Immudyne, Inc.CONVERSION LABS, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

Table of ContentsTABLE OF CONTENTS

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) regarding our company that include, but are not limited to, projections of earnings, revenue or other financial items; statements of the plans, strategies and objectives of management for future operations; statements concerning proposed new products, services or developments; statements regarding future economic conditions or performance; statements of belief; and statements of assumptions underlying any of the foregoing. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “hopes,” “estimates,” “should,” “may,” “will,” “with a view to” and variations of these words or similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are set forth in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business” and other sections in this report. Other sections of this report include additional factors that could adversely impact our business and financial performance.

Unless otherwise indicated, information in this report concerning economic conditions and our industry is based on information from independent industry analysts and publications, as well as our estimates. Except where otherwise noted, our estimates are derived from publicly available information released by third party sources, as well as data from our internal research, and are based on such data and our knowledge of our industry, which we believe to be reasonable. Unless otherwise indicated, none of the independent industry publication market data cited in this report was prepared on our or our affiliates’ behalf.

The forward-looking statements made in this report are based only on events or information as of the date on which the statements are made in this report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents we refer to in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect.

Additional information on the various risks and uncertainties potentially affecting our operating results are discussed in this report and other documents we file with the Securities and Exchange Commission (the “SEC”). We undertake no obligation to revise or update publicly any forward-looking statements for any reason, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on these forward-looking statements.

As used in this report, “Immudyne,” “Company,” “we,” “our” and similar terms refer to Immudyne, Inc., unless the context indicates otherwise.

PART I.I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONVERSION LABS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statementsstatements.

CONVERSION LABS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statementsstatements.

CONVERSION LABS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statementsstatements.

CONVERSION LABS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statementsstatements.

Immudyne, Inc.

CONVERSION LABS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

September 30, 2017

(unaudited)NOTE 1 – NATURE OF THE ORGANIZATION AND BUSINESS

Nature of Business

Immudyne,Conversion Labs, Inc. (the “Company”) is a Delaware corporation established to develop, manufacture and sell natural immune support products containing the Company’s proprietary yeast beta glucans, a group of beta glucans naturally occurring, was formed in the cell wallsState of yeast that have been shown through testing and analysisDelaware on May 24, 1994, under our prior name, Immudyne, Inc. We changed our name to support the immune system. The Company’s products include once a day oral intake tablets and topical creams and gels for skin application. The Company concentratesConversion Labs, Inc. on June 22, 2018. Further, in connection with changing its sales and marketing efforts on healthcare professionals, distributors for its all-natural raw material ingredient products and direct-to-consumer sales.

In 2015,name, the Company formed a joint venture domiciled in Puerto Rico, Innate Skincare, LLC (“Innate”). Under the terms of the joint venture agreement, the Company held a 33.3% equity interest, and a 51% controlling voting interest, in Innate. On January 20, 2016, Innate amended its limited liability company operating agreement and changed its legal nametrading symbol to CVLB. On April 1, 2016, our majority-owned subsidiary, Immudyne PR LLC (“Immudyne PR”). On April 1, 2016, Immudyne PR further, which was initially organized for the purpose of forming a joint venture with the original owners of one of our skincare products, amended and restated its operating agreement and restated the Company’swhereby we increased our ownership and voting interest in Immudyne PR increasing its ownership to 78.1667% resulting78.2%. Concurrent with the name change of the parent company to Conversion Labs, Inc. completed in a charge to noncontrolling interest and additional paid-in-capital of $91,612.2018, Immudyne PR was renamed to Conversion Labs PR LLC (now known as “Conversion Labs PR”, and/or “CLPR”). On April 25, 2019, the operating agreement of Conversion Labs PR was amended and restated in its entirety after acquiring the remaining minority interest in the Conversion Labs PR, which is now a wholly-owned subsidiary of the Company.

The Company is a direct-to-consumer response healthcare company that provides a convenient, cost-effective and smarter way for consumers to access high quality Over The Counter (OTC) products and prescription medications.

For the nine months ended September 30, 2020 the Company generated $20.3 million in revenue from sales of its branded products and $ 4.1 million in revenue from sales generated on its software platform. The Company has incurred operating losses since inception and has an accumulated deficit of $47.9 million as of September 30, 2020.

