| COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS | NOTE 6 — COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS:
a)
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, 2021
September 30, 2020
September 30, 2021
September 30, 2020
September 30, 2021
December. 31, 2020
Sales
% of Sales
Sales
% of Sales
Sales
% of Sales
Sales
% of Sales
Customer 1
$
5,434,186
58.0
%
$
4,226,040
50.3
%
$
5,724,171 33.04 %
$
6,523,416
36.4
%
$
3,183,367
$
1,622,866
Customer 2 1,196,217
12.8
%
*
*
2,347,832 13.55 %
*
* 1,264,639
*
Customer 3 * * 1,071,513 12.7 % * * * * * *
Customer 4 * * 963,671 11.5 % * * * * 17,510 * In the table above, an asterisk (*) indicates that sales did not exceed 10% for the period indicated. The following table discloses product purchases the Company had to each vendor in excess of 10% of the Company’s net purchases for the periods indicated:
For the three months ended
For the nine months ended
Accounts Payable as of
September 30, 2021
September 30, 2020
September 30, 2021
September 30, 2020
September 30,
2021
December 31, 2020
Purchases
% of Purchases
Purchases
% of Purchases
Purchases
% of Purchases
Purchases
% of Purchases
Vendor 1
$
1,678,250
34.4
%
$
*
*
$
2,339,182.00
18.8
%
$
*
*
$
1,651,866
$
*
Vendor 2 * * 501,562 15.4 % * * 1,600,916 12.3 % * 178,395 In the table above, an asterisk (*) indicates that purchases did not exceed 10% for the period indicated. The
b)
Governmental Regulation: All “ ”)
c)
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 December 2022
2021
$
210,823
2022
460,000
d)
Benefit Plan: The Company has a 401(k) plan established for its employees whereby it matches
of the first of salary (or up to of salary) that an employee contributes to the plan. Matching contribution expenses totaled $ and $
e)
Leases: The Company 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 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. Effective May 2021, the Company permanently discontinued its operations in Malaysia. Impairment charges for the Malaysian facility right-of-use asset
recorded during the three and nine months ended September 30, 2021 was $0
and $0.1 million, respectively The components of lease expense were as follows:
Three months ended September 30,
Nine months
ended September 30,
2021
2020
2021
2020
Operating lease expense
$
398,089
$
405,989
$
1,208,885
$
1,258,797
Finance lease cost
Amortization of right-of-use assets
$
17,038
$
15,571
$
49,834
$
42,657
Interest on lease liabilities
5,047
5,395
15,358
14,762
Total finance lease expense
$
22,085
$
20,966
$
65,192
$
57,419 Supplemental cash flow information related to leases was as follows:
Three months ended September 30,
Nine months
ended September 30,
2021
2020
2021
2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
$
353,009
$
340,205
$
1,049,198
$
797,482
Operating cash flows for finance leases
5,047
5,395
15,358
14,762
Financing cash flows for finance leases
15,859
13,587
45,680
37,166
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
-
$
-
$
616,100
$
-
Finance leases
-
5,486
25,609
73,600 Supplemental balance sheet information related to leases was as follows:
September 30, 2021
September 30, 2020
Finance Leases
Finance lease right-of-use asset
$
340,762
$
315,153
Accumulated depreciation
(131,854
)
(66,261
)
Finance lease right-of-use asset, net
$
208,908
$
248,892
Weighted-Average Remaining Lease Term
Operating leases
7.7 Years
9.1
Finance leases
3.1 Years
4.0
Weighted-Average Discount Rate
Operating leases
8.41
%
8.60
%
Finance leases
8.74
%
8.18
% Maturities of lease liabilities were as follows:
September 30, 2021
September 30, 2020
Operating Leases
Finance Leases
Operating Leases
Finance Leases
2020 2021
$
355,335
$
20,906
$
342,462
$
19,226
2022
1,447,249
83,624
1,209,787
76,904
2023
1,221,017
83,624
1,057,757
76,904
2024
1,018,875
55,856
1,026,272
76,904
2025
1,049,442
12,471
1,018,875
49,136
Thereafter
4,724,446
1,679
5,773,888
5,750
Total lease payments
$
9,816,364
$
258,160
$
10,429,041
$
304,824
Less: imputed interest
2,751,749
34,119
3,269,991
46,712
Total
$
7,064,615
$
224,041
$
7,159,050
$
258,112
f)
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 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. 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 L. 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 L. 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 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 FDA 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, Mary Lake Polan, John Potthoff and the underwriters for the May 2020 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 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
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 allege
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 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. The 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 seek 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 defendants’ motions remain pending before the Court. 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 us, 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. 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 us, 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 assertedly provided to us 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 recently served initial disclosures, 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. Under the present case schedule, all discovery is expected to be completed by April 28, 2022. 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. |
