.5 million related to additional automated manufacturing equipment with payments expected to come due during 2022 based on vendor performance milestones.

The Company has a minimum volume commitment of 10 million STAT-PAK units to be manufactured by Reszon through December 31, 2024.

Employment Contracts:

The Company has multi-year contracts with three key employees. The contracts call for salaries presently aggregating $1,178,000 per year. The contracts expire in December 2022 and December 31, 2024. The following table is a schedule of future minimum salary commitments:

2022	$	589,000
2023		383,000
2024		383,000

Benefit Plan:

Chembio has a 401(k) plan established for the Company’s 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 $37,778 and $29,933 for the three months ended June 30, 2022 and 2021, respectively. Matching contribution expenses totaled approximately $104,913 and $65,388 for the six months ended June 30, 2022 and 2021, 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 non-lease components for all of the Company’s facility leases.

The components of lease expense were as follows:

	Three Months Ended June 30				Six Months Ended June 30
	2022		2021		2022		2021
Operating lease expense	$	372,232	$	402,329	$	775,617	$	810,795

Finance lease cost
Amortization of right-of-use assets	$	17,850	$	17,038		35,429		32,796
Interest on lease liabilities		4,480		5,368		9,166		10,312
Total finance lease expense	$	22,330	$	22,406	$	44,595	$	43,108

Supplemental cash flow information related to leases was as follows.

	Three Months Ended June 30				Six Months Ended June 30
	2022		2021		2022		2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	361,325	$	348,317	$	722,204	$	696,188
Operating cash flows for finance leases		4,480		5,368		9,166		10,312
Financing cash flows for finance leases		17,491		15,538		34,421		29,820
Right-of-use assets obtained in exchange for lease obligations:
Finance leases		-		25,609		16,234		25,609
Operating leases		717,956		694,668		717,956		694,668

Supplemental balance sheet information related to leases was as follows:

	June 30, 2022			June 30, 2021
Finance Leases
Finance lease right of use asset	$	356,997		$	340,762
Accumulated depreciation		(184,321	)		(114,815	)
Finance lease right of use asset, net	$	172,676		$	225,947

Weighted Average Remaining Lease Term
Operating leases	7.0 years			7.9 years
Finance leases	2.4 years			3.4 years

Weighted Average Discount Rate
Operating leases		8.75	%		8.73	%
Finance leases		9.05	%		8.43	%

Maturities of lease liabilities were as follows.

	June 30, 2022				June 30, 2021
	Operating Leases		Finance Leases		Operating Leases		Finance Leases
2022	$	731,574	$	43,942	$	708,344	$	41,812
2023		1,428,820		87,884		1,447,249		83,624
2024		1,220,150		60,116		1,221,017		83,624
2025		1,049,441		16,731		1,018,875		55,856
2026		1,080,925		5,940		1,049,442		12,471
Thereafter		3,643,521		355		4,724,446		1,680
Total lease payments	$	9,154,431	$	214,968	$	10,169,373	$	279,067
Less: imputed interest		2,371,852		25,301		2,909,688		39,166
Total	$	6,782,579	$	189,667	$	7,259,685	$	239,901

Litigation:

SEC Investigation

The SEC is conducting a non-public, fact-finding investigation relating to the public offering of common stock that Chembio completed in May 2020 (the “May 2020 Offering”) and to the FDA’s revocation in June 2020 of an emergency use authorization for the DPP COVID-19 IgM/IgG system that was issued by the FDA in April 2020. Chembio received subpoenas from the SEC in July 2020 and April 2021 seeking the production of documents in connection with this investigation. In addition, the SEC delivered subpoenas in April 2021 to five of Chembio’s employees (including its three executive officers, who consist of its Chief Executive Officer and President, its former Executive Vice President and Chief Financial Officer, and its Executive Vice President and Chief Scientific and Technology Officer). An additional subpoena was issued in June 2021 to Chembio’s former Interim Chief Executive Officer and Executive Chair. Each subpoena requested the production of documents relating to the same matters as are the subject of the subpoenas Chembio received. One current employee, the Chief Executive Officer, also received a testimonial subpoena from the SEC. Chembio and the six individuals are cooperating fully in the SEC’s investigation and expect to continue to do so.

The SEC’s letters transmitting the subpoenas expressly provide that the inquiry does not mean that the SEC or its staff have concluded that anyone has violated the federal securities laws or have a negative opinion of any person, entity or security. The Company cannot predict the scope, duration or outcome of the investigation or the impact, if any, of the investigation on its results of operations.