The U.S. healthcare system is undergoing a paradigm shift largely due to new technologies and the emergence of direct-to-consumer healthcare. The COVID-19 Pandemic has accelerated this paradigm shift across all facets of internet commerce activities. We believe the traditional model of visiting a doctor’s office, receiving a physical prescription, visiting a neighborhood pharmacy, and returning to see a doctor for follow up care or prescription refills is inefficient, costly to patients, and discourages many patients from seeking much needed medical care, as well as hindering prescription adherence. Direct-to-consumer telemedicine companies, like our Company, offer patients immediate and virtual treatment from licensed physicians, and the home delivery of prescription medications, devices and diagnostics bundled with over-the counter wellness products.

The worsening global COVID-19 pandemic occurring during the fall season of 2020, has resulted in significant, and heightened governmental measures being implemented to control the spread of COVID-19, and while we cannot predict their scope and severity, these developments and measures could materially and adversely affect our business beyond the initial positive impacts we recognized. As a result of the worsening pandemic, our results of operations and our financial condition could be negatively impacted.

We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and are taking steps to minimize its impact on our business. However, the extent to which COVID-19 impacts our business, results of operations or financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 or the effectiveness of actions taken to contain the pandemic or treat its impact, among others, including the timing and the likelihood of a successful vaccine.

Furthermore, if we or any of our significant supply vendors, with whom we engage were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially or negatively affected, which could have a material adverse impact on our business, results of operations and financial condition.

We have built a platform that allows us to efficiently launch telehealth and wellness product lines wherever we determine there is a market need. Our platform is supported by a driven team of digital marketing and branding experts, data analysts, designers, and engineers focused on building enduring brands

Business and Subsidiary History

In June 2018, Conversion Labs closed the strategic acquisition of 51% of LegalSimpli Software, LLC (“LegalSimpli”), a software as a service (SaaS) application for converting, editing, signing and sharing PDF documents. In addition to LegalSimpli’s growth business model, this acquisition added deep search engine optimization and search engine marketing expertise to the Company.

In early 2019, the Company had launched a service-based business under the name Conversion Labs Media LLC, which was to be used to run e-commerce marketing campaigns for other online businesses. However, this business initiative was terminated in early 2019 in order to focus on its core business as well as the expansion of our telehealth opportunities.

In June 2019, a strategic joint venture with GoGoMeds.com (GoGoMeds) was formed in order to help facilitate the launch of our telemedicine business. GoGoMeds is a complete skin care regime formulated using strategic ingredients providednationwide pharmacy licensed to dispense prescription medications directly to consumers in all 50 states and the District of Columbia However, on August 7, 2020, the Company terminated its Strategic Partnership Agreement with GoGoMeds. The joint venture with GoGoMeds had not initiated activities, and its termination did not have an impact on the Company’s operations.

Conversion Labs Rx, LLC (“CVLB Rx”), a Puerto Rico limited liability company, had no activity during the nine months ended September 30, 2020 and was dissolved during the period.

Unless otherwise indicated, the “Company” refers Conversion Labs, Inc. (formerly known as Immudyne, Inc.), our wholly owned subsidiary Conversion Labs PR, LLC (“Conversion Labs PR”, formerly known as Immudyne PR LLC), a Puerto Rico limited liability company and our majority-owned subsidiary LegalSimpli Software, LLC, a Puerto Rico limited liability company (“LegalSimpli”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.

Reverse Stock Split

On October 9, 2020, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Delaware (the “Amendment”) in order to effectuate a 1-for-5 reverse stock split of the Company’s issued and outstanding shares of common stock (the “Reverse Split” or “Split”). The Reverse Split was approved by the Company. InFinancial Industry Regulatory Authority (FINRA) and became effective in the second quartermarket on October 14, 2020 (the “Effective Date”). All references to common shares and common share data in these unaudited financial statements and elsewhere in this Form 10-Q as of 2017, Immudyne PR expanded their product lineSeptember 30, 2020, and launched their in-licensed patented hair loss shampoofor the three and conditioner.nine-months then ended, reflect the Reverse Stock Split.

Liquidity

The Company has funded operations in the past through the sales of its products, issuance of common stock and through loans and advances from officers and directors. The Company’s continued operations are dependent upon obtaining an increase in its sales volumesale volumes and the continued financial support from officers and directors, obtaining funding from third-party sources or the issuance of additional shares of common stock. See Subsequent Event Note 9 for a further discussion of a private placement offering, which closed on November 3, 2020, yielding approximately $13.2 million in net proceeds to the Company after deduction of placement fees and other offering expenses. The Company intends to use the net proceeds to expedite growth initiatives, as well as for general corporate purposes.

