Here's the snippet from the error log. The SMTP server requests the password due to the use of LOGIN type authentication mode. The Chilkat control does not send it resulting in a failure to send the message:
250 OK
            login_method: LOGIN
            auth_login_1:
                SmtpCmdSent: AUTH LOGIN<CRLF>
                SmtpCmdResp: 334 VXNlcm5hbWU6
                SmtpCmdSent: dml0YWxpZGE=<CRLF>
                SmtpCmdResp: 334 UGFzc3dvcmQ6
                SmtpCmdSent: ************<CRLF>
                SmtpCmdResp: 535 5.0.0 Authentication Failed
                535 5.0.0 Authentication Failed
                Failed to get response to login password
            ConnectionLog:
                (leaveContext)
            (leaveContext)
        Failed to login using LOGIN method
        (leaveContext)
David,
This is not a bug, but a simple invalid login/password failure.  Your application simply passed an invalid login/password to the SMTP server, and the SMTP server responded with an "Authentication Failed".