Legal Proceedings

Stockholder Litigation

Putative Stockholder Securities Class-Action Litigation

In 2020 four purported securities class-action lawsuits were filed in the United States District Court for the Eastern District of New York by alleged stockholders of Chembio:

•	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. (collectively, 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 the May 2020 Offering.

Chembio and the plaintiffs entered into Court-approved stipulations relieving Chembio and the other 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. By order entered December 29, 2020, Magistrate Judge Lindsay consolidated the cases and appointed the Special Situations Funds and Municipal Employees’ Retirement System of Michigan (together, the “Lead Plaintiffs”), 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 Lead Plaintiffs filed their Consolidated Amended Complaint (the “CAC”) on February 12, 2021. In summary, the CAC purported 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 FDA with respect to the DPP COVID-19 IgM/IgG System “was - or was at an increased risk of - being revoked.” The CAC named as defendants Chembio, Richard L. Eberly, Gail S. Page, Neil A. Goldman, Javan Esfandiari, Katherine L. Davis, Mary Lake Polan, John Potthoff (together, the “Chembio Defendants”) and the underwriters for the May 2020 Offering, Robert W. Baird & Co., Inc. and Dougherty & Company LLC (the “Underwriter Defendants”).

The CAC purported to assert five counts under the Securities Act and the Exchange Act. Counts I through III were 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 May 2020 Offering pursuant to Chembio’s shelf registration statement on Form S 3 (File No. 333-227398) and the related prospectus, as supplemented by a prospectus supplement dated May 7, 2020 (the “Securities Act Class”). Count I purported to allege a claim for violation of Section 11 of the Securities Act against all defendants other than Messrs. Eberly and Esfandiari. Count II purported to allege a claim for violation of Section 12 of the Securities Act against all defendants other than Messrs. Eberly and Esfandiari. Count III purported 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 alleged claims under the Exchange Act on behalf of a purported class consisting of all persons who purchased Chembio common stock on the open market from March 12, 2020 through June 16, 2020 (the “Exchange Act Class”). Count IV purported 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 purported to allege a claim under Section 20(a) of the Exchange Act against Mr. Eberly, Ms. Page, Mr. Goldman and Mr. Esfandiari.

In their CAC, the Lead Plaintiffs sought, 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 sought 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 the 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 it advised the parties that it had determined 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 the 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.

The Court issued its Opinion and Order (the “February 23 Order”) on the defendants’ motions to dismiss on February 23, 2022. In its February 23 Order, the Court: (i) dismissed Counts I and II without prejudice as to all defendants named in those Counts except the Underwriter Defendants as to which Counts I and II were not dismissed; (ii) dismissed Count III without prejudice as to all defendants named in that Count; and (iii) dismissed Counts IV and V with prejudice as to all defendants named in those Counts. The Court gave Lead Plaintiffs fourteen days within which to attempt to replead their claims under the Securities Act against Chembio, Ms. Page, Mr. Goldman, Ms. Davis, Ms. Polan and Mr. Potthoff.

On March 4, 2022, Lead Plaintiffs filed a letter motion in which they advised the Court that they intended to file an amended complaint, but that they wished to first seek reconsideration of the Court’s February 23 Order. They accordingly requested, and the Court granted, an adjournment of the deadline for filing an amended complaint until three business days after the Court’s ruling on Lead Plaintiffs’ anticipated motion for reconsideration. The Court also granted a request by the Underwriter Defendants to extend the time for them to file their answer to the CAC, and set May 2, 2022 as the date for the filing of that answer.

On March 7, 2022, Magistrate Judge John Wicks entered an order requiring that the parties meet and confer regarding the scheduling of discovery in the case, requiring that the parties submit a Proposed Scheduling Order by March 23, and setting a hearing (via Zoom) on March 30. The Chembio Defendants filed a letter motion requesting that the Court adjourn the initial conference and suspend the other requirements in the March 7, 2022 order. Magistrate Judge Wicks granted the letter motion on March 14, and further ordered that the initial conference would be rescheduled “following the resolution of all preliminary dispositive issues.”

On March 9, 2022, Lead Plaintiffs filed a motion for partial reconsideration of the Court’s February 23 Order. In their motion, Lead Plaintiffs requested that the Court reconsider and reverse its dismissal of Counts IV and V with prejudice, and its dismissal of Counts I, II and III without prejudice. The Chembio Defendants filed their memorandum in opposition to this motion on March 23, 2022; Lead Plaintiffs filed their reply memorandum in support of the motion on March 30, 2022.

On April 26, 2022, the Court entered an order canceling the previously-set May 2 date by which the Underwriter Defendants were required to file their answer to the CAC, and providing that the Underwriter Defendants’ answer to an amended complaint shall be due within three weeks after such amended complaint has been served.