Going Concern Evaluation

The accompanying unaudited financial statements have been prepared on the basis that the Company will continue as a going concern, which assumes the realization of assets and the satisfaction of liabilities in the normal course of business. AtAs of September 30, 2017,2020, the Company has an accumulated deficit approximating $10.7$47.9 million and has incurred negative cash flowsexperienced significant losses from its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Based on the Company'sCompany’s cash balance atas of September 30, 2017,2020, and projected cash needs, for 2017, management estimates that it will need to increase sales revenue and/or raisean additional capital to cover operating$7.2 million through the next 12 months. The Company has also closed a private placement offering, discussed in “Liquidity” above, and capital requirements for the remainder of the 2017 year. Management will need to raise the additional needed funds through increased sales volume, issuing additional shares of common stock or other equity securities, or obtaining debt financing.further in Note 9, “Subsequent Events”. Although management has been successful to date in raising necessary funding, there can be no assurance that sales revenue will substantially increase or that any required future financing can be successfully completed on a timely basis, or on terms acceptable to the Company.

Immudyne, Inc. Based on these circumstances, management has determined that these conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Notes to Consolidated Financial StatementsNOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements were prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and are unaudited. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with US GAAP have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2019 was derived from our audited financial statements but does not include all disclosures required by US GAAP. Accordingly, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 30, 2020. The results of the three and nine months ended September 30, 2017

2020 (unaudited) are not necessarily indicative of the results to be expected for the pending full year ending December 31, 2020, nor the pending three month results ending December 31, 2020.

Principles of Consolidation

The Company evaluates the need to consolidate affiliates based on standards set forth in Accounting Standard CodificationASC 810 Consolidation (“ASC”ASC 810”) 810 Consolidation..

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, CLPR and its majority owned subsidiary, Immudyne PR and variable interest entities (VIE’s) in which the Company has been determined to be the primary beneficiary.LegalSimpli. The non-controlling interest in Immudyne PRLegalSimpli represents the 21.8333%49% equity interest held by other members of the joint venture. subsidiary.

All significant consolidatedintercompany transactions and balances have been eliminated in consolidation.

Variable Interest Entities

Use of Estimates

The Company follows ASC 810-10-15 guidance with respect to accounting for VIE’s. These entities do not have sufficient equity at risk to finance their activities without additional subordinated financial support from other parties or whose equity investors lack any of the characteristics of a controlling financial interest. A variable interest is an investment or other interest that will absorb portions of a VIE’s expected losses or receive portions ofprepares its expected residual returns and are contractual, ownership, or pecuniary in nature and that change with changes in the fair value of the entity’s net assets. A reporting entity is the primary beneficiary of a VIE and must consolidate it when that party has a variable interest, or combination of variable interests, that provides it with a controlling financial interest. A party is deemed to have a controlling financial interest if it meets both of the power and losses/benefits criteria. The power criterion is the ability to direct the activities of the VIE that most significantly impact its economic performance. The losses/benefits criterion is the obligation to absorb losses from, or right to receive benefits from, the VIE that could potentially be significant to the VIE. The VIE model requires an ongoing reconsideration of whether a reporting entity is the primary beneficiary of a VIE due to changes in facts and circumstances.

As of September 30, 2017 and December 31, 2016, the Company consolidated nine VIEs.

Immudyne PR as the primary beneficiary of Ace Account Management LLC, Innerwell Skincare LLC, MCD Merchants LLC, One Equity Research LLC, Inate Gems LLC, Retriever Health Products LLC, Spurs 5, LLC, Salus LLC and Huntley LLC which are qualified as VIEs. The assets and liabilities and revenues and expenses of these VIEs are included in the financial statements of Immudyne PR and further included in the consolidated financial statements. As of September 30, 2017, the VIEs had assets of $3,096, liabilities of $10,146, revenues of $1,487, and operating expenses of $2,119. As of December 31, 2016, the VIEs had assets of $10,306, liabilities of $5,748. The assets and liabilities include balances due from and due to the subsidiaries of Immudyne PR. Any inter-company receivables and payables are eliminated upon consolidation of the VIEs with Immudyne PR and Immudyne, Inc. No assets were pledged or given as collateral against any borrowings.

The Company utilizes third party entities to provide and increase credit card processing capacity and optimize corresponding rates and fees. A majority of these entities provide this service as independent contractors in exchange for a one percent (1%) fee of the net revenues processed and collected by such contractors from sales initiated by the Company. The VIEs consolidated in the Company’s financial statements are primarily contracted to provide credit card processing through one or more merchant banks. Upon receipt of funds by each VIE, the collection of receipts less any returns, chargebacks and other fees charged by such merchant bank is transferred to Immudyne PR.

Immudyne, Inc.

Notes to Consolidated Financial Statements

September 30, 2017

(unaudited)

Use of Estimates

The Company prepares itsunaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates required to be made by management include the determination of reserves (if necessary) for accounts receivable, returns and allowances, the accounting for derivatives,useful life of intangible and right of use assets, the valuation of inventory and inputs into the provision for lease liabilities and stockholders’ equity basedequity-based transactions. Actual results could differ from those estimates.

Derivative LiabilitiesThe continuing impact on business activity brought about by the Coronavirus pandemic (“COVID-19”) continues to evolve, globally in macro terms, and in micro terms, as such affects the Company. As a result, many of our estimates and assumptions for the three and nine months ended September 30, 2020 were subject to an increased level of judgment and may carry a higher degree of variability and volatility. In future periods, subsequent to September 30, 2020, when additional information becomes available, which may differ from our current assumptions, may subject our estimates to material change in future periods.

Under ASC 815-40-05, Accounting for Derivative Financial Instruments IndexedReclassifications

Certain reclassifications have been made to and Potentially Settled in a Company’s Own Stock,conform the prior year’s data to the current presentation. These reclassifications have no effect on previously reported operations, stockholders’ equity (deficit) or cash flows. Given the increase in the eventCompany’s software business and to conform the Company’s presentation of operating results to industry standards, the Company has changed their categories for reporting operations, as result the Company has made reclassifications to the prior year presentation in order to conform it to the current periods’ presentation.

Revenue Recognition

The Company records revenue under the adoption of ASC 606 by analyzing exchanges with its customers using a five-step analysis:

For the Company’s product-based contracts with customers, the Company has determined that there is one performance obligation, which is the delivery of the product; this performance obligation is transferred at a discrete point in time. The Company generally records sales of finished products once the customer places and pays for the order, with the product being simultaneously shipped by a third-party fulfillment service provider; in limited cases, title does not pass until the product reaches the customer’s delivery site, in these limited cases, recognition of revenue should be deferred until that time, however the Company does not have a sufficient numberprocess to properly record the recognition of authorizedrevenue if orders are not immediately shipped, and unissued sharesdeems the impact to be immaterial. In all cases, delivery is considered to have occurred when title and risk of common stockloss have transferred to satisfy obligationsthe customer, which is usually commensurate upon shipment of the product. In the case of its product-based contracts, the Company provides a subscription sensitive service based on the recurring shipment of products and records the related revenue under the subscription agreements subsequent to receiving the monthly product order, recording the revenue at the time it fulfills the shipment obligation to the customer.

For its product-based contracts with customers, the Company records an estimate for stock options, warrantsprovisions of discounts, returns, allowances, customer rebates and other instruments potentially convertible into common stock, the fair value of these instruments should beadjustments for its product shipments, and are reflected as contra revenues in arriving at reported as a derivative liability. Pursuant to the outstanding option, warrantnet revenues. The Company’s discounts and convertible debt agreements, there is currently no effective registration statement covering the shares of common stock underlying these agreements, whichcustomer rebates are currently subject to a cashless exercise whereby the holders,known at their option, may surrender their options and warrants to the company in exchange for shares of common stock. The number of shares of common stock into which an option or a warrant would be exchangeable in such a cashless exercise depends on both the exercise price of the options or warrant and the market price of the common stock, each at or near the time of exercise. Because both of these factorssale, correspondingly, the Company reduces gross product sales for such discounts and customer rebates. The Company estimates customer returns and allowances based on information derived from historical transaction detail, and accounts for such provisions, as contra revenue, during the same period in which the related revenues are variable, it is possibleearned. The Company has determined that the population of its product-based contracts with customers are homogenous, supporting the ability to record estimates for returns and allowances to be applied to the entire product-based portfolio population. Customer discounts, returns and rebates on product revenues during the three months ended September 30, 2020 and 2019 approximated $823,000 and $219,000, respectively, and approximated $2,157,000 and $1,004,000, respectively, during the nine months ended September 30, 2020 and 2019.