On April 28, 2022, Lead Plaintiffs expressed a willingness to participate in a mediation with the Chembio Defendants. Thereafter, on July 14, 2022, all parties in the In re Chembio Diagnostics, Inc. Securities Litigation action participated in a mediation. The mediation was adjourned without an agreement to resolve the action, but the parties are continuing to discuss a potential negotiated resolution with the mediator’s assistance.

On July 21, 2022, the Court denied Lead Plaintiffs’ motion for partial reconsideration. Lead Plaintiffs filed their Second Consolidated Amended Complaint (the “SAC”) on July 26, 2022. The SAC purports to allege three counts under the Securities Act on behalf of the Securities Act Class. Count I purports to allege a claim for violation of Section 11 of the Securities Act against Chembio, Ms. Page, Mr. Goldman, Ms. Davis, Dr. Polan, Dr. Potthoff and the Underwriter Defendants. Count II purports to allege a claim for violation of Section 12 of the Securities Act against Chembio, Ms. Page, and the Underwriter Defendants. Count III purports to allege a claim under Section 15 of the Securities Act against Ms. Page, Mr. Goldman, Ms. Davis, Dr. Polan and Dr. Potthoff.

In order to facilitate the parties’ ongoing discussions concerning a potential settlement, the parties have agreed that the defendants may have until August 23, 2022 within which to respond to the SAC. The defendants have accordingly submitted a letter to the Court requesting that the date by which they are required to respond to the SAC be moved to August 23, 2022; the Court granted the defendants' request on August 1, 2022. At this stage of the litigation, the Company is not able to predict the probability of a favorable or unfavorable outcome.

Putative Stockholder Derivative Litigation

On September 11, 2020, a putative stockholder derivative action 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”) was filed purportedly on Chembio’s behalf in the United States District Court for the Eastern District of New York. 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 the Company’s rapid COVID-19 antibody test in the proxy statement disseminated in advance of Chembio’s 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 stipulation provides for a stay that lasts until all motions to dismiss the class action litigation have been finally resolved. Wong can, however, terminate the stipulation on 14 days’ notice if a related derivative action is not stayed for a similar or longer duration. Further, if the defendants in the Wong action agree to engage in a mediation “or other similar formal process” with plaintiffs in any related class action or derivative action during the pendency of the stay or for a one-year period following its termination, they must promptly provide notice of the mediation to Wong, not object to Wong’s participation in the mediation (subject to the consent of the other involved parties), and if consent to Wong’s participation is not provided, they must separately engage in mediation or a similar formal process with Wong. The Court entered an order granting the requested stay on November 3, 2020.

On March 31, 2022, a second putative stockholder derivative action captioned Michelle Chen, 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 “Chen complaint”) was filed purportedly on behalf of Chembio in the Supreme Court for the State of New York, County of Suffolk. The Chen complaint purports to assert a claim for breach of fiduciary duty against the defendants based on ostensibly false and misleading statements and omissions concerning the Company’s rapid COVID-19 antibody test. The Chen complaint goes on to allege that the misconduct asserted in the complaint gave rise to the filing of the consolidated securities litigation described above.

The parties in the Chen action have agreed to a stipulated stay of the action which shall continue until a motion to certify a class in the class action has been decided. Chen can, however, terminate the stay on seven days’ notice if a related derivative action is not stayed for the same or a longer duration. The stipulation also provides that if the defendants agree to engage in a formal mediation with the class action plaintiffs or the plaintiff in any other related derivative action, they must notify Chen of the mediation and participate with Chen in a mediation “or other settlement talks,” whether separately or in combination with a mediation involving other related actions.

The plaintiffs in the Wong and Chen actions took part in the July 14, 2022 mediation described above, and are engaged in continuing discussions concerning a potential resolution of these actions. At this stage of the litigation, the Company is not able to predict the probability of a favorable or unfavorable outcome.

Employee Litigation

On March 19, 2021, John J. Sperzel III, Chembio’s former chief executive officer, filed a fifteen-count complaint in the United States District Court for the Eastern District of New York. The complaint was filed following the dismissal of an action previously filed by Mr. Sperzel in the United States District Court in Maine, which was dismissed for lack of personal jurisdiction over Chembio. In summary, the complaint filed in the Eastern District of New York alleges that Chembio wrongfully refused to allow Mr. Sperzel 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 allegedly vested as of the date of his separation from Chembio, on January 3, 2020. The complaint alleges that under the terms of the applicable stock incentive plans, Mr. Sperzel had thirty days after the date on which he ceased to qualify as an “Eligible Person” under the plans within which to exercise the options, and asserts that by reason of his alleged continued service to Chembio, he remained an “Eligible Person” and ostensibly retained the right to exercise the options. The Compensation Committee of the Board determined that the options expired on February 3, 2020, thirty days after Mr. Sperzel’s separation from Chembio, and that a purported attempt by Mr. Sperzel to exercise the options after that date was not valid.

Count I of the complaint purports to allege that Chembio breached Mr. Sperzel’s separation agreement by refusing to allow him to exercise the stock options. Counts II through XI of the complaint purport to allege claims for breach of each of ten separate stock option agreements, collectively asserting damages of “at least” $3,190,198. Count XII of the complaint alleges a breach of Mr. Sperzel’s separation agreement based on Chembio’s purported failure to pay Mr. Sperzel consulting fees to which he claims to be entitled for consulting services allegedly performed following his separation. Count XIII of the complaint alleges a claim for breach of an implied covenant of good faith and fair dealing under Nevada common law based on the allegation that Chembio prevented Mr. Sperzel from obtaining the benefits of the stock option agreements and separation agreement. Mr. Sperzel alleges that he suffered damages in excess of $3 million as a result of the purported breach of the covenant of good faith and fair dealing. Count XIV of the complaint purports to assert a claim for quantum meruit, alleging that “it is reasonable for Sperzel to expect payment in exchange for ... services” he allegedly provided to Chembio and, based on allegations that upon his separation Mr. Sperzel was not informed as to the pending expiration of the stock options he later sought to exercise, that Chembio has been unjustly enriched. Finally, Count XV of the complaint seeks a declaratory judgment that Mr. Sperzel is relieved from performance under his separation agreement due to asserted material breaches of the agreement based on the allegations summarized above. The complaint seeks compensatory damages in an unspecified amount, a declaration, as described above, and an award of Mr. Sperzel’s costs and expenses in the litigation, including reasonable attorneys’ fees, expert costs and disbursements. The complaint requests a trial by jury. In his initial disclosures served in discovery, Mr. Sperzel claims entitlement to recover damages in a total amount not less than $10 million, together with prejudgment interest at the rate of 9% per annum.

On May 20, 2021, Chembio filed its answer and affirmative defenses denying the material allegations of Mr. Sperzel’s complaint. Chembio and Mr. Sperzel are presently engaged in discovery. All discovery in the case was completed on June 28, 2022. On July 6, 2022, pursuant to local court rules, Chembio filed a formal notice with the District Court stating its intention to file a motion for summary judgment on all of Mr. Sperzel’s claims. Mr. Sperzel’s responsive letter and factual statements were due on July 27, 2022 an were timely filed. At this stage of the litigation, the Company is not able to predict the probability of a favorable or unfavorable outcome.

Other

From time to time the Company may become involved in legal proceedings or may be subject to claims arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.

Nasdaq Communications

On April 5, 2022, the Company received a deficiency letter from the Listing Qualifications Department of The Nasdaq Stock Market notifying it that, because the bid price for shares of the Company’s common stock had closed below the $1.00 per share minimum Bid Price Requirement for thirty consecutive business days, its common stock may be subject to delisting by as early as October 3, 2022 if the Company has been unable to regain compliance with the Bid Price Requirements or to qualify for an additional period to regain compliance by such date, all as described in more detail in the Current Report on Form 8-K filed with the SEC on April 7, 2022. The closing price of the Company’s common stock was $1.08 on August 4, 2022, which was the second day since February 18. 2022 that such closing price was equal to or greater than $1.00. If the Company’s closing bid price remains at or above $1.00 for ten consecutive business days it will regain compliance with the Bid Price Requirement. There can be no assurance that the Company will be able to regain compliance with the Bid Price Requirement. The Company’s inability to regain compliance with the Bid Price Requirement would, and the existence of the pending deficiency letter could, materially impair its ability to raise capital. Moreover, if the Company were unable to regain compliance with the Bid Price Requirement, the common stock would likely then trade only in the over-the-counter market and the market liquidity of the common stock could be adversely affected and its market price could decrease. If the Company’s common stock were to trade on the over-the-counter market, selling its common stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and the Company could face significant material adverse consequences, including: a limited availability of market quotations for its securities; reduced liquidity with respect to its securities; a determination that its shares are a “penny stock,” which will require brokers trading in its securities to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for its securities; a reduced amount of news and analyst coverage; and a decreased ability to issue additional securities or obtain additional financing in the future. These factors could result in lower prices and larger spreads in the bid and ask prices for the Company’s common stock and would substantially impair its ability to raise additional funds and could result in a loss of institutional investor interest and fewer development opportunities for the Company.