The Company, could have insufficient authorized sharesthrough its majority-owned subsidiary LegalSimpli, offers a subscription based service providing a suite of software applications to satisfyits subscribers, principally on a cashless exercise. In this scenario, ifmonthly subscription basis. The software suite allows the subscriber/user to convert almost any type of document to another electronic form of editable document, providing ease of editing. For these subscription-based contracts with customers, the Company were unableoffers an initial 14-day trial period which is billed at $1.95, followed by a monthly subscription, or a yearly subscription to obtain shareholder approval to increase the number of authorized shares,Company’s software suite dependent on the subscriber’s enrollment selection. The Company has estimated that there is one product and one performance obligation that is delivered over time, as the Company could be obligatedallows the subscriber to settle such a cashless exercise with cash rather than by issuing sharesaccess the suite of common stock. Further, ASC 815-40-05 requires thatservices for the Company recordtime period of the potential settlement obligation at each reporting date using the current estimated fair value of these contracts, with any changes in fair value being recorded through our statement of operations.subscription purchased. The Company had reportedallows the potential settlement obligationcustomer to cancel at any point during the billing cycle, in which case the customers subscription will not be renewed for the following month or year depending on the original subscription. The Company records the revenue over the customers subscription period for monthly and yearly subscribers or at the end of the initial 14 day service period for customers who purchased the initial subscription, as the circumstances dictate. The Company offers a derivative liability. Indiscount for the third quartermonthly or yearly subscriptions being purchased, which is deducted at the time of 2017,payment at the Company obtained a majorityinitiation of shareholders’ approval and amended its Articles of Incorporation to increase the number of shares of its authorized common stock,contract term, therefore the derivative liabilityContract price is no longer applicable.

Sequencing Policy

Under ASC 815-40-35,fixed and determinable at the contract initiation. Monthly and annual subscriptions for the service are recorded net of the Company’s known discount rates. As of September 30, 2020 and December 31, 2019, the Company has adoptedaccrued contract liabilities, as deferred revenue, of approximately $413,000 and $110,000, respectively, which represent obligations on in-process monthly or yearly contracts with customers and a sequencing policy whereby,portion attributable to the yet to be recognized initial 14-day trial period collections.

For the three and nine months ended September 30, 2020 and 2019, the Company had the following disaggregated revenue:

Accounts Receivable

Accounts receivable principally consist of amounts due from third-party merchant processors, who process our subscription revenues; the merchant accounts balance receivable represents the charges processed by the merchants that have not yet been deposited with the Company. The unsettled merchant receivable amount normally represents processed sale transactions from the final one to three days of the month, with collections being made by the Company within the first week of the following month. Management determines the need, if any, for an allowance for future credits to be granted to customers, by regularly evaluating aggregate customer refund activity, coupled with the consideration and current economic conditions in its evaluation of an allowance for future refunds and chargebacks. As of September 30, 2020 and 2019, the event that reclassificationCompany had an allowance for bad debt, attributable to single agent relationship amounting to $58,470 and $0, respectively. As of contracts from equitySeptember 30, 2020 and December 31, 2019, the reserve for sales returns and allowances was approximately $294,000 and $83,000, respectively. As of September 30, 2019 and December 31, 2018, the reserve for sales returns and allowances was approximately $83,000 and $43,000, respectively. For all periods presented, as noted above, the sales returns and allowances were recorded as contra assets in arriving at presented accounts receivable, net. The Company has reevaluated the nature of the accounts and determined them to assets or liabilities is necessary pursuant to ASC 815 duebe liabilities.

Inventory

As of September 30, 2020 and December 31, 2019, inventory primarily consisted of finished goods related to the Company’s inability to demonstrate it has sufficient authorized shares, shares will be allocated onbrands included in the basisproduct revenue section of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of authorized but unissued shares, and all future instruments being classified as a derivative liability, with the exception of instruments related to share-based compensation issued to employees or directors. 

Inventory 

At September 30, 2017 and December 31, 2016, inventory consisted primarily of cosmetic and nutraceutical additives, and finished cosmetic products.table above. Inventory is maintained inat the Company’s leased Kentuckythird-party warehouse and thirdlocation, which is owned by a related party, warehouses in Pennsylvania and Louisiana.at Amazon fulfillment centers.

Inventory is valued at the lower of cost or marketnet realizable value with cost determined on a first-in, first-out (“FIFO”) basis. Management compares the cost of inventory with the net realizable value and an allowance is made for writing down inventory to market value,net realizable, if lower. AtAs of September 30, 20172020 and December 31, 2016,2019, the Company recorded an inventory reserve in the amount of $20,000. Inventory consists$57,481 and $12,500, respectively. The increase in our inventory reserve mainly is attributable to the lack of marketability for our INR Wellness product line.

As of September 30, 2020 and December 31, 2019, the Company’s inventory consisted of the